Victoria misses out on $444m because it has less cash in its offset account

Victoria missed out on $444 million in forecast revenue last financial year, largely because of the dwindling balance in a bank account the Allan government uses to offset its ballooning debt.

In a double blow, the forgone revenue was almost as much as the government had also hoped to actually save by using the account over the next four years.

Victorian Treasurer Tim Pallas.Credit: Joe Armao

It comes as Treasurer Tim Pallas on Wednesday hit back at critics emboldened by a report from the Victorian Auditor-General’s Office that criticised the state government’s financial management and triggered a stoush over its economic strategy.

The Department of Treasury and Finance annual report shows that its income from interest in the 2023-24 financial year was $322 million – compared with a forecast figure of $766 million.

The discrepancy was largely based on “lower than budgeted” interest revenue from the government’s Central Banking System (CBS).

This system is an account used to pool surplus funds held by departments and agencies across the Victorian government – making money via bank interest earned on the balance.

But it also functions as an offset account, reducing the cost of servicing debt, lowering long-term borrowing costs and helping the state’s credit rating.

In June, The Age revealed that instead of having money in the CBS, it instead went into overdraft. The government budgeted about $500 million to cover the overdraft – and pushed out the bulk of the payment to clear it to the end of the 2025 financial year.

A ministerial briefing obtained by the state opposition under Freedom of Information also shows the government had forecast that using the CBS would save the government $482 million between 2023-24 and 2026-27. This was to be achieved through lower interest expenses.

Opposition finance spokeswoman Jess Wilson said the missed interest revenue showed the schools, hospitals and agencies that used the CBS were cash-strapped, leaving less in the account.

“Just like a mortgage offset account, the government’s central banking system only works if there is actually money in it,” Wilson said.

“With so many Victorian government agencies operating in the red, with negative cash balances and struggling to pay bills on time – it’s no surprise Victoria’s primary bank account is running on fumes.

“The consequence of this lower bank balance is that Victorians are paying more in interest repayments and seeing less invested in vital services like health and education.”

A Victorian government spokesperson said there had been “no impact” on the state budget due to missing out on interest revenue generated by the CBS.

“Under the CBS, we consolidated thousands of bank accounts of entities across government – delivering savings of more than $400 million since 2019,” they said on Wednesday.

“The Liberals economic policy is simply cuts, closures and an American-style debt ceiling which means we will end up with an American-style health system – as well as doctors, nurses and ambos being sacked.”

Victoria’s net debt is expected to peak at $187.8 billion by the middle of 2028. As Pallas has tried to rein in debt, he has been forced to find $1.5 billion for hospitals – pledged after the budget – following a dispute between the state and the sector over funding woes.

Analysis by The Age of dozens of state hospital annual reports this month showed they racked up combined operating deficits of more than $900 million in 2023-24, up from just $460,000 a year earlier.

“The Victorian economy is strong. Our state is thriving – we have more Victorians in jobs than ever and have outperformed other states across key economic indicators, underpinned by a clearly defined fiscal strategy,” the government spokesperson said.

However, Victoria’s Auditor-General Andrew Greaves last week observed that the Allan government did not appear to have a clear long-term plan for financial management

He said that to return to financial resilience, it would need to find bigger surpluses than it had forecast.

But Pallas on Wednesday said he struggled to think of another country or jurisdiction that had a long-term strategy like this.

“The only one I’m aware of is the World Bank’s strategy that has questionable value. Some 68 countries are signatory to it, and I don’t think any of them have actually complied with the broad objectives contained within it,” the treasurer said.

An analysis of the state’s finances by economist Saul Eslake, published this week in The Australian Financial Review, found household income had fallen behind Tasmania’s and predicted voters would face spending cuts or tax rises.

Pallas said Victoria’s economy had grown by 27.4 per cent over the 10 years that Labor had been in power, which he claimed was 5 per cent faster than New South Wales.

“What that means is that our economy would have been $23 billion smaller had we had the slower performance of the New South Wales government,” he said.

Pallas said any suggestion Victoria could not meet its liabilities was “nothing short of nonsense”.

He argued that former Victorian premier Henry Bolte had managed a budget that had debt equivalent to 57 per cent of gross state product, while his government would max out at “maybe 25 per cent”.

Pallas said Victoria’s strategy of paying off debt through economic growth had been used as far back as Napoleonic Wars and was the “only way that works without trying to tank your economy”.