The intimidating debt bill facing our new premier

Just before the 2014 election, then opposition leader Daniel Andrews was desperate to neutralise what was seen as a key vulnerability for Labor.

The Coalition government had been ramping up its attacks on Labor’s financial credibility, warning voters not to trust it with the budget.

Jacinta Allan will have to tackle the state’s debt.Credit: Joe Armao

In a typically shrewd tactical response, Andrews quietly hired Jeff Kennett’s chief fiscal surgeon, Professor Bob Officer, to scrutinise Labor’s election costings.

Officer had chaired Kennett’s 1992 Victorian Commission of Audit and the Howard government’s 1996 National Commission of Audit – both of which paved the way for deep spending cuts. He gave his verdict two days before the Victorian election, ruling that Labor had been “comprehensive and thorough” with its costings.

Getting Officer, a man highly respected on the conservative side, to sign off on Labor’s financial plan was a clever move.

Then shadow treasurer Tim Pallas declared it was “the most rigorous costings process ever undertaken by an opposition”, promising no impact on Victoria’s budget surplus predictions, no increase in net debt, no increase in taxes and no impact on Victoria’s AAA credit rating.

Former premier Daniel Andrews and Tim Pallas.Credit: Eddie Jim

A great deal of financial water has since flowed under the fiscal bridge, including a pandemic, a housing slump, soaring inflation and an aggressive interest rate tightening cycle. Add to that an infrastructure agenda likely to keep costing the state about $20 billion a year for the foreseeable future.

Victoria now has a lower credit rating, the highest debt, and – arguably – the highest state taxes per person in the nation.

Just how dire is the financial situation now confronting Victoria’s 49th premier, Jacinta Allan? The big issue for the government will not so much be the current debt level, high though it is. It is the ability of the state budget and the economy to handle it.

Nine years later, Officer now says the financial situation confronting the state is “somewhat intimidating”. He points out that Victoria’s debt levels are now much greater than during the Cain-Kirner years both in absolute and relative terms.

“The only way to ease the pain of that debt is by productivity increases and or selling off assets,” Officer told The Age on Wednesday. “But there isn’t that much there left [to sell] and the tax base of the state is very narrow, and somewhat antithetical to productivity.

“At the broad level the figures look somewhat intimidating, I have to say. It is not going to be easy. In the short-term interest rates are not going to go up much more, in the longer term I’m not optimistic.”

According to state Treasury’s May budget predictions, net debt is set to grow from about $135.4 billion by the middle of next year to $171.4 billion by mid-2027.

That would represent an extraordinary $146 billion increase since 2018-19, just before the pandemic derailed the state’s economy.

The government has been particularly keen to distinguish “emergency” debt, used to protect the economy and the health system part of the government’s COVID-19 response, from more productive borrowings used to fund the government’s infrastructure program.

Despite the government’s tough talk in this year’s budget about repaying COVID borrowing racked up during the pandemic, net debt as a proportion of the state economy is to keep rising, hitting 24.5 per cent by mid-2027. That far exceeds the previous high of 16.1 per cent reached during the recession of the early 1990s.

The idea is that a return to budget surpluses from 2025-26 onwards will gradually begin to drag Victoria’s debt levels back down.

This, however, remains an aspiration extending beyond the budget’s four-year forecasting period. There is a lot that could go wrong between now and then.

Former premier Steve Bracks points out that much of the state’s debt has been built up for productive purposes.

“The difference is that this government borrowed for infrastructure, borrowed to provide real services that improve the life of Victorians,” Bracks told The Age.

“Much of the debt is at a very low rate of interest, locked in for a long time. The debt is 8 per cent of outgoings. There are many governments around the world that would love to have such a low level of debt.”

Back in 1992-93, the financial year Kennett became premier, Victoria’s interest bill was soaking up the equivalent of almost 14 per cent of total revenue, compared to about 5 per cent currently (or an expected 8 per cent in 2026-27).

Steve Bracks and Jeff Kennett.Credit: Heath Missen

Other economists, including RMIT emeritus professor David Hayward, have argued we should not yet be alarmed about the level of debt. Hayward too has pointed out much of the borrowing was locked in at historically low interest rates, using long-term government bonds.

The argument is that this time the debt is being used to provide economic infrastructure, such as public transport, roads, hospitals and schools.

As long as that is delivering the economic benefits it is supposed to it should to a large extent pay for itself. The big question is over what period of time.

For Victoria’s newly appointed premier – and for the state’s long-serving and experienced treasurer Pallas – managing the rising interest bill against a backdrop of high interest rates, high inflation and challenging international circumstances will be a difficult a balancing act.

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