The treasurer says Victoria’s economy is improving. Economists say otherwise.

A widening trust deficit has emerged between Victorian Treasurer Tim Pallas and some of Australia’s leading economists over the sustainability of the state’s finances after his mid-year budget update revealed the government will spend nearly $40 billion more than it earns over the next year four years.

Pallas was buoyant when he released the latest figures on Friday, declaring the combination of economic growth above the national average, strong employment and a marginal improvement to the state’s forecast bottom line demonstrated the government’s post-COVID fiscal repair strategy was working.

Treasurer Tim Pallas is sticking to his strategy of budget repair despite the misgivings of economists.Credit: Joe Armao

Claiming he had overseen a “dramatic improvement” in the state’s accounts and a “profound economic and fiscal resurgence”, Pallas pointed to forecasts showing that net debt as a percentage of gross state product will fall for the first time in seven years.

“I don’t want to mislead you to say that the government has effectively declared its fiscal strategy is at an end and concluded,” he said. “What it does tell us is that the strategy is working and working very dramatically.”

But this assessment is jarringly at odds with what economists Saul Eslake and Dr David Hayward identified as the central weakness in the government’s financial management – its inability to contain expenditure on the day-to-day business of running the state.

“It would seem to me that they haven’t learned anything, or at least, haven’t changed anything,” Eslake told this masthead. “There is no change of strategy here, there is no more credible path back to cash surpluses than there was at the time of the budget.

“There is still, it would seem, an inability to control expenditure growth. There doesn’t appear to be any serious attempt to rein in either operating or infrastructure spending.”

The budget update shows the government is now expecting to generate $10 billion more in revenue over the next four years than it was just seven months ago when Pallas handed down his 10th state budget.

This is being driven by an additional $1.7 billon in forecast taxes – due in no small part to the doubling of a renamed fire services levy on all households, revealed by this masthead – and $4.4 billion more in Commonwealth government grants, including a $1.9 boost to Victoria’s share of the GST.

The update shows the government plans to spend all this money and then some, with an $11.3 billion increase in total forecast expenditure over the same four-year period.

Independent economist Saul Eslake.Credit: Dominic Lorrimer

The spending splurge includes the extra $1.5 billion Premier Jacinta Allan promised the state’s public hospitals in August after they unleashed a fierce public relations campaign against the budget efficiencies Pallas had asked the health department to find.

Pallas now claims the backflip as a virtue. “We have never compromised on the wellbeing and resources for the Victorian community when there is a need for it, and we have seen a peaking demand for hospital services and healthcare services more generally,” he said on Friday.

While voters didn’t object to giving more money to public hospitals when Allan announced it, economist and public policy expert Dr David Hayward said the government had put off tackling a serious problem.

Dr David Hayward.

“I was surprised that the government folded as quickly as they did on health funding, because the hospital budgets are still running at COVID levels, even though we are post-COVID,” said Hayward, RMIT emeritus professor of public policy and the social economy.

“If they don’t get efficiencies out of the health system it’s going to make it even more difficult to get that budget back into surplus.

“Not so very long ago, the health services used to be run extremely efficiently. They had to loosen the reins because of COVID, but if you don’t keep them on a very tight rein, it’s very hard to get it back under control.”

A sizeable gap between the money public hospitals are allocated in the budget and the money they actually spend has become a permanent feature of the Victorian health system. It means that, although the government is forecasting operating surpluses of $1.6 billion next financial year, $1.7 billon in 2026-27 and $2 billion in 2027-28, these margins will disappear if the government has to provide a sum similar to this year to top-up public hospital spending in those years.

Meanwhile, the government wages bill continues to head north, with employee expenses jumping nearly $1 billion for this year and $3.7 billion over the four-year forecast period since Pallas handed down his most recent budget. Pallas said the difference was due to the timing of public sector wage deals.

Jacinta Allan’s peace deal with public hospitals stripped another $1.5 billion from Pallas’ books.Credit: Justin McManus

As things now stand, net debt is forecast to reach $155.2 billion by the end of June – an improvement of $1 billion on what the May budget forecast – and reach $187.3 billion by 2027-28, which is $500 million less than previously forecast.

These revised figures, combined with the projections for economic growth, means that net debt as a proportion of GSP will tick down from 25.2 per cent in 2026 to 25 per cent the following year. Victoria remains the most indebted state in Australia.

Eslake said the most important bottom line in Victoria’s finances is not the operating result preferred by treasurers but the cash surplus or deficit – a simpler measure of total cash going in and out of the state’s coffers. On this measure, Victoria’s general government sector remains mired in red ink.

This financial year’s cash deficit is expected to come in at $15.36 billion, a slight deterioration of $170 million since the May budget, despite the state’s surging revenues. Over the four-year forecast period, Victoria’s cumulative cash flow deficit is calculated to reach $39.3 billion.

Eslake rejected Pallas’ claim that his budget repair strategy was working. His kindest assessment is that Victoria’s finances aren’t materially worse than they were seven months ago.

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