Victoria's interest bill soars by almost half a billion dollars

Rising interest costs ripped more than $400 million out of the state budget in the first half of this financial year, with the Andrews government warning it faces the same challenges as Victorian households battling severe cost of living pressures.

State Treasury’s budget update has revealed the interest bill on government debt topped $1.8 billion during the final six months of 2022, as the state’s net debt climbed above $100 billion for the first time ever and central banks globally, including in Australia, repeatedly lifted borrowing costs in an aggressive effort to tamp down soaring inflation.

The state government says its budget is facing the same cost of living pressures as Victorian households.Credit: Jason South

That compares with an interest bill of $1.39 billion for the same six-month period in 2021.

Treasurer Tim Pallas said the report confirmed that the state economy was robust and resilient, with state final demand, a key measure of economic activity, up 4.1 per cent and employment up 2.2 per cent in 2022.

But he also warned the government was now facing “the same challenges” as households battling rising interest rates and cost of living pressures. That presents a potentially tricky backdrop for the May budget.

“The coming budget will reflect prevailing economic conditions and forecasts as Victoria continues on its deliberate and assured path out of the pandemic,” he said.

State Treasurer Tim Pallas.Credit: Jason South

Australian households are dealing with the effects of the Reserve Bank lifting its official cash rate to an 11-year high of 3.6 per cent over 10 separate interest rate rises since May last year.

The report said Melbourne recorded an inflation rate of 8 per cent for the year to December 2022, the highest for more than 30 years, warning that rising interest rates and a weaker global outlook had tempered the outlook for the state economy.

It revealed a budget deficit of $4.2 billion over the six months to December 31. That represented a $5.8 billion improvement on the same six-month period in 2021, when the government recorded a deficit of almost $10 billion.

The report also showed Victoria’s net debt officially climbed above $100 billion for the first time to hit $104.2 billion by December 31. That was equivalent to 18.2 per cent of the state economy.

Victoria has the highest debt in proportional terms of all the states, largely because the government ratcheted up borrowing during the pandemic to help insulate the state economy, but also because it has been running an ambitious big projects agenda since it came to power in late 2014.

As a consequence, the cost of servicing the debt is expected to rise sharply. According to Treasury’s latest predictions, interest charged on Victoria’s debt will rise to about $3.9 billion this financial year, equivalent to about 4.7 per cent of total revenue.

Victoria is expected to shell out $7.4 billion in 2025-26, equivalent to about 8 per cent of the government’s total revenue – the highest since the late 1990s.

Shadow treasurer Brad Rowswell accused the government of being addicted to spending and higher taxes. “The Andrews government has no plan to grow the economic and opportunity pie,” he said. “All they do is create new taxes and increase existing ones.”

The report said the government raked in $39.9 billion in revenue during the final six months of last year, about $1.2 billion more than the same period in 2021. But total spending was about $4.6 billion lower, largely because pandemic-related business and community support measures came to an end.

The government wages bill was about $637 million higher, at $16.7 billion. Treasury said this was due to annual salary growth and increased spending on health and education services.

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