Cuts, delays and taxes in bad-news budget that fails to rein in debt

Major projects will be stalled, key government promises abandoned and the state’s ailing health system propped up as a bad-news budget tries to rein in spiralling debt and interest payments.

Tuesday’s budget – the 10th for Treasurer Tim Pallas – includes payments of $400 per child for the families of children in Victorian public schools and concession cardholders at non-government schools from next year. But it’s the only bit of good news in a budget that leaves Victoria with a $25 million-a-day interest bill.

Victorian Treasurer Tim Pallas hands down the 2024 Victorian budget.Credit: Joe Armao

Pallas said his budget would help families, but added the focus was on fiscal discipline and “making sensible decisions that respond to the challenges that confront us and that lie ahead”.

But transport, school and health projects are being pushed back to manage cost blowouts, the rollout of government-funded preschool will be delayed for four years amid a shortage of workers and pressure on construction, and Melbourne Airport Rail is now on ice for twice as long as expected.

The state’s trial of sick pay for casual workers has been abandoned and help for first home buyers will be cut off in a year. Instead, the scheme has been handballed to a one-off $700 million supplement and then handed off to the federal government.

The government has also increased its tax take by hiking the waste and fire services levies.

Despite the tough economic decisions, Victoria’s debt will continue to rise, peaking at 25.2 per cent of gross state product by 2026-27. Net debt will rise from $156.2 billion by the end of the next financial year, and hit $187.8 billion by June 2028.

Four months ago, the Treasury predicted the state’s net debt would hit $177.8 billion by mid-2027, but that forecast has been pushed up, with net debt now expected to reach $179.2 billion by the end of the 2026-27 financial year.

The Allan government is forecasting operating surpluses of $1.5 billion in 2025-26 leading into the next state election, and $1.6 billion in 2026-27 – an improvement from the mid-year budget update.

Pallas said the budget considered their two big problems – high inflation and workforce shortages – and “how best to manage both”. He said Australia was 229,000 workers short of what was needed for construction projects alone.

In an election backflip, the rollout of 30 free hours of pre-prep for four-year-olds will be delayed by four years and government-owned childcare centres will open years later than promised.

Pallas said: “The workforce shortage is hitting not only our construction projects, it’s also hitting our caring and our social sectors.

“Early childhood workers [shortages] are three times higher than they were in 2019 … With high global inflation, the International Monetary Fund says now it’s time for governments to adapt infrastructure investment to economic capacity.

“We’re progressively returning the capital program to pre-COVID levels to better align with the ability of our economy to deliver, and to free up capacity in the private sector to build much more needed housing.”

Pallas said the budget wouldn’t take Victoria from “feast to famine”, but pledged to bring infrastructure spending from $24 billion in 2023-24 to just over $15 billion by 2027-28. Average spending on projects over the forward estimates will be $19.3 billion a year.

Small projects across all government portfolios will be pushed back to achieve this, but it will not affect the $26 billion North East Link or $35 billion Suburban Rail Loop East.

Pallas said the government needed to be realistic about the timeline for the Airport Rail, which it initially promised would allow commuters to travel from the CBD to the airport in less than 30 minutes by 2029.

“We’ve made the sensible decision to acknowledge the project is now at least four years delayed,” he said.

Hospitals, which are increasingly reporting major operating deficits, will receive an additional $8.8 billion over the next four years.

New campuses for the Royal Melbourne and the Royal Women’s hospitals will no longer be above the Arden station being built as part of the government’s signature Metro Tunnel project.

Electromagnetic interference from the underground trains will disrupt medical equipment so significantly, the government has decided it is not feasible to use this site. These extra facilities will instead be delivered in Parkville, where the project has already built protections against the interference.

Government belt-tightening will also mean the sale of office space previously used to house public servants and a delay to a program that offers treatment, care and support to Victorians aged over 26 experiencing mental health issues.

But the government will inject a further $211 million to keep women and children safe, with new prevention programs designed to stop violence before it starts.

There will be more than $30 million in subsidies for short courses in growth sectors such as energy, disability, construction and transport.

Opposition Leader John Pesutto said the budget showed a series of broken promises and accused the government of blaming COVID for “every failure”. “Labor’s 10th budget is proof that those who caused the problem cannot be relied upon or trusted to fix the problems,” he said.

“This has got to stop, this blame game that the government plays where they use every excuse in the book simply to walk away from their own promises because they can’t manage money.”

The budget was tabled in state parliament on Tuesday as the Reserve Bank kept interest rates on hold at 4.35 per cent.

Standard & Poor’s said the state’s debt pile was set to “soar” compared with the government’s revenue, thanks to large deficits during the pandemic and significant spending on major projects.

The credit agency, which affirmed its AA rating for Victoria, said the ratio of debt to income for the state was the highest in Australia, at 200 per cent, and the cost of servicing the debt was increasing as interest rates rose.

But the agency said Victoria still had strong access to global capital, allowing it to fund its budget despite interest costs and more volatile financial markets.

“The state is partially shielded from rising interest rates in the immediate future because it mainly funds itself through fixed-rate, long-term borrowings.”

John Manning, vice president and senior credit officer at Moody’s, said they did not expect Victoria’s debt burden to stabilise before the end of the 2028 financial year, maintaining negative pressure on the state’s rating.

“Debt affordability has continued to deteriorate with the state projecting interest payments to increase to 6.2 per cent of revenue by end June 2024 and will significantly constrain Victoria’s operating profile over time.”

Ahead of the budget, Pallas received a big windfall from Canberra, with an extra $3.7 billion from the Commonwealth in GST payments, but economists warned the government against baking in the new rate, based on Victoria’s comparative position against NSW and Queensland, which benefited from coal royalties and soaring land values.

Federal Treasurer Jim Chalmers will next week hand down the federal budget and Pallas used his economic statement to push for more assistance from Canberra.

He accused the Commonwealth of a long-term failure to adequately fund Victoria’s infrastructure. “Between 2014-15 and 2022-23 Victoria received $8.3 billion less than our population share of infrastructure funding,” Pallas said.

The state government also announced it would rein in funding to a controversial investment fund that uses taxpayers’ money to invest in start-ups and expanding businesses.

Get the day’s breaking news, entertainment ideas and a long read to enjoy. Sign up to receive our Evening Edition newsletter here.