State’s financial watchdog slams ‘reactive’ budget with no long-term plan

Victoria’s financial watchdog has accused the state government of reactive financial management and warned Labor it will need to improve its forecast surpluses.

In a probe of the state’s reports for the past financial year, released on Friday, the Victorian Auditor-General’s Office said there was no “clear plan for long-term fiscal management” as government departments and agencies incurred another operating loss.

Victorian Treasurer Tim Pallas says the state’s economy remains strong despite its rapidly growing debt.Credit: Joe Armao

The general government sector reported an operating loss of $4.2 billion, bringing accumulated losses over the past five years to $48 billion.

Of these losses, $16.5 billion has gone towards providing ongoing public services rather than funding infrastructure.

Forecast surpluses over the next four years were expected to help claw back $5.1 billion, which the report warned would not be enough to shore up the state’s budget in the long term.

“The government will need to make significant surpluses beyond current budgetary forecasts to restore the financial resilience eroded by these losses,” the report found.

While revenue was $8.4 billion higher compared with 2022-23, off the back of a greater tax take, the auditor-general warned the fiscal cash deficit of $14.4 billion was expected to continue to 2027-28.

“Prolonged operating losses and ongoing fiscal cash deficits are not financially sustainable, largely because they lead to higher debt levels than otherwise and indicate underlying structural risks,” the report found.

The watchdog also warned that gross debt was spiralling at a pace “faster than revenue and economic growth”, projected to reach $228.2 billion by June 30, 2028. Net debt is expected to hit $187.8 billion by this time.

“While strategies and objectives are in place, the state has not articulated a clear plan for long-term fiscal management,” the report found.

“Current strategies are short term, reactive and do not address both the existing financial challenges and emerging financial risks … A more comprehensive approach is needed to ensure long-term fiscal sustainability and proactive management of the state’s finances.

“Sound financial management is foundational to fiscal sustainability. A clear and well-defined long-term financial plan is required and integral to a robust and mature financial management framework.”

The report comes ahead of the government’s mid-year financial report for the 2024-25 budget year, where it will have to account for and offset an extra $1.5 billion promised to hospitals since May and further blowouts on the Metro Tunnel.

Opposition treasury spokesperson Brad Rowswell said the report confirmed that Victoria’s financial position continued to deteriorate under the Allan government.

“Under Labor, debt is growing by $80 million a day, operating deficits are set to continue for years to come, and growing interest repayments are draining vital funds from frontline services,” he said.

“Labor cannot manage money, cannot manage our economy and Victorians are paying the price.”

In a letter responding to the report, Treasurer Tim Pallas said the government’s debt strategy was a balanced approach to the current economic climate.

“The recent 2024-25 budget demonstrated that this strategy is working, with the economy performing well and the labour market strong.”

On Thursday, Victoria’s Parliamentary Budget Office reported Victoria’s economy grew by 1.5 per cent in the last financial year, slightly higher than the national average and second only to Queensland.

Per person, Victoria’s economy shrank by 1.3 per cent, compared with 1 per cent nationally.

The auditor-general also reported that Victoria had clawed $2.4 billion back from public corporations into its budget in 2022-23. This figure was nearly double the year before, largely because of $1.1 billion raided from the Transport Accident Commission.

Victoria plans to find $4.9 billion in savings over the next four years, but the report said maintaining services while doing this would be a challenge.

It noted the risks included gross debt growing faster than the economy, rising employee expenses and $17.3 billion that would be needed from now until 2035 to make sure the state’s superannuation liabilities were properly funded.

Unplanned and significant blowouts on major projects were also identified as a potential risk that could significantly strain the state’s financial sustainability.

The auditor-general noted that the first stage of the Suburban Rail Loop was expected to cost up to $34.5 billion, but said the government had not yet disclosed the total estimated expenditure and completion date for the entire project.

Assistant Treasurer Danny Pearson disagreed with the auditor-general’s observations about the long-term strategy.

He said on Friday the government had been upfront about its path back to surpluses and 10-year plan to pay down COVID-19 debt.

“We’ve got a really strong, vibrant economy here in Victoria. We’re investing heavily in the services that Victorians rely upon, and in infrastructure they have overwhelmingly voted for, and we’re not taking a backward step,” he said.

Saul Eslake, former chief economist of ANZ Bank and of Bank of America Merrill Lynch in Australia, said the report echoed recent assessments by rating agencies including S&P, which said Victoria’s financial management practices were “lagging those of many highly rated domestic and international peers”.

He said that when treasurers mentioned surpluses, they referred to the difference between their revenue and “operating expenses”.

“These specifically exclude what the budget papers call ‘net purchases of non-financial assets’ and what everyone else calls ‘capital expenditure’ or ‘infrastructure spending’.

“So while the most recent budget predicts net operating surpluses totalling $5.1 billion in the three years 2025-26 through 2027-28, it will actually be incurring cash deficits totalling $23.3 billion over the same period.”

Eslake said Moody’s had warned in September that interest payments above 8.5 per cent of operating revenue – a figure Victoria is forecast to exceed in 2028 – may be “inconsistent with a rating at its current level” and that further overruns on major projects would risk a downgrade.

The Morning Edition newsletter is our guide to the day’s most important and interesting stories, analysis and insights. Sign up here.