‘Bad news’ budget looms: Services slashed, wishlists axed and promises delayed

Funding for election commitments is at risk of being held back and departments have been told to cut back their spending requests, as the Allan government warns of another “very, very” tight budget.

Treasurer Tim Pallas on Tuesday singled out the government’s COVID-19 spending in areas such as health and education, suggesting the state needed to wind the services back.

Treasurer Tim Pallas has warned Victorians the state budget could slash more government services.Credit: Wayne Taylor

As discussions over the state budget ramp up, government agencies, departments and ministerial offices are increasingly being told to expect little in the way of funding because of rising interest rates, ballooning construction costs and net debt heading towards $177.8 billion by 2027.

The Age has spoken to half a dozen ministers, Labor MPs and government sources with knowledge of the budget deliberations on the condition of anonymity so they could speak freely and reveal internal government discussions.

One Victorian government minister said smaller projects promised during the 2022 election would likely be pushed back, with nervous MPs concerned the delays will get close to the next election.

Another minister said that while the state government remained committed to all its election commitments, department bosses had been instructed to “strip back priorities” and delay non-essential projects to the later years of the forward estimates.

“A lot of us are getting bad news back,” they said. “There are a lot of things that are nice to have, but a lot of people get news that programs will be cut.

“It’s about reducing government costs without impacting frontline services.”

According to analysis from the Parliamentary Budget Office, Labor committed $5 billion worth of health promises and about $2 billion each for education and transport ahead of the 2022 election.

These included hospital plans for Melbourne’s north and south-east, planning for 25 new schools and $850 million worth of upgrades across 89 schools.

One Labor MP said there was increasing nervousness that funding for their local projects would not be ready in time for them to “cut ribbons” ahead of the 2026 election.

A minister said the former Andrews government had injected millions into school upgrades in recent years, but Victoria’s budget position meant it was unable to continue at the same pace.

Another government source familiar with the deliberations of the cabinet’s new budget and finance committee said it was yet to consider any possible revenue-raising options and was hesitant to raise taxes.

On Tuesday, Pallas said there would be no wholesale increase in taxes, but suggested there could be targeted tax changes around the margins.

He said he was expecting a “very, very tight budget” for what will be his 10th delivered as treasurer, but that the Allan government was conscious of cost-of-living pressures, particularly on low- and middle-income households.

“This will not be a budget where there will be essentially wholesale increases in taxes,” Pallas said.

“We put in place our COVID repair plan in the last budget. That’s not to say that we won’t do anything, but it’ll be pretty marginal.

“What we will be looking at is how we can make our tax base more efficient, I’m constantly looking at that.”

Pallas said the government had identified $31 billion of financial support it had provided during the pandemic and that the budget would not be sustainable if the state continued to fund COVID-19 measures at the same rate.

When asked what areas could be cut back, he said education and health had been “profoundly expensive” during the pandemic.

He pointed to “substantial” spending on a statewide tutoring program, which has been funded until the end of 2025.

“Believe me, I am looking very closely at all the expenditures that government is making, and we will make choices, and we will wind back the provision of support,” he said.

“Since the last budget, we’ve had multiple increases in interest rates. We’ve seen that our construction costs continue to mount as a consequence of an overheating infrastructure delivery pipeline.”

The Reserve Bank of Australia has increased rates twice since the treasurer delivered the 2023-24 state budget in May.

Infrastructure is the main driver behind an increase in the state’s forecast net debt – which is expected to reach $177.8 billion by 2027 – according to the December financial mid-year budget update, which revealed the North East Link was $10 billion over budget. Interest repayments will hit $8.8 billion a year by 2027.

Community and Public Sector Union Victorian branch secretary Karen Batt said the government should fund public services to help families deal with the cost of living rather than “taking the axe to them again”.

She said the government didn’t argue the budget was tight when the Victorian Independent Remuneration Tribunal awarded MPs a pay rise or when executives were paid above salary caps.

“Victorians are sick of the double standards and one rule for them and another applying for the workforce,” Batt said.

Opposition Leader John Pesutto said households and businesses would have to suffer because of financial mismanagement.

“Victorians can expect another horror budget and that they will pay the price for Labor’s financial mismanagement through higher taxes, broken election promises and further cuts to key services across health, education, justice and roads,” he said.

Northern Futures, an organisation that has helped workers in Geelong’s most disadvantaged suburbs find work since 2007, has recently had its funding cut and faces an uncertain future as it appeals for donations to remain afloat.

Chief executive Andrew Palmer said census data had shown Norlane was the most disadvantaged small area in the state and was a key focus of Northern Futures work.

“It just astounds me that the state government has withdrawn substantial resources from what they’ve been doing here,” he said.

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