Victoria’s debt risks doubling in a decade, budget office warns

Victoria’s net debt will double over the next decade if the Andrews government does not start to significantly pay off its borrowings, the independent Parliamentary Budget Office has found.

Economists say the debt burden could rise even further if the government sticks to its current policy of stabilising the state’s debt ratio, especially if Victoria is hit with an economic downturn or infrastructure blowouts, forcing the government to further cut services or raise taxes.

Victorian Treasurer Tim Pallas said the Andrews government was pursuing a “growth strategy” with “stabilised debt” as a way of reducing the relative level of debt.Credit: Joe Armao

The projections, contained in new analysis by the state’s independent budget watchdog, predict net debt will climb from $116 billion – which it is expected to hit this month – to $234 billion in 2032-33 if the debt ratio remains stable.

Handing down his ninth budget last month, Treasurer Tim Pallas revealed the state’s net debt would climb to $171.4 billion by June 2027 – almost 25 per cent of gross state product (GSP).

While the government does not provide information on its debt ratio beyond 2027, Pallas’ past four budgets have included a target of stabilising net debt as a percentage of GSP over the next 10 years. Presenting his budget last month, Pallas told parliament the Andrews government was pursuing a “growth strategy” with “stabilised debt” as a way of bringing down the relative level of debt.

AMP chief economist Shane Oliver said maintaining such a high debt ratio was only possible in periods of strong growth and that Victoria “couldn’t afford anything to go wrong” or it would be forced to take drastic austerity measures.

“On that scenario, the government really can’t afford an economic downturn, more cost blowouts or higher interest rates,” Oliver told The Sunday Age.

The budget office analysis also warns that Victoria’s debt as a share of the economy would reach 31.9 per cent in 2032-33, or $305.3 billion, if it continued to climb at the current forecast rate of 10.1 per cent per year.

Oliver said a debt of $300 billion would be “problematic” for global ratings agencies and could result in the state’s credit rating being further downgraded, adding to the state debt repayment burden.

He said that would leave the government with few options but to lift taxes, cancel and delay infrastructure projects or cut back on public transport or healthcare services.

A separate report released yesterday by the budget office also contradicted claims by Pallas that Victoria was the “lowest-taxing state”, revealing the state’s tax burden was now 5.8 per cent of GSP – higher than all other states.

The Andrews government used last month’s budget to impose billions of dollars of new taxes for businesses and property investors, outlined cuts to the public service and delayed major infrastructure projects in an effort to keep up with its debt repayments.

Despite this, net debt is expected to reach $135.4 billion next financial year and $171.4 billion in 2026/27 – 24.4 per cent of the state’s economy. The budget office projects that the government’s peak net debt-to-GSP ratio would come at some point beyond 2026-27.

Shadow treasurer Brad Rowswell said the budget was meant to rein in Victoria’s record debt, but the analysis showed it was instead projected to “keep ballooning to new highs”.

“At the same time the Andrews government has introduced a raft of new taxes that will only punish Victorians even further,” he said.

The budget office analysis found Victoria’s net debt would begin to fall from 2027 if the state government adopted the debt-to-GSP ratio predicted by Labor governments in New South Wales and Queensland.

Victoria’s net debt would be 43 per cent lower than projected, dropping to $134 billion in 2032-33 if the state government adopted New South Wales’ forecast debt ratio for 2025-26 of 14 per cent.

It would reach $72 billion, one third of its projected level in 2032-33, if the government was able to reduce its debt ratio to 7.5 per cent, consistent with Queensland’s forecast ratio for 2025–26.

To reach that level of debt, Victoria would need to dramatically cut spending, run budget surpluses of more than $10 billion a year and further raise taxes, Oliver said.

“Bottom line is to get the debt profile running down, it would require quite a lot of austerity which would have an adverse effect on economic activity,” he said.

In response to the analysis, a government spokesperson said Victoria “borrowed money to protect lives and support families, workers and businesses during the global pandemic”.

“We are the only state or territory with a COVID debt repayment plan – paying back the emergency credit card while we continue to grow the economy and jobs,” the spokesperson said.

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