$86bn ‘debt time bomb’ to rock Victoria

Victoria’s debt crisis will deepen in just four years, increasing the state’s already crippling interest bill by billions of dollars and making it even harder to fund basic services.

Victoria Treasurer Tim Pallas. Picture: Asanka Ratnayake/Getty Images

Victoria is confronting an $86bn “debt time bomb” that will start detonating in four years, increasing the state’s already crippling interest bill by billions of dollars and making it even harder to fund basic health, education and transport services.

Global financial experts also say the Allan government’s unfunded Suburban Rail Loop project, the first stage of which is budgeted to cost $34bn, will intensify financial risks facing Victoria.

Just days after the Auditor-General sounded the alarm about Victoria’s finances and the Allan government’s “reactive” budget management, Treasury data confirms the debt crisis will significantly deepen between 2029 and 2034.

Treasury Corporation Victoria figures reveal during this five-year period, about $86bn of state debt must be refinanced, and with the cost of borrowing soaring on global markets, the state’s interest bill will spiral.

TCV data shows the average interest rate for the $86bn debt is around 2.4 per cent, a historically low rate attributed to a wave of cheap money that swept the world triggered by the Covid-19 pandemic.

TCV debt figures show $14.2bn will mature in 2029, $12.4bn in 2030, $16.4bn in 2031, $15.3bn in 2032, $15.9bn in 2033 and $12.4bn in 2034.

The global cost of borrowing money is rising, and interest rates on refinancing the $86bn could average around 4.5 to 5 per cent, increasing Victoria’s interest bill on just this parcel of debt – the state’s overall debt is projected to hit $228bn by 2028 – by more than $2bn.

Ratings agency S&P Global says the cost of borrowing money is on the rise as the world moves into an “environment of potentially higher for longer interest rates” and this will drive Victoria’s interest bill upwards.

“There is quite a lot of debt mat­uring beyond the forward estimates and beyond 2028,” S&P director Martin Foo said.

“The weighted average interest expense that the state will pay will continue to rise because all of those low interest bonds issued during the pandemic will roll off.

“The long story short is weighted average interest expenses will almost certainly increase.”

Premier Jacinta Allan. Picture: NewsWire/Wayne Taylor

Treasurer Tim Pallas’s office has defended the government’s debt management, saying its strategy smoothed the impact of interest rate movements by borrowing in largely fixed rate loans and spreading the maturity dates on the majority of these loans evenly over a period of some 12 years.

“This (the $86bn in maturing debt between 2029 and 2034) has been factored into the budget forecasts and will have no impact on the bottom line,” a government spokesperson said.

“The Victorian economy is booming because of the Labor government’s investments in infrastructure and services. We have created 885,000 jobs since we were elected – the strongest jobs growth of any state in this period – and blitzed all other Australian states in real economic growth.”

Mr Foo said the increased debt servicing costs would not just be driven by higher rates but by the government’s need to increase existing debt levels. “It’s not just the refinancing of these maturities, it is also the financing of new and upcoming debt as well,” he said.

“It (debt) is far from static. In the case of Victoria, it is rising quite significantly.

“All of those new deficits will have to be financed at these higher interest rates that we face today …. So all of that will drag out the weighted average interest bill for the state.”

The Allan government is pushing ahead with plans for the unfunded Suburban Rail Loop running between Cheltenham and Box Hill and estimates the cost of the first section at $34bn.

The overall cost of the project is more than $125bn.

“There is a large component of that project that appears to be unfunded,” Mr Foo said. “The Victorian government is hoping the commonwealth will chip in a large sum of money but that hasn’t been committed yet.

“There is a large chunk that relies on so-called value capture and other revenue mechanisms that are yet to be fully explained.

“When we see a very large infrastructure program like this, it does point to longer term risks to the state credit rating, especially if for whatever reason the commonwealth doesn’t fund as much as the state expects, and then the state has to step in more.”

S&P Global has rated Victoria’s economy at AA, two steps below a AAA rating that is applied to states with stronger budgets such as WA. If Victoria’s rating is downgraded further, this will also increase the cost of borrowing money.

Mr Foo said S&P was “constantly reviewing” ratings. He said another challenge for Victoria’s budget was the rising proportion of public sector revenue required to service the growing debt, which is about 7 per cent.

“The rising interest expense is an issue. For the likes of Victoria you can see … when you get to a situation where interest expense starts to consume 8 or 10 per cent of revenues then it really puts the government in a difficult spot because it’s money that could be spent on other essential government services,” he said. “It (the interest rate bill) is one of the fastest, if not the fastest, growing operating expense line items.”

The Allan government’s financial record is coming under intense scrutiny in the wake of last week’s report from Auditor-General Andrew Greaves.

In a report to parliament, Mr Greaves said Labor had yet to develop a “clear plan” for managing the budget and he also warned the government about the state’s rising debt. “While strategies and objectives are in place, the state has not articulated a clear plan for long-term fiscal management,” the report stated.

“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.”

The general government sector reported a net operating loss of $4.2bn this year, bringing total losses over the last five years to $48bn, according to the Auditor-General’s 2023-34 annual financial report.

Mr Greaves found that as GGS gross debt is projected to grow to $228.2bn by June 30, 2028, the state’s gross debt will also jump from $195.7bn in 2024 to $268.4bn by June 30, 2028.

“Using debt to fund investment in intergenerational infrastructure is common … However, a higher and unsustainable level of public debt can pose a significant risk to future prosperity and economic stability,” his report said.