Victoria’s tax-and-spending spiral

Days after ratings agency S&P Global warned that Victoria risked another credit rating downgrade, the spending and debt vortex in the nation’s second most populous state remains out of control. Tuesday’s budget, the first delivered by Treasurer Jaclyn Symes, lacks the recurrent and infrastructure spending restraint that the government’s books and the state’s economic position demand. Despite eye-watering tax rises that will further dampen productive business activity, Victoria’s debt – currently $155.5bn – is set to rise to almost $200bn within four years. And despite Ms Symes insisting the government has made “responsible choices”, Victorian taxpayers will be paying $10.5bn in annual interest by June 2029 to service the debt – a significant increase from 2019 when the interest bill was $2.1bn.

Although the budget contained no new taxes, the government continues to increase its taxation take, predicting it will reap 30 per cent a year more in taxes by 2028-29. Land taxes, which are crippling many small and medium-sized businesses, will continue to provide billions of dollars in revenue, including from the Covid debt levy on landholdings. The Reserve Bank of Australia’s 0.25 per cent interest rate cut, while welcome for borrowers doing it tough, will be relatively minor for many Victorians struggling to keep up with land tax.

The state’s fiscal crisis has been years in the making. In November 2022, shortly before the last Victorian election, The Australian reported that the state was on track to owe more than NSW, Queensland and Tasmania combined by June 2026. At that point, interest payments on state debt were expected to soar from $3.86bn in the 2022-23 financial year to $7.44bn in 2025-26. The situation has deteriorated badly since then. The budget revealed that across the forward estimates an average 8 per cent of the state’s total revenue will be used to pay off interest on the debt.

The budget papers identified the nub of the problem. Interest payments were forecast to grow, the papers noted, as “the government continues to support significant investment in the delivery of services and the infrastructure program”. Despite promises of public service efficiencies, employee expenses have grown by more than $1bn from last year’s budget. Major government departments – health, education, energy, families, transport, housing, and justice and community safety – collectively recorded billions of dollars in blowouts since the last budget.

Nor is excessive infrastructure spending feasible, especially on dubious undertakings such as the Suburban Rail Loop to nowhere. The first stage, from Cheltenham to Box Hill, to cost more than $30bn, remains unfunded. To the bemusement of Victorians, Labor’s budget tried to rebadge the SRL as “Australia’s largest housing project” that will deliver another 70,000 homes close to healthcare, education precincts and jobs. Premier Jacinta Allan faces mounting problems about how to pay for the project, with federal Labor investing only $2bn and the Victorian Auditor-General questioning where funding will come from.

Ms Symes heads off to New York soon to meet credit rating agencies, which are likely to emphasise the need for spending restraint in 2026 election promises. Unfortunately for Victorians and the nation, this budget is a missed opportunity to make headway in the structural financial reform needed.