If there is one constant in Australian fiscal affairs, it is that the Victorian Labor government will spend excessively, mismanage major projects, swell the ranks of its public servants and – notwithstanding punitive tax assaults on investors and other unfavoured classes – further inflate the state’s debt.
It was not always this way. Under Jeff Kennett, Steve Bracks and John Brumby, Victoria was in many ways a model for other states. Its fiscal house was in order, it modelled best-practice micro-economic reforms and its economic performance was strong.
Why the fall from grace?
The most obvious reason is that since the election of Dan Andrews in 2014, Victoria has effectively been a one-party state. The state Coalition parties – at least until the recent elevation of Brad Battin to the Liberal leadership – have been an opposition in name only.
This has been justified as political expediency, but when put to the electoral test in 2018 and 2022, it signally failed.
The result? The Andrews and Jacinta Allan governments have faced no challenge to their hard-left policy agenda. This has allowed them to commit to the most ambitious – read economically costly – emissions targets in the country and bet the house on intermittent wind and solar power.
A less widely recognised factor in Victoria’s downfall is the collapse in quality of its public service, and its Treasury Department. As recently as the late 2000s, it had arguably the finest public service in the country, including its federal counterpart. Its Treasury was first-rate.
I saw this myself in 2007, when – as a commonwealth Treasury official – I was heavily involved in the negotiation of education funding agreements with the states and territories. While most state officials focused only on how much money would go to their jurisdictions, Victoria’s were well-versed in the academic literature on best-practice reforms, understood the economic pay-offs of better education, and were willing to consider the national – and not just their state’s – interest.
Yet today, this same public service has been thoroughly discredited. In a scathing 2023 report, the Victorian Ombudsman found that the integrity, competence and professionalism of the state’s public service had been compromised by its “creeping politicisation”.
It reported “growing pressure to tailor official advice to the preferences of the government”, particularly on politically sensitive infrastructure projects; “decisions made in echo chambers not subject to the scrutiny of expert career officials”, and; a “culture of fear in the upper echelons of the public sector” that “does not support frank and fearless advice”.
With a public service unable to fulfil its traditional role as a trusted, arm’s-length and credible adviser, another potential check on the government’s mismanagement of the state has been removed.
The third, and perhaps most significant, reason Victoria has gone off the rails is that Canberra has not only allowed it to do so, but rewarded it into the bargain.
In part, this is a by-product of the way our deeply flawed federation has evolved. Our chronic vertical fiscal imbalance – the fact that Canberra raises the vast majority of the nation’s taxes, while the states focus largely on spending – has relegated the latter to little more than service delivery entities.
At the time of Federation, the states levied their own income taxes, an arrangement that promoted fiscal prudence on their part. And since 1994, the Loan Council has not regulated state borrowing. Even worse, the way we distribute goods and services tax revenue – nominally a state tax but collected by the federal government – between the states rewards those, such as Victoria, which mismanage their economies.
When Victoria was well-run, it was a net donor of GST revenue to other states. For the first time in its history, it is set to become a recipient state. (When a systemically important jurisdiction such as Victoria achieves deadbeat status, joining Tasmania, it is a national economic problem.)
But by far the most egregious blank cheque Canberra has ever written Victoria – and one still not widely recognised – was Scott Morrison and Josh Frydenberg’s $88.9bn JobKeeper program.
If he did not have access to this wage subsidy initiative, Dan Andrews would have had to end his Beijing-inspired lockdowns far sooner. Given the immense economic and human toll lockdowns exacted, it is no exaggeration to say that JobKeeper – which Morrison, Frydenberg and Treasury still pat their own backs over – is the single worst example of moral hazard in Australian policy history.
And of course, the Victorian government benefits from strong financial and ideological support from the Albanese government.
The latter’s financial backing for the disastrous Suburban Rail Loop project is well known. But arguably more important is its semi-religious commitment to emissions austerity, which provides cover for its southern counterpart.
While the picture I have painted of Victoria is a depressing one, there may be cause for optimism.
Judging by the polls, and given recent taxpayer demonstrations, the Svengali-like hold the Labor Party has had over the state has been broken. The government could well be defeated at next year’s election, which would be the circuit-breaker the state needs.
But what about Canberra?
Could what we have witnessed in Victoria over the past decade – the destructive feedback loop between a one-party state and a compromised public service – now play out in the national capital?
There is no question that the Albanese government will dominate the next parliament. It has a huge majority in the lower house and needs only the support of the Greens to get legislation through the Senate. Furthermore, its leading lights have already misread the election result, seeing it as a popular endorsement of its hard-left economic agenda, rather than a rejection of Peter Dutton’s me-too, Labor-lite alternative.
And with Labor’s Right faction no longer the voice of economic reason internally, there will be no policy brake on the Left – which shares the Andrews-Allan view of the world. And, on the other side, while Canberra’s bureaucracy may not be as damaged as Victoria’s, it is a shadow of its former self.
To my knowledge, it never provided robust advice to ministers on the economic and social costs of lockdowns during the Covid era. And our mandarins do not acknowledge the heavy economic cost of net zero, an escalating self-imposed energy tariff, or the environmental futility of this agenda in a world now moving away from it.
And our Treasury Department, which used to believe in low taxation, limited government and balanced budgets, is now led by someone who argues for permanent fiscal stimulus, praises bracket creep, supports the taxation of unrealised capital gains, and believes inflation can be successfully suppressed by energy subsidies.
In the next few years, the only real check on Albanese government’s mismanagement and ideological excess may be the bond market. Only weeks ago, global investors in American debt forced Donald Trump to drop his ill-conceived Liberation Day tariff assault.
While credit ratings agencies are sounding the alarm about Canberra’s fiscal trajectory, let’s not forget they are only warning about our AAA rating. If these outfits looked more closely at our books – and in particular the wildly unrealistic spending, taxation and productivity assumptions they rely on – they would take a far harsher view, but that is not how these agencies work.
If the Albanese government is to be held to account before wrenching change is forced on us from outside, we are left with one hope: that the federal Liberal opposition takes up the challenge with gusto and political courage, informed by the best of its philosophical traditions. Lower taxes and smaller government must be part of the “modern” Liberal agenda, but these commitments will be meaningless if the party continues to support net zero – a deeply regressive tax on energy and a pretext for pandemic-like government control of the economy for decades to come.
The worst thing Sussan Ley could do, for herself, her party and the country would be to capitulate to a dominant Labor Party and its economic and social agenda.
To do so would be to repeat the historic mistake her Victorian counterparts made when Dan Andrews came to power in 2014, guaranteeing Labor a decade of dominance and risking the nation going off the rails, but with no funding sugar daddy to fall back on.
David Pearl is a former Treasury assistant secretary.
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