Victorian election: Poll promises to fire up inflation

Massive spending by both major parties ahead of the Victorian state election will exacerbate inflation and put pressure on interest rates, leading economists say.

Victorian Premier Daniel Andrews, Deputy Premier Jacinta Allan and Public Transport Minister Ben Carroll board the bus. Picture: NCA NewsWire / Andrew Henshaw

Massive spending by both major parties ahead of the Victorian state election will exacerbate inflation and put pressure on interest rates, leading economists say.

The stark warning came on the first full day of the election campaign, as both government and opposition made it clear the next 3½ weeks would be all about Premier Daniel Andrews.

Mr Andrews and wife Catherine boarded a big red bus with his face on it, and headed to the regional town of Ballarat to announce a $1bn regional train package.

Deputy Premier Jacinta Allan – regarded as Mr Andrews’ most likely successor – was also on the bus in her role as Transport Infrastructure Minister, as was Public Transport Minister Ben Carroll.

Matthew Guy’s opposition, meanwhile, shrugged off questions over the legality of their “Ditch Dan-mobile” – a restored 1979 ambulance intended to highlight Victoria’s health crisis – pledging to save households up to $100 a year by freezing fixed household water charges for five years.

As the government came under fire for using public servants to cost Mr Guy’s policy of reducing daily metropolitan public transport fares to $2, he struggled to explain a $1.6bn discrepancy between the costings he commissioned from the Parliamentary Budget Office and the costings Labor commissioned from Department of Transport.

The opposition says the PBO has costed their policy at $1.3bn but is yet to make public the modelling underpinning that finding, which compares with the transport department’s $2.9bn costing. In contrast, the opposition has made public findings it commissioned from the PBO on Labor’s Suburban Rail Loop, which found the controversial project could cost as much as $200bn.

AMP chief economist Shane Oliver on Wednesday warned of the likely inflationary effect of both major parties’ promises.

“The bottom line is (election spending) probably will exacerbate inflation,” he said. “If a government is spending up big (and) it’s financed by debt, and you’re issuing state government bonds to finance extra spending then that can add to inflation. In borrowing that money you’ve got to compete with other borrowers which puts pressure on interest rates.

“The time to spend money is when the economy is weak.

“When you’ve got strong economic activity like Victoria does now, and inflation is a problem, it’s the time to cut back.

“We saw that earlier in the year with the federal Coalition budget in March, when we were starting to see higher inflation and that budget pumped more money into the economy just at the wrong time.”

Monday’s mid-year economic and fiscal update shows Victoria on track for net debt of $165.4bn by 2025-26 – higher than the combined total for NSW, Queensland and Tasmania.

Unemployment is at its lowest levels since the 1970s – forecast to finish the current financial year at 3.75 per cent – while the consumer price index is expected to be 6.5 per cent for the year.

Grattan Institute Transport and Cities Program director Marion Terrill warned the government was facing an “absolute mountain of debt” at a time when the construction sector has been facing capacity constraints “for some years”.

“Putting more large projects into an already overheated market means you’re just pushing up the price of construction (and) ... firms were already having difficulty finding people to do the work,” she said.

“The implication of adding more construction and committing to more projects is it just exacerbates something that is already problematic. It then becomes really important to not commit to projects before doing due diligence on them. The Suburban Rail Loop has been a very controversial project, but not the only one. Airport Rail Link is another one.”