Will the feds have to bail out Victoria?

Former Victorian premier Daniel Andrews with workers at a construction site in Melbourne in April last year. The Labor government has been on a spending binge for close to a decade. Picture: NCA NewsWire / Luis Ascui

I gave up going to state budget lockups some time ago. They just seemed so pointless and, let’s face it, even an economics commentator can only take so much.

It’s not that state budgets don’t matter; they do, particularly in the biggest states of NSW and Victoria. But in the very early days of Dan Andrews’s government in Victoria, the need for prudent budget management held some sway, so I unwisely concluded there was nothing much to see. Mind you, the Andrews government did waste more than $1bn not to build a tunnel and accompanying road early on.

To say Victoria’s fiscal position is now a disaster is to understate the point. The Labor government has been on a spending binge for close to a decade. Expect it to continue, but just at a slightly more subdued pace.

Its Big Build program – I always wondered whether that title was meant as a joke, a bit like Big Bird – involves a catalogue of out-of-control projects, both massively delayed and massively over budget. A sop to the government’s trade union mates, the projects have drawn workers away from other activities and massively driven up costs in the state. Annual wages of 200-large are very common.

A key variable in any state budget is employee expenses – it’s the largest cost governments must cover. Each year, there have been pledges made by long-serving Treasurer Tim Pallas that employee expenses would be tightly controlled. Each year, they have blown out relative to expectations.

In Pallas’s first budget, employee expenses were a tad under $19bn. In 2024-25, they are expected to be $36.5bn. By 2027-28, they will reach $40bn – at least. If Pallas were a CFO in the private sector, there is no way he would have lasted a decade.

Just take a look at the debt figures. When the Andrews government was first elected, there was hardly any government debt to speak of, thanks mainly to the aggressive repair of the state’s books undertaken by Jeff Kennett.

In 2021-22, net debt reached $100bn and is now expected to be $190bn by mid-2027. It will amount to over one-fifth of the state’s output and the interest payments will become an increasing burden, rising to an annual figure of $9.4bn by 2027-28. Interest payments will make up nearly a quarter of employee expenses, which is an extraordinarily bad outcome.

While Victoria’s cousins to the north in NSW may be feeling slightly smug about the dire fiscal position of Victoria, similar deleterious indications abound for NSW too, although it’s not as bad. In 2021-22, government net debt in NSW was $56bn; it is expected to reach $113bn by 2026-27. It will rise from 8 per cent of the state’s output to 13 per cent over that period. The tight fiscal ship Mike Baird ran was short-lived.

The NSW government has had no more success in running recurrent budget surpluses recently than Victoria. Covid was an excuse but the excess spending lingers. It would seem “value for money” is a largely alien concept for both our largest state governments.

The sad reality is that Victoria now has very little going for it, apart from rapid population growth spurred by excessive international migration. Its real per capita household income puts it in the bottom half of the states. High taxes are sending money out of the state, particularly in the real estate sector.

Victoria has a series of incomplete and wildly expensive infrastructure projects as well as the beginning of the insane Suburban Rail Loop. The state’s Energy Minister is by far the most incompetent in the country and the state is paying a high price for this ineptitude. The reborn State Electricity Commission is just another shaggy dog story.

It’s absolutely astonishing the ratings agencies haven’t taken an axe to Victoria’s credit rating: it is still AA, having been downgraded in 2020. Presumably, there is a view that if – should that be when? – the alarm clock of disaster goes off, the federal government will have no choice but to bail Victoria out. One would assume there would be conditions attached to such a financial rescue – there would need to be.