Victoria set up an offset account to save money. Then it went into the red

An offset account meant to help drive down Victoria’s borrowing costs was instead put into overdraft, forcing the government to repay hundreds of millions of dollars by the end of this financial year.

The May budget papers reveal Treasury will need to cover the overdraft of the state’s Central Banking System (CBS) – an account used to collect surplus funds held by departments and agencies across the Victorian government – again next financial year as it pushes out billions of dollars in repayments.

Treasurer Tim Pallas and Premier Jacinta Allan in parliament.Credit: Getty Images

Centralising funds into the CBS was meant to improve the state’s cash-flow management and drive down the higher borrowing costs by acting as an offset account. Managed in this way, the system can reduce the state’s gross debt and help its credit rating by reducing long-term borrowing costs.

The CBS overdraft first appeared in the 2023-24 budget when the government allocated $5 billion to be paid by the end of this financial year, before downgrading that amount to about $500 million. The government has now pushed out the bulk of the payment to the end of the 2025 financial year to clear the overdraft.

A Victorian government auditor, speaking on the condition of anonymity to discuss financial management, said that while the Central Banking System could go into overdraft, it was “not a good look” for the government’s account to go into the red.

However, Percy Allan, the former secretary of the NSW Treasury and chairman of the NSW Treasury Corporation, said it was possible for the Victorian Treasury Department to make the decision to use the overdraft because it might have been cheaper than issuing a longer-term bond.

The Age has confirmed with a senior government source, speaking on the condition of anonymity, that an overdraft is often seen as a cheaper source of funding than long-term borrowings, and that the balances of department and agency accounts were not affected by the arrangement.

“A centralised banking system is commonly used by governments around the world to consolidate financial holdings,” a government spokesperson said in a statement. “The CBS uses the Victorian government’s own funds and reduces the government’s borrowing costs, saving significant amounts in interest and other expenses.

“We retain significant liquid funds to cover the CBS holdings of departments and agencies – Victoria has cash and deposits totalling $17.4 billion.”

In April, The Age revealed Victoria’s Treasury had sought an emergency cash injection to cover the cost of the state’s rising interest bill weeks before the 2023 budget.

Opposition finance spokeswoman Jess Wilson said the overdraft provided the clearest example yet “of a government that cannot manage money”.

“Labor is bailing out their own bank account and this situation raises serious concerns about the financial stability of Victoria’s frontline service delivery agencies, including schools, hospitals, community safety and emergency services,” she said.

“Due to Labor’s financial mismanagement, a banking arrangement aimed at reducing Victoria’s record debt and interest bill will instead be adding to it.”

Seven months ago, the government was predicting it would be in deficit by about $1 billion by June 2025. That expected financial hole more than doubled to $2.2 billion in the May state budget.

The budget papers forecast Victoria’s net debt to rise to $187.8 billion by June 2028. That will leave Victorian taxpayers with a $25 million daily interest bill within four years.

On Tuesday, Premier Jacinta Allan would not put a date on the opening of $272 million Wyndham Law Courts, following reports from this masthead that it would not operate from March 2025 as intended due to a lack of funding set aside for operational costs.

Documents seen by The Age show operational funding for the facility has been deferred and consultation is under way on a new opening date.

Allan said her advice was that the facility would open early next year, but she did not commit to a specific date.

“Like we do with all projects ... as you get towards construction being completed, you work with the departments and agencies on how that new infrastructure is going to be operationalised,” she said. “Court Services Victoria is having those discussions.”

Shadow attorney-general Michael O’Brien said it was now a phantom court.

“It’s the most efficient court in Victoria because it doesn’t have any trials,” he said. “It’s a court that Labor can build, but they just can’t afford to open.”

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