Victoria’s $36b interest bill could fund the entire first stage of the Suburban Rail Loop

Victoria’s debt will cost taxpayers $36 billion over the next four years in interest – more than the projected cost of the entire first stage of the Suburban Rail Loop.

At the same time, government spending will add an average of $9.6 billion a year to the state’s mounting debt pile.

While the state has passed the peak of its Big Build infrastructure splurge, with the long-awaited Metro Tunnel and West Gate Tunnel projects both expected to open by the end of this year, the 2025-26 budget papers reveal the government has a whopping $213 billion in capital projects in the works.

To pay for this and the bill still outstanding from Victoria’s COVID-era health and stimulus spending, government debt is forecast to reach $155.5 billion by the end of the current financial year, $167.6 billion by June 30 next year and $194 billion by 2028-29.

The cost of servicing this debt is $6.8 billion this year. By 2028-29, interest payments will reach $10.6 billion. This represents a 55 per cent increase in interest payments over the four years of the budget and confirms interest as the fastest-growing major expense item on the government’s books.

It means that by 2028-29, nine cents from every dollar of government revenue will be spent on servicing debt.

Jaclyn Symes delivers her first budget.Credit: Joe Armao

The four-year, forward estimates of the budget show that while operating surpluses are expected in every year, the size of Victoria’s continued investment in infrastructure will keep the state’s overall fiscal position in deficit and in turn, keep adding to debt.

The government will invest $23.8 billion in infrastructure this financial year and $21.3 billion next year. From there, total investment gradually declines to $15.6 billion in 2028-29, in what the government claims is a return to sustainable, pre-COVID levels.

Debt is forecast to increase in the out years, on average, at about half the $18.2 billion increase projected for the current financial year. Forecast growth in the state’s economy of between 2.5 per cent and 2.75 per cent means debt will plateau when measured as a percentage of the state’s economy.

Treasurer Jaclyn Symes, in handing down her first budget, said this was the measure the government’s fiscal management should be judged by.

Symes made no commitment - either in budget papers, her speech to parliament or her budget day comments to media outlets - about reducing state debt. Five years after Melbourne headed into its first lockdown, the government has not adopted reducing debt as a fiscal goal nor outlined a strategy to start paying it down.

Responding to questions about her management of the debt and the increasing amount of public money that must go towards servicing it, Symes said she remained committed to the government’s previously stated fiscal strategy.

That five-step plan, developed by her predecessor Tim Pallas, sets as its ultimate goal stabilising and then reducing net debt as a proportion of GSP.

“Reducing net debt as a proportion of GSP is the measure we are focused on,” Symes said. “It’s the measure that a lot of the world is focused on as well.

“Today is a surplus. We have met step 3. Step 4 and step 5 [are] about stabilising and reducing debt as a share of the economy. We are on track to do that.”

Symes said she would travel to New York next month to meet global ratings agencies whose assessments directly impact Victoria’s access to global debt markets and the interest it must pay.

Symes will take with her some positive selling points about Victoria’s fiscal outlook.

The budget papers note that the debt level for each of the forward estimate years is marginally improved from that forecast in Pallas’ final budget update, published in December last year, which was in turn marginally improved from last year’s budget.

Where debt was forecast in December to reach $187.3 billion by 2027-28, it is now forecast to reach $185.2 billion. Where net debt as a percentage of GSP will rise to 25.2 per cent by June 2027, it is forecast to plateau over the next two years.

These indicators meet some of the targets set for Victoria by S&P Global, one of the world’s most influential ratings agencies. S&P Global’s Melbourne-based analyst Rebecca Hrvatin said on Tuesday the budget was “roughly in line” with the agency’s expectations.

“Victoria’s fiscal outlook is slowly improving after several years of yawning deficits and rapidly rising debt,” she said. “Today’s budget … highlights the protracted fiscal recovery the state is undergoing following the easing of the pandemic.

“We view Victoria’s commitment to controlling operating costs, delivering promised savings, and slowing growth in debt as important for maintaining the ‘AA’ credit rating.”

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