There are 17 states like Victoria around the world. None has more debt
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Victoria has the worst debt burden of 17 similar states across the world, and credit agencies warn it is likely to deteriorate unless tough decisions are made to cut infrastructure spending and raise more taxes.
In a view backed by leading economists, credit agencies Standard & Poor’s and Moody’s say that while Treasurer Tim Pallas took steps in Tuesday’s budget to begin repairing the state’s finances, Victoria’s debt burden would not meaningfully decline soon.
Treasurer Tim Pallas said he handed down his most difficult budget on Tuesday. Credit: Eddie Jim
An S&P analysis shows Victoria not only has the highest debt burden of any state in the country, it also carries more debt than any of the 10 other sub-sovereign states in Canada and Germany – two countries that experts nominate as most similar to Australia.
“Victoria’s percentage of debt to revenue is not unsustainable … and we do believe Victoria’s wealthy economy can afford Victoria’s debt burden over the long term,” S&P director of government ratings Anthony Walker said.
“However, Victoria has had very weak fiscal outcomes for the last couple of years. We saw some effort on [Tuesday] – the government was trying to take a few steps towards fiscal repair, slightly lower expenses and tax increases. But there’s still more to do … large infrastructure projects weren’t pared back as much as we would have liked to have seen.”
Pallas gave his ninth budget on Tuesday, describing it as the most difficult he has delivered since the government came into power in November 2014.
The budget will hit 860,000 property investors with a land tax rise to reap the government $4.7 billion over four years, while businesses with a payroll of more than $10 million face extra taxes to raise $3.9 billion over four years. Pallas also announced 4000 public servants would lose their jobs to save the government $2.1 billion.
Despite these measures, the budget revealed Victoria’s net debt would continue to rise, up from $135.4 billion next financial year to $171.4 billion by 2027, the equivalent of 24.5 per cent of the economy.
The S&P analysis shows Victoria’s debt burden will be twice as high as its revenue by 2027, the highest of comparable jurisdictions the leading credit ratings agency assesses.
Quebec in Canada comes second with its debt burden exceeding revenue by 95 per cent, followed by Germany’s North Rhine-Westphalia at 84.39 per cent and Saxony-Anhalt at 83.9 per cent.
Walker said it would take some time before Victoria’s AAA credit rating, which it lost in 2020, would be restored.
On Wednesday, Pallas conceded it was “going to take quite some time” to get that rating back, but he said the government would continue to borrow to build infrastructure projects and deliver election commitments.
“The choices that we made here go to the government delivering on its promises, assisting in the rebalancing of the state’s finances but recognising that that journey is a long one,” the treasurer said.
The budget forecasts that debt as a percentage of the economy in 2026-27 will stabilise at just 0.1 per cent higher than the preceding year. Victoria’s net debt to GSP (gross state product) ratio of 22.6 per cent in 2023-24 has come down from a forecast of 28.9 per cent in November 2020.
A government spokesperson said: “We borrowed money to protect lives and support families, workers and businesses during the global pandemic – like governments did around the world.
“We are the only state or territory with a COVID Debt Repayment Plan – paying back that emergency credit card while we continue to grow the economy and jobs.”
AMP Capital chief economist Shane Oliver said that if state debt continued to grow as projected, Victorians would end up paying the price with higher taxes in the near future and diminished government services.
“There is not enough action to rein in spending, and at some point ratings agencies and investment will reach the conclusion that it’s not sustainable, which would put upward pressure financing the cost of the debt,” Oliver said.
“The problem will come if the economy slows faster than projected, and this is the big risk … If the [Reserve Bank] miscalculates the forecast, and we end up going too far, and we fall off the RBA’s narrow path, that will lead to a more significant deterioration in the fiscal situation in Victoria.”
Moody’s senior credit officer John Manning said Victoria had successfully managed its debt profile over the past few years, predominantly by fixing its interest repayments when the cash rate was at historical lows.
He said the state government had a “reasonable buffer for debt affordability”, but noted Victoria’s net debt by 2026-27 would be 71 per cent higher than at the end of June 2022.
“I would focus more on debt affordability, and debt affordability right now is OK,” Manning said.
“Interest repayments are 4.9 per cent of total revenue in 2023 … but we project interest costs will become 8 per cent of operating revenue [by 2027].”
Manning said that was worse than last year’s budget, which had predicted that costs would rise to 7 per cent of operating revenue by 2027.
Economists have described the government’s plan to increase taxes in the name of reducing debt accumulated during the pandemic as merely paying for the government’s election commitments. Net debt will be only $3.5 billion lower than projected in last year’s budget.
Manning said the state’s challenge in fiscal repair had been increased by underlying inflationary pressures, delivering on election commitments and huge infrastructure projects, and providing cost-of-living relief savings.
Brendan Coates, of the Grattan Institute, said the government continued to face tough choices, and urged it to review the viability of the Suburban Rail Loop, the only project that will not be subject to the federal government’s national review of infrastructure spending.
Capital expenditure is forecast to reach $22.5 billion for the 2022-23 financial year, and an average of $19.6 billion a year over the forward estimates, which is an increase against the $18.7 billion achieved in 2021-22.
The Andrews government’s infrastructure spending is four times the long-term average from a decade ago, according to the budget papers.
“Have they done enough to rein in spending? Probably not,” Coates said. “You can balance the budget with higher taxes or lower spending. But a lot of the taxes that it will raise does appear to be funding spending commitments rather than paying down debt. Tuesday’s budget is not making good progress towards fiscal budget repair.”
Asked on Wednesday why the COVID-19 levies were being used to pay off the Big Build rather than pandemic borrowings, Premier Daniel Andrews said it was “in effect the same thing”.
“Some of the COVID debt itself was bought at very, very low rates, and that’s locked in. You wouldn’t go and pay that back now because they are very, very low rates,” the premier said.
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