Seeing red: Has Labor’s economic reckoning finally arrived?
By Josh Gordon
When Tim Pallas handed down his first budget as treasurer in May 2015, the theme emblazoned on the front cover was “for families”.
“Our stable finances mean we can build more projects and provide more services for families in growing areas,” he declared.
Since Labor was elected, a lot of water has flowed under the economic bridge.Credit: Marija Ercegovac
Victoria’s finances at the time were tip-top, with budget surpluses stretching to the fiscal horizon and net debt equivalent to just 4.4 per cent of the state economy.
For the next four budgets, Victoria was similarly in clover. In 2016, the theme was “Getting it done”. The following year it was “Getting on with the job”; then it was (again) “Getting things done”; and then in 2019, “Delivering for all Victorians”.
By the time the pandemic struck, all the doing, getting on with it and delivering had resulted in a significant yet still manageable increase in the state’s net debt as the Andrews government ramped up an ambitious infrastructure and social policy agenda.
Then borrowing costs were slashed to historic lows as the pandemic derailed the state economy. Borrowing heavily to save jobs and shore up the health system was seen as a political and economic no-brainer. For the first time in several decades, debt was no longer seen as the enemy of public good, but rather the enabler of it.
Since Labor was elected, a lot of water has flowed under the economic bridge.
The theme of Pallas’ 10th budget as treasurer – “helping families” – bears a striking similarity to Pallas’ first budget. But with the budget now bogged axle-deep in debt, and with high inflation, skills shortages and rising interest rates starting to weigh on the economy, this time Labor’s pitch carries a distinctly hollow ring.
Has Victoria’s day of economic reckoning finally arrived? And how will it play out for Victoria’s new Premier Jacinta Allan?
Monash University emeritus professor of politics Paul Strangio says the budget remains a “very circumspect document” for Allan, featuring neither tough decisions nor eye-catching initiatives.
“The budget appears to be consistent with the emerging picture of Jacinta Allan being a cautious – dare we even say, pedestrian – premier, in contrast to her swashbuckling predecessor, Daniel Andrews,” Strangio says.
This conservatism has already been displayed in earlier defining decisions such as allowing duck hunting to continue and not proceeding with a second safe injecting facility in the CBD.
“To be fair to Allan, Andrews’ adventurous leadership, especially in accumulating a mountain of debt for a gargantuan public infrastructure program, is the very thing constraining her room for manoeuvre: there is little budgetary leeway for her to decisively shape the state,” Strangio adds.
The Allan government now finds itself backed into something of a financial and political corner. Almost every public asset not bolted down has been sold, except for Victoria’s water businesses, which are enshrined as public assets in the state’s Constitution.
And even after imposing billions of dollars of new taxes, delaying major infrastructure projects, axing public sector jobs and shelving social policy spending programs, net debt is continuing to rise. In other words, the government now has little economic wriggle room.
Just six months ago, the government was predicting the budget would be in deficit by about $1 billion next financial year. Far from presiding over an improvement in the state’s financial position, that expected financial hole has now blown out to $2.2 billion.
According to the latest predictions, net debt, currently about $135.9 billion, will hit an unprecedented $187.8 billion by mid-2028. That would be equivalent to about one-quarter of the state economy, well above the previous peak of 16.3 per cent that occurred in 1992-93.
The annual interest bill is projected to hit $9.7 billion by 2027-28, equivalent to about 8.8 per cent of the government’s total revenue, assuming state Treasury hasn’t undercooked its predictions for interest rates.
That would be a 44 per cent increase over four years, making annual borrowing costs the fastest-growing big expense item in the budget.
Bad though this is, it is still well below the peak of 13.9 per cent recorded in the early 1990s when interest rates soared to 17 per cent.
On Tuesday, Pallas insisted the government was taking the tough decisions to shore up the state’s financial position.
“This is a budget focused on fiscal discipline,” he said. “It makes sensible decisions that respond to the challenges that confront us and that lie ahead. It considers our two big problems: high inflation and workforce shortages.”
The theme of Tim Pallas’ 10th budget as treasurer – “helping families” – bears a striking similarity to his first budget.Credit: Joe Armao
The government’s economic strategy – if you can call it that – now depends crucially on a single idea. If the Allan government is to wriggle out of political trouble, Treasury’s relatively optimistic growth predictions must come to fruition – at a time when a lot could potentially go wrong.
For example, as Treasury itself acknowledges in the budget, “geopolitical risks remain elevated”, including the very real possibility an escalation in the conflict in the Middle East fuels global inflation, either through disruptions to global shipping routes or through energy markets.
The hope is simply that Victoria will gradually grow its way clear of trouble, with state debt gradually shrinking relative to the state economy as the government continues to deliver productive infrastructure.
Hence, net debt is expected to edge back by just 0.1 of a percentage point to 25.1 per cent of the state economy by the middle of 2028, from a peak of 25.2 per cent in 2027.
Yet for all the government’s fiscal tough talk, if you dig into the budget papers, there is little evidence it is serious about bringing spending under control, particularly if you take the coming financial year as a benchmark.
There are some savings in the budget, including winding up the government’s sick pay guarantee, cutting the public sector’s office space budget and reducing government advertising. The government has also lifted its waste collection charge and fire services levy and delayed some big projects, including the Airport Rail Link.
But those decisions are significantly outweighed by new spending since Treasury’s December budget update, with $3.4 billion worth of new spending announcements, $166 million worth of new revenue measures, and a $701 million increase in the existing tax haul, with higher than anticipated revenues from stamp duty and land taxes in particular.
The government has also squirrelled away an extraordinary $75.7 billion in financial hollow logs over the four-year budget period for future recurrent spending and infrastructure decisions not yet announced.
RMIT emeritus professor David Hayward said the budget was both “generous and expansionary”, coming after a flood of new spending announcements in its December budget update.
“The government would like us to think with this budget, it has started to slow down,” Hayward said. “That might be its intent in a few years’ time, but for now, it’s full speed ahead.
“With the economy at or near full employment, inflation still running hot, and interest rates high and poised to go higher, it might have been better advised to take the foot off the fiscal accelerator and start applying the brakes while it still has the economic discretion to do so.”
Ratings agencies have also raised concerns, suggesting the government has little room left to manoeuvre.
Pallas insists the size of the state government, or total spending, is continuing to shrink relative to the economy. But this is only true when compared to the extraordinary levels of spending that prevailed during the pandemic years.
Next year, for example, government spending is expected to be running about 15.3 per cent of the Victoria’s gross state product – well above the annual average of 13.9 per cent for the decade immediately preceding the pandemic. Whether spending will continue to fall in the lead-up to the next election remains to be seen.
Not all debt, however, is the same. Professor Bob Officer, who chaired Jeff Kennett’s 1992 Victorian Commission of Audit and the Howard government’s 1996 National Commission of Audit – both of which paved the way for deep spending cuts – said while Victoria’s debt was now higher than the levels prevailing during the Cain-Kirner years, it was now far more geared towards productive infrastructure.
“The big difference between the composition of this budget and previous budgets like the Cain Kirner budgets is that this time, the debt, which is substantially higher … is largely directed at infrastructure,” Officer told The Age.
“But the only simple point to all of this is that ultimately, the debt has to be repaid and not necessarily by this generation of taxpayers.”
Kennett himself accuses the government of “tinkering” around the edges in its efforts to restore Victoria’s financial position.
“This has been a train wreck that has been building up over many years,” he told The Age this week.
“I’m not sure yet the train has arrived at its final destination because debt will continue to grow, and there will be a huge impact on Victorian businesses and some communities.”
Jacinta Allan, then Victoria’s transport infrastructure minister, and Paul Fletcher, then federal urban infrastructure minister, at a press conference on the Airport Rail Link in 2021.Credit: Jason South
Much is at stake politically. Allan may wish it was still 2015, but for now, she has little choice but to hang on for the ride.
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