Analysis – How bad is Victoria’s debt?

The State of Victoria is facing a debt crisis that has been exacerbated by the COVID-19 pandemic and the prolonged lockdowns. According to the latest official figures, Victoria's net debt on June 30, 2022 was $99.98 billion, which is more than five times higher than the post-Cain-Kirner recession peak of $18.8 billion in 1995. Moreover, the net debt is projected to increase to $116 billion by June 2023 and $165.9 billion by June 2026.

How does this compare to other states in Australia?

Victoria has the largest borrowing/debt level among the six states, followed by New South Wales with $135 billion in FY2022. By FY2026, Victoria will have $226 billion and NSW $221 billion of borrowing. In contrast, Queensland's borrowing will be $122 billion, South Australia's $38 billion, Western Australia's $39 billion and Tasmania's $8 billion by FY2026. If we combine the borrowing of NSW, Queensland and Tasmania, it will still be less than Victoria's by FY2026.

Another way to compare the debt levels of different states is to look at their net debt as a proportion of gross state product (GSP), which measures the size of their economies. By this measure, Victoria's net debt was 19.5% of GSP in June 2022, which was higher than any other state except for the Northern Territory (19.6%). By June 2026, Victoria's net debt is expected to reach 28.9% of GSP, which will be the highest among all states and territories.

Why is Victoria's debt so high and what are the implications?

The main reason for the surge in debt is the massive spending on infrastructure projects and social services by the Labor government, which has been partly funded by borrowing. The government argues that this is necessary to stimulate the economy and create jobs, especially after the devastating impact of the pandemic. The government also claims that the debt is manageable and sustainable, as it can borrow at low interest rates and has a strong credit rating.

However, not everyone agrees with this view. Some economists and opposition politicians have warned that Victoria's debt is unsustainable and risky, as it exposes the state to future interest rate hikes and revenue shocks. They also argue that the debt will constrain the budgetary options of future governments, which will likely have to cut spending or raise taxes to repay it. Moreover, they question whether the government is spending wisely and efficiently, or whether some of the projects are wasteful or unnecessary.

What needs to be done immediately to fix this issue?

There is no easy or quick solution to Victoria's debt problem, as it will take years or decades to reduce it to a more manageable level. However, some possible steps that could be taken immediately are:

1.????? Reviewing and prioritizing the infrastructure projects and ensuring that they deliver value for money and meet the needs of the community.

2.????? Improving the efficiency and effectiveness of public service delivery and reducing waste and duplication.

3.????? Strengthening the fiscal rules and targets to ensure that the government maintains a balanced budget over the medium term and reduces its reliance on borrowing.

4.????? Diversifying and broadening the revenue base and ensuring that taxes are fair and efficient.

5.????? Seeking more financial support from the federal government for COVID-19 recovery and infrastructure funding.

These steps would require political will and public support, as they may involve some difficult trade-offs and sacrifices. However, they could also help Victoria achieve a more sustainable fiscal position and a stronger economic future. These are the main sectors which can help boost economic recovery in State of Victoria and government is trying to help some of these sectors since pandemic as follows:

1. Business and tax

One of the key priorities of the Victorian budget after pandemic is to provide tax relief and incentives for businesses to invest, grow and create jobs. The government has brought forward tax cuts for businesses to 1 July 2021, including increasing the payroll tax-free threshold to $700,000, reducing tax for 42,000 businesses across the state. The payroll tax for regional employers will also be reduced to 1.2125%, a quarter of the metropolitan rate, from 1 July 2021, saving money for around 4,000 regional businesses a year. The government has also allocated $431 million to support businesses and create new jobs, including grants, vouchers and mentoring programs.

2. Skills and education

Another priority of the Victorian budget has been to invest in skills and education, especially for young people who have been affected by the pandemic. The government has committed $384 million to the skills sector, including $86 million to establish the Victorian Skills Authority, a new body that will oversee the planning and delivery of skills and training in Victoria. The government has also allocated $209 million to support TAFE and training, including free TAFE courses, apprenticeships and traineeships, and scholarships for women in non-traditional trades.

3. Health and mental health

The Victorian budget also recognizes the importance of health and mental health services, especially in the wake of the pandemic. The government has allocated $7 billion to health services, including $3.8 billion to build and upgrade hospitals, $1.9 billion to improve ambulance services and emergency departments, and $759 million to expand elective surgery capacity. The government has also invested $3.4 billion to build a new mental health system, including $954 million to deliver 20 new local mental health services across Victoria.

4. Melbourne CBD and regional areas

The Victorian budget also aims to revitalize Melbourne CBD and regional areas, which have been impacted by lockdowns and travel restrictions. The government has allocated $107 million to help drive economic activity and attract visitors to Melbourne CBD, including grants for events and festivals, support for hospitality and retail businesses, and incentives for workers to return to offices. The government has also invested $3.7 billion to support rural and regional communities, including $2 billion for regional infrastructure projects, $626 million for regional tourism and recovery initiatives, and $550 million for regional jobs and innovation.

5. Creative industries

The Victorian budget also acknowledges the vital role of creative industries in Victoria's economy and culture. The government has allocated $288 million to support creative industries, including $167 million to upgrade arts venues and facilities, $77 million to support creative workers and organizations, and $13 million to boost screen production and attract international projects.

6. Nature-based tourism

Victoria is home to diverse and stunning natural attractions, such as national parks, wildlife reserves, coastal areas, alpine regions and more. Nature-based tourism can offer visitors a range of benefits, such as relaxation, adventure, education and connection with the environment. It can also generate economic benefits for local communities, such as employment, income and investment.

The state government has launched the Visitor Economy Recovery and Reform Plan, which aims to grow Victoria's visitor economy to $35 billion by 2024-25 and create 300,000 jobs. The plan identifies nature-based tourism as one of the key growth sectors, and provides funding for projects that enhance natural assets, improve visitor infrastructure and services, and promote environmental sustainability.

Some examples of funded projects include:

- The Grampians Peaks Trail, a 160-kilometre walking trail that showcases the scenic beauty and cultural heritage of the Grampians National Park.

- The Shipwreck Coast Master Plan, a long-term vision to transform the visitor experience along the iconic Great Ocean Road, including new lookouts, trails, accommodation and interpretation facilities.

- The Alpine Resorts Recovery Program, which supports the recovery and resilience of Victoria's alpine resorts, which offer year-round activities such as skiing, snowboarding, hiking and biking.

7. Epicurean experiences

Victoria is renowned for its epicurean experiences, which include food, wine, beer, cider, spirits and more. The state has a rich culinary culture, influenced by its diverse and multicultural population, its fertile land and its innovative producers. Epicurean experiences can attract visitors who seek quality, authenticity and variety in their dining options. They can also support local economies by creating jobs, value-added products and regional branding.

The state government has recognized epicurean experiences as another key growth sector in its Visitor Economy Recovery and Reform Plan, and has allocated funding for projects that enhance food and beverage offerings, support local producers and supply chains, and celebrate Victoria's culinary identity.

Some examples of funded projects include:

- The Gippsland Regional Food Innovation Hub, which will provide facilities and services for food businesses to develop new products, access new markets and collaborate with industry partners.

- The Yarra Valley Wine down Festival, which will showcase the region's premium wines, food and entertainment across various venues and events.

- The Bendigo Craft Beer and Cider Festival, which will feature local and interstate brewers, live music, food trucks and masterclasses.

The Victorian government has demonstrated its commitment to supporting these above mentioned sectors through its 2021-22 budget, which aimed to create jobs, stimulate growth and improve wellbeing for all Victorians. The Victorian government recent budget 2023-24, delivered on 23 May 2023, also targeted several sectors for uplifting the economic boost. Some of these sectors are:

Health care: The budget allocated $3.8 billion to build new hospitals, upgrade existing ones, and expand mental health services. The budget also included $1.9 billion to support the National Disability Insurance Scheme and $1.2 billion to improve ambulance response times and paramedic workforce.

Education: The budget invested $3.5 billion to build and upgrade more than 200 schools, as well as $1.6 billion to deliver universal three-year-old kindergarten across the state. The budget also provided $2 billion to support skills development and training, including free TAFE courses for priority industries.

Transport: The budget committed $10.9 billion to continue the delivery of major transport projects, such as the Suburban Rail Loop, the Melbourne Airport Rail Link, and the North East Link. The budget also funded $986 million to purchase 25 new trains for the metropolitan network and $660 million to upgrade regional rail infrastructure.

Energy: The budget established a new State Electricity Commission to drive Victoria's transition to renewable energy and create thousands of jobs. The budget also allocated $1.6 billion to support households and businesses to install solar panels, batteries, and electric vehicle chargers, as well as $540 million to expand the state's hydroelectric capacity.

Social services: The budget delivered $3.9 billion to boost social housing supply and affordability, as well as $1.5 billion to support vulnerable families and children. The budget also included $515 million to address family violence and sexual assault, and $213 million to improve justice outcomes for Aboriginal Victorians.

Conclusion

State of Victoria has to do some serious brain storming to synergies the efforts to bring together a strategy which can solve debt crisis before they get worse in few years’ time. Therefore, it may be prudent to adopt a more sustainable fiscal strategy that reduces the reliance on borrowing and increases the revenue base.

Note: These views are the writers take on Victoria's debt crisis, only for reading, learning and understanding purpose.