Victoria’s debt crisis: Dan Andrews to blame RBA, COVID-19 for unsustainable debt

If you want an early summary of tomorrow’s Victorian Government’s Budget, here it is: “It wasn’t our fault.’’

Faced with an unsustainable debt projection level that will require an unprecedented combination of tax increases and spending cuts, the Andrews Government has decided to blame a combination of the Reserve Bank and COVID-19 for the bulk of these ills.

If you follow the logic, the Reserve Bank governor Dr Philip Lowe is said to have advised state governments at federal cabinet meetings during the pandemic to keep up the spending to reduce the economic damage and in return he would keep interest rates super-low.

Dan Andrews and Treasurer Tim Pallas – in their own minds – kept up their part of the deal by keeping up a solid raft of spending on infrastructure and health while Dr Lowe – again according to Dan/Tim logic – failed to keep his part of the bargain by pushing through 11 interest rate rises.

Rate rises push debt to unsustainable levels

That had the alarming effect of totally changing the debt trajectory for Victoria and not in a good way, which could cause havoc with the state’s debt rating and greatly restricts the ability of Dan and Tim to spend and tax like they might want to.

The problem with this analysis is that it effectively outsources the blame for a raft of decisions that sit squarely at the desk of the Premier and Treasurer of Victoria and no amount of “$31.5 billion COVID-19 debt repayment plan” rebranding will manage to spread that blame to the Reserve Bank or a global pandemic.

Not all states are equal

All of the other states were operating under the same set of circumstances but most of them are not facing the sort of emergency decisions to slow down or delay big infrastructure programs and look to major new revenue sources to try to convince ratings agencies that Victoria deserves to keep its AA debt rating which is already now below those of NSW, Queensland and South Australia.

Mind you, that lower debt rating is manifestly well earned, given that Victoria’s debt is higher than those three states combined.

So, when you hear the State Government claim that there is “normal” good debt for infrastructure and a totally different sort of “bad” COVID emergency debt that is behind most of the state’s woes, it will pay to take the whole performance with a dose of salt.

Debt is debt – don’t believe anything different

Debt is debt and State Governments – particularly this one which is bringing down its ninth Budget – are totally responsible for how they tax and spend.

By definition Reserve Bank Governor’s such as Dr Lowe need to act quickly and decisively to attack inflation and that means raising official interest rates to reduce demand – even demand from State Governments which might have bitten off more debt than they should have.

If there is room for any sympathy for the hard decisions that the State Government will announce tomorrow, it is the narrow and poor taxing options that face all State Governments under our current tax system.

Extra taxes will land somewhere

In summary, their choices are to further tax employment by raising payroll tax, to further tax property buyers by raising property taxes or to further tax drivers more for keeping their cars on the road.

Then again, there is the old Kennett Government trick of putting an emergency tax on top of council rates, so let’s see if the team of Andrews and Pallas are as creative in their taxing options as they have been in re-assigning state debt to spread the blame to others.