Victoria’s debt trajectory is a major cause for concern

There are two very different budgets set to be delivered in the next few weeks, with each one expected to adopt a very different tone.

While we are still a while out from Federal Treasurer Jim Chalmer’s Budget on 9 May and even further out from Victorian Treasurer Tim Pallas’ Budget on 23 May, there are distinct differences that are already clearly visible.

Both are already blighted by debt and limited by servicing the interest cost on those borrowings.

Things are much more serious in Victoria

However, in the case of the Federal Government that will not be nearly as big a challenge as that faced by the Victorian Government, despite a much greater debt magnitude.

That is because while gross Federal Government debt is running at a record level of more than $911 billion, strong business and personal tax receipts have constrained what promised to be truly monstrous debt numbers.

While still running at a concerning level of just below 40% of gross domestic product (GDP) – the highest in more than 70 years – gross debt has risen by only a couple of billion since the Albanese Government was elected and now looks unlikely to hit the trillion-dollar level in 2023-2024 as had been forecast in the October budget by Dr Chalmers.

Victoria’s debt trajectory is worrying

In contrast, Victoria’s net debt seems more constrained at $115 billion this year but the trajectory is much more worrying, with the independent Parliamentary Budget Office saying it is forecast to rise to $165 billion by 2025-2026.

They are the sort of numbers that cause debt ratings agencies to start looking at downgrades, which is something that can lead to higher interest rates and cascading and serious budget cuts.

While there are a number of reasons why the trajectory of the two debt numbers is so different, the main issue is that state governments in Australia have very limited options to raise extra taxes – usually concentrating on property and payroll taxes.

Such narrow tax bases restrict the ability to raise extra revenue – something that can actually be a positive for taxpayers when it acts as a disincentive for extra spending.

At a federal level, the government has many more taxation levers to pull, which certainly leads to more flexibility but also, potentially, more dangerous spending.

However, in the lead up to these budgets, it has become clear that the spending issues for the Victorian Government are much more serious and require more attention than at a federal level.

There are certainly plenty of big spending issues at a federal level – growth in interest payments being the really big one but also fast running blowouts in areas such as National Disability Insurance Scheme (NDIS) spending.

Get ready for a smaller and slower big build

At the Victorian level, though, a massive “big build” of infrastructure spending which is being hit hard by inflating costs and massive delays plus a burgeoning public service have seen the state government spending almost 20% of gross state product while raising just 16%.

Those numbers simply must be brought much closer together and fast, otherwise the sort of budget numbers that will be around at the next state election will see Dan Andrews’ time as Victoria’s Premier come to a very inauspicious end.

That is why the Victorian Government’s media team and state government departments have been busily “selectively leaking” items that look set to be part of a ‘slash and burn’ style budget.

Infrastructure spending – long a mainstay of the Andrews’ Government – is such a big-ticket item at $21 billion a year that it must be curtailed and so some projects will be completed over a longer time frame – something that was probably going to happen anyway given that most infrastructure projects are running way behind schedule with burgeoning costs.

Some infrastructure on the back burner

The rail line to the airport and the fast train to Geelong seem to be on the “delay” list while other projects seem to have been saved for now.

Putting a longer delivery date on other projects such as the North East Link or West Gate Tunnel will really only be making official large delays, although it would be nice to think they can be used to spread out payments a little bit and reduce the pressure on the budget.

Health is another area set for the slasher, with grants to preventative care and other external health bodies already the subject of phone calls warning to prepare for big cuts.

Expect a similar treatment across all other departments because it is much easier to outsource financial discipline by cutting grants than curbing internal department spending.

The bloated size of the public service will still be hit though, with a literal “decimation” of 10% of head count seeming to be the agreed upon figure, although it might be applied differently in different departments.

Bear in mind that the Victorian public service is 25% larger now than when Andrews became Premier, so cuts need to be kept in perspective.

Higher payroll taxes to come

On the revenue end, whispers seem to be coalescing around increasing taxes for business, on the assumption that will cause much less political disruption than hitting people directly.

However, increasing payroll tax, for example, is a cost that eventually gets paid by individuals anyway, even if they are not sure who to blame for the rising costs that are hitting them from all directions anyway.

As a direct tax on employment, some people may even pay for this tax grab with their jobs.

At a federal level the cutbacks look set to be much less severe, although the Federal Government has already ruled out providing much of a helping hand to the Victorian Government – its version of an outsourced spending cut.

On the tax side there might be some action on higher taxes for oil and gas producers but areas such as superannuation and income tax seem to remain on their current trajectories, with the changes such as the stage three tax cuts and $3 million super tax already widely known.

There will always be some surprises but the most interest for markets will be the Federal Government’s predictions for a slowing in economic growth which will harm its revenue.

Budget deficit coming in lower at federal level

The extra flexibility on the federal side comes about because a hot jobs market, higher commodity prices and lower than expected government debt interest rates have helped to bring down the expected deficit for the current financial year by about $20.5 billion.

The common link between both budgets, though, is that high levels of debt and continuing deficits will constrain spending amid a slowing economy and a highly uncertain international outlook.

It is always tempting for governments to “bring forward” spending by running deficits and increasing debt but eventually there comes a time to pay the piper.

That time is now for the Andrews Victorian Government – although earlier would have been much better – and is fast approaching for the Albanese Government as well.