Victoria’s debts are coming home to roost

Forget about the repayment cliff for home owners, there is a bigger cliff that is facing the Victorian State Government which will hit everybody.

In remarks by the Auditor-General’s office that should alarm all Victorians, the state’s interest bill is set to surge to a staggering $12 billion a year by 2033 unless the government makes some major changes to repayment levels.

While the Allan government seems content to point to its raft of special levies to pay down pandemic debt as the answer to all problems, the Auditor-General Andrew Greave’s annual financial report for the 2022-23 financial year shows that relying on such levies will still leave net debt rising fast from the current $120 billion to a staggering $171.4 billion by 2027.

Debt has continued to rise faster than increases in economic growth and state revenue, with the rising cost of servicing debt compounding the problem over time.

Repayment cliff will see debt servicing costs rise rapidly

This is where the repayment cliff comes into play, with a large pile of state debt that was accrued when interest rates were close to zero set to be refinanced as the cash rate has risen to 4.35%.

To add some scale to this issue, the Auditor-General’s report says that between 2024 and 2033 about $90.8 billion in debt will need to be refinanced at much higher interest rates.

On current figures, that would leave Victoria’s annual interest bill at $12 billion a year by 2033.

That compares to the 2022-23 total of just $4 billion that was needed to service Victoria’s debts – still equal to about 4.7% of the government’s general revenue.

COVID credit card rate will rise fast

By 2027, debt servicing is forecast to be as high as $7.98 billion, which would swallow a higher proportion of the Budget just to stand still.

Using the COVID credit card analogy that the Victorian Government’s spin doctors are so fond of using, the credit card “rate” charged to the state to roll over its bonds is set to increase sharply at the same time as the amount on that credit card continues to grow as the cost of infrastructure projects balloons and general government spending continues to rise.

Rising repayment pressure will slam the Budget

Governments are very different to households, which is why the credit card analogy falls down, but in plain and simple terms the Auditor-General has pointed out the home truths that the cost of just meeting the “minimum repayments” on that card are set to rocket upwards over time.

Precious little seems to have been done on the expenditure side to stop debt servicing costs alone becoming one of the major expenses in the State Budget, other than a blind hope that perhaps the Victorian economy will grow its way out of trouble.

As Auditor-General Andrew Greaves pointed out: “If it continues to grow at this pace, the cost of servicing debt will compound this fiscal challenge.

“The government have not laid out a plan for when and how the state will pay down existing and future debt.’’

“Several other emerging financial risks exist requiring close attention to manage financial sustainability.”