‘Tearing’ spending and rising debt make up surprisingly generous Victorian state budget

Victoria’s budget offered more of the same on Tuesday, with the only change being the way the budget documents were packaged. The usual shrink wrap was gone, hinting at savings on the pages it contained.

But that was not to be, because the government – ​​which has the largest debt of all states and territories at A$156 billion – has kept its fiscal juices flowing.

State coffers swelled beyond budget estimates last year by $4.2 billion, but rather than bank on the increased revenue, the government has chosen to continue spending.

cash splash

Six billion dollars in new initiatives were announced for 2024-25, or about $3 billion net of savings. New capital spending initiatives next year are also healthy, at more than $2 billion, and total infrastructure spending will exceed $23 billion.

The government does not depend on the federal government for additional financial support. But a large part of budget document number 4 link He lays out in some detail why he thinks he has a strong case for more federal dollars, pointing to a series of consecutive years in which his share of federal capital grants and the GST has been less than his share of the national population.

That argument is likely to fall on deaf ears, no matter how well it was put.

As the table below shows, the underlying budget situation has been allowed to soften compared to last year’s budget and the budget update delivered last December.

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All that additional spending will keep the budget in a slightly larger deficit next year and the government’s net debt will continue to rise faster than budgeted.

The government might have been expected to reduce spending to reduce inflationary pressures, especially now that interest rates are high. That’s why his approach is surprising, even for a government as committed to Keynesian principles as Victoria’s.

Keynesian economics is based on the idea that strong economies spend or invest more than they save. Even if this means going into debt, it creates jobs and increases consumer purchasing power.

But it’s not that the economy needs more stimulus.

Budget documents show the state’s economy has truly recovered from the dark days of the COVID shutdowns. Victoria has done so well that she has led the country for the last 12 months in employment and economic growth.

Instead of mass unemployment, the opposite is happening: the unemployment rate in Melbourne and the rest of the state is approaching record lows.

As the budget documents put it:

Victoria’s unemployment rate has been around 4% or lower since the beginning of 2022, which has not happened in almost 50 years.

The labor market is so strong that “key parts of the economy (now) face labor shortages.”

Stick to a plan

Treasurer Tim Pallas could defend his lax tax settings by saying: why change when they have worked to date?

His plan will return the budget to an operating surplus in 2025-26 and is expected to remain that way for the foreseeable future. You could point to your forecasts that show unemployment rising to 4.7% in the coming years. He wants to keep the fiscal tap open to prevent unemployment from getting worse.

The problem with this is that it sits uncomfortably next to the settings set by the Reserve Bank, which, rightly or wrongly, has inflation as its number one target.

There are many voices urging the bank to pull the trigger on interest rates once again to control inflation, and flexible fiscal adjustments will only help their cause.

When the Victorian government and the Reserve Bank were at odds in the past, things did not end well for Victoria.

Pallas could also be reminded that things have changed. The economy has recovered better than expected. Income has skyrocketed. His own successes to date are why a new approach was needed.

And what better way to start than with capital spending.

Potential savings

Pallas could have slowed down the pace of growth. Nothing had to be canceled. The new measures that were going to be announced could have been delayed for another year. Yes, the airport rail link has been delayed by four years, but that reflects the dispute between the government and the airport over where the station should be built and at whose expense, rather than a commitment to budget austerity.

The budget offers another set of surprising initiatives, across a wide range of portfolios.

There is $287 million for families with children in low-income public and private schools to help cover the cost of things like uniforms, $473 million for 16 new schools, $1.8 billion for hospitals, $100 million to begin construction of new hospitals, $131 million for free TAFE. , $58 million to remove unsafe cladding, $75 million to prepare the subway tunnel for opening, an additional $105 million for road maintenance and $700 million to expand the government’s Home Buyers Fund.

In the media dungeon, Pallas argued to a sea of ​​unconvinced journalists that the budget implies a significant adjustment. He pointed to slightly lower projected deficits in 2026-27 and 2027-28 and a lower level of infrastructure spending during those years as evidence.

But that’s what happens in the legendary “final years,” which fortunately for treasurers never come.

The government’s largesse will be welcomed by an electorate reeling from a cost-of-living crisis.

But if the Reserve Bank raises interest rates and pushes the economy into recession, partly due to excessive government spending, policy could turn out very differently.

The Victorian budget is no longer wrapped in plastic. It is dangerously exposed to inclement economic weather.