State deficit forecast blows out by $1.8b as spending arms race ramps up

Victoria’s budget position has deteriorated by a further $1.8 billion this financial year despite higher than expected payroll and land taxes, but the Andrews government is adamant its strategy to pay back the state’s debt is on track.

State Treasury’s mid-financial-year budget update – containing the latest economic and financial predictions for the next four years – will on Monday reveal Victoria is on course to record a $9.7 billion deficit in 2022-23.

Victorian Treasurer Tim Pallas handed down the budget in May.Credit:Joe Armao

After billions of dollars of recent spending announcements, it represents a significant deterioration from the prediction of a $7.9 billion deficit made just six months ago in the May budget. Spending this financial year now includes $500 million to deal with recent floods through road repairs, clean-ups, community recovery and support packages for individuals and businesses.

The deterioration effectively leaves both sides of politics with less room for big spending promises as the official starter’s gun for the election campaign is about to fire.

The updated predictions come as Victoria’s Parliamentary Budget Office urges parties to hand over their costings for independent analysis, to give voters time to see the results before the November 26 election.

The budget office has counted 59 announcements from the Liberals and Nationals that have no estimated cost, based on media statements released by the parties, and another 222 that were announced with funding, at a total cost of $25.7 billion. Labor had two commitments without funding, and 81 with funding worth a total $8.3 billion.

The announcements come amid growing skittishness about the outlook for the world economy, and the impact rising interest rates and cost of living pressures will have on the domestic economy.

The federal budget last week predicted electricity prices will soar by 56 per cent over the next 18 months, while retail gas prices are tipped to lift by a total of 44 per cent this year and next.

The state’s budget position is also expected to deteriorate next financial year. Treasury is predicting a deficit of $3.6 billion compared with a May budget prediction of $3.3 billion.

The following year, 2024-25, the financial outlook for the state is finally expected to improve. Treasury is predicting a deficit of $700 million for 2025-26, compared with a May budget prediction of $1.1 billion. And finally, by 2025-26, Treasury expects a surplus of $894 million, up from about $700 million in the May budget.

Treasurer Tim Pallas said the budget update confirmed the government’s staged plan to get the budget on track was working, after massive spending to insulate Victoria from the COVID-19 pandemic. He accused the opposition of planning for deep spending cuts.

“Labor governments invest in the people and the projects we need to grow the economy – without the savage cuts we’ve seen time and time again from Matthew Guy’s Liberals,” Pallas said.

“Make no mistake – Victorian jobs are on the ballot. The Liberals’ plans to audit every major project would mean cuts and closures that would hurt Victorian families and put our whole economic recovery at risk.”

Parliamentary budget officer Anthony Close said he would like to see funding announced when commitments were made, but they should also be accompanied by independent budget assessments. He called on all parties to request a pre-election report from the budget office and release the results to voters with sufficient time before November 26.

“If one party uses a different source to cost its policies, then it will likely use different assumptions, approaches and inputs, which greatly diminishes its usefulness for comparison and its credibility,” Close said.

Opposition Leader Matthew Guy has committed to auditing all projects valued at more than $100 million to minimise waste if elected – a policy recommended by both the Grattan Institute and the Victorian Auditor-General’s Office to stop worsening cost overruns.

“If adverse cost outcomes continue, further additional unplanned debt will occur or the announced capital program may need to be curtailed,” the auditor-general said in a report on Friday.

Labor has not committed to the audits or curtailing its capital works program. Instead, it has labelled Guy “the cuts guy”, and said voters should assume the Coalition would slash projects and thousands of jobs.

“We know what Matthew Guy’s Liberals mean when they say ‘audit’ – they mean cuts,” a government spokesman said.

The Age has been surveying readers to help inform our coverage of next month’s state election, as part of the Victoria’s Agenda approach. Readers expressed concern about project mismanagement leading to cost overruns and adding to net debt projections.

The budget update will show a slight improvement in the outlook for net debt, which represents the cumulative impact of budget deficits.

By the middle of 2026, net debt is expected to be $165.4 billion, or 24.8 per cent of the state economy, down from a budget forecast of $167.5 billion, or 26.5 per cent of the economy.

The budget update will also show spending of $91.1 billion in 2022-23, up slightly from a May budget prediction of $89.8 billion. Infrastructure investment averages $21.6 billion over the next four years.

The government is expecting to rake in $31.2 billion of tax revenue, up $678 million from the May budget. Stamp duty collections are now expected to be slightly lower due to the slowing property market, but land tax collections are expected to jump by $322 million, while payroll tax collections have been upgraded by $330 million.

The update will predict growth of 3 per cent this financial year, down slightly from a budget prediction of 3.25 per cent.

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