Victoria must tackle public sector blowout to halt spiralling debt

At the Reserve Bank’s first meeting of the year on Tuesday the board decided to turn off the tap on government borrowing.

Under the RBA’s quantitative easing program, which started in early 2020 as the pandemic was getting under way, the bank has bought billions in federal and state government bonds while keeping interest rates extraordinarily low.

The Reserve move means state governments may find they have to pay more to borrow.Credit:Louie Douvis

From a pre-pandemic staring point of $16 billion, the RBA’s government debt has grown to a staggering $337 billion. This week it has finally said no more.

Without the RBA to snap up its bonds, the chances are state governments may find they have to pay more to borrow.

In Victoria’s case this comes at a time when the state government’s debt is forecast to surge. Indeed, when it comes to debt, Victoria is truly in the lead.

By next July, the state’s net debt is forecast to exceed $100 billion.

In comparison, even though it has 1.5 million more people than Victoria and its economy is more than a third larger, NSW’s debt is projected to be $58 billion.

In the next three years, Victoria’s net debt is expected to grow by another $60 billion.

It will be more than the forecast net debt of Queensland, Western Australia, South Australia and Tasmania put together, and over $50 billion more than that of NSW.

Can we service it?

Gross state product (GSP) is the measurement of the size of the state’s economy – the total goods and services that Victoria produces. Historically, the higher the ratio of net debt to GSP, the higher the risk of default.

And the news here isn’t good.

The net debt-to-GSP ratio is now at its highest level in decades and is set to keep rising.

In its most recent budget update, the Victorian government predicted its debt as a proportion of GSP would hit 27.9 per cent by 2025.

The growth in debt has been astonishingly quick. Between 1999, when Jeff Kennett left office, and 2014, when the Andrews government was elected, successive Labor and Coalition governments had held it below 6 per cent. But since the 2019-20 budget, the state government no longer even sets a target ratio.

The growth in state government debt cannot be explained by the pandemic alone.

In his report to Parliament late last year, the Auditor-General found that even without the pandemic’s impact, the government would still have run a $2.9 billion deficit last year.

So why has our debt soared?

Aside from the emergency pandemic spending, the deterioration in Victoria’s public finances can be put down to three things: a large-scale capital works program; cost blowouts on that capital works program; and huge increases in the public sector wage bill, which in the last year alone grew by more than 10 per cent.

Public sector employee costs as a percentage of government revenue will hit 42 per cent this year; over the past 10 years they averaged 36.6 per cent.

In other words, if this trend continues we will have gone from spending slightly more than a third of our income on wages to a point when we will soon be spending half. The budget predicts this trend won’t continue, but that has to be taken with a grain of salt, given the state government has consistently overshot its wage targets since coming to office.

Premier Daniel Andrews announcing $2.2 billion to kickstart stage one of the Suburban Rail Loop in November 2020.Credit:Joe Armao

If – or as some predict, when – interest rates rise, as they have already in the United States, more of our state budget will go towards servicing debt, significantly constraining the ability to spend.

This could be a real problem for a government that needs to find extra money.

For example, the Suburban Rail Loop, which the Victorian government touts as a “once-in-a-generation opportunity” still remains largely unfunded.

And it’s not just major projects that will struggle in a high interest rate environment. Services, too, will come under pressure.

We have become used to governments that don’t have to make nasty decisions.

Although we have been forced to accept a stop to elective surgery and, in recent days, maternal care for most infants, it will be a different story in “normal times” if there have to be cuts to health services or schools.

But is there another way? Just as the blowout in the public sector explains much of how we got into this mess, it might also provide us with the way out.

Does the state really need multiple building authorities such as the Major Transport Infrastructure Authority, Level Crossing Removal Authority, the Suburban Rail Loop Authority, Health Building Authority, the Victorian School Building Authority, Development Victoria and Homes Victoria?

The savings in executive salaries alone would be staggering. The Department of Transport’s annual report last year revealed 112 executives who earned more than $300,000, and they’re just the ones in its purview.

And that’s before you get to the consultants, spending on whom has increased 300 per cent since this state government was elected.

Reducing that sort of duplication will be a lot more palatable than cuts to schools and hospitals.

Unfortunately, if the state government doesn’t get its house in order, we may end up with both.

Roshena Campbell is a Melbourne City councillor and commercial barrister. She is a member of the Liberal Party. The views expressed are her own and not those of Melbourne City Council.

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