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Taxes up, debt rising: Victoria’s finances are teetering above an abyss
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- The Andrews government is walking a fine economic line, teetering above a political abyss.
- Even with billions in new taxes, slashing the public service and delaying major builds, Victoria’s net debt is going to keep rising to $171.4 billion by 2026-27.
- The hope is that sustained budget surpluses from 2025-26 will tug debt levels downwards, but this depends on the government’s predictions coming to fruition – and those are “subject to a high degree of uncertainty”.
- The danger is that unemployment turns out to be higher than expected, which could create a disastrous negative feedback loop.
- In other words, it’s a risky time to be burdening the state with major new taxes.
Even after imposing billions of dollars of new taxes, slashing the public service and delaying major infrastructure projects as part of the government’s COVID debt repayment plan, Victoria’s net debt is going to keep going up.
And that’s assuming everything goes to plan. The Andrews government is walking a fine economic line, teetering above a political abyss of debt, rising taxes, a slowing economy and rising unemployment.
It must walk this line while juggling many moving economic parts, with a growing chance things could start to go badly wrong as it gears up for the 2026 election. As Treasury itself acknowledges in the budget, “risks to Victoria’s economic outlook are greater than normal”.
Next financial year alone, the government has to deliver – in net terms after factoring in offsetting cuts and some major new business taxes – some $2.2 billion worth of new spending initiatives announced since Treasury’s last budget update, delivered just over six months ago before the November 2022 state election.
It must also manage a growing debt burden. According to Treasury’s predictions, net debt will grow from about $135.4 billion next year to $171.4 billion by 2026-27.
Coupled with higher interest rates that means the cost of servicing that debt is going to keep rising – even with the new taxes and savings measures. The interest bill is expected to rise from $4.1 billion this financial year, equivalent to about 4.9 per cent of total revenue, to $5.6 billion next year, or 6.2 per cent of total revenue.
The government argues it is taking tough decisions, including public sector job cuts and a “temporary” (10-year) levy strategy (using land and payroll tax levers), that it expects to raise $8.6 billion over four years.
Those tough decisions won’t actually cut the state’s debt burden; they will merely help to “stabilise” it. Net debt as a proportion of the state economy is still expected to keep rising, albeit at a decreasing rate, hitting 24.5 per cent by mid-2027, compared with 20.6 per cent expected by the end of the current financial year.
The hope is that sustained budget surpluses from 2025-26 onwards will eventually tug debt levels downwards. But that remains a hope, stretching beyond the budget’s four-year forecast period, and beyond the current term of government.
The tricky part of this is it all depends on the government’s growth predictions coming to fruition. As it is, the state’s economic growth is expected to slow sharply, from 5.75 per cent last year, to 2.75 per cent this financial year, and then to 1.5 per cent the next in real terms.
Unemployment is expected to edge up from an average of 3.75 per cent this financial year (call it “full employment”) to 4.25 per cent next year.
As Treasury is quick to point out, its forecasts are “subject to a high degree of uncertainty”. The chief uncertainty is the risk that “current high levels of interest rates” could weigh on consumers more than expected – particularly since the increases have not yet fully flowed through to mortgage repayments. There is also the risk the international economic situation could continue to sour.
The danger is that unemployment turns out to be higher than expected. With tens of thousands of households already under enormous pressure from rising interest rates and soaring inflation, a sustained increase in the jobless rate could have a devastating effect on business and consumer confidence, creating a negative feedback loop that could spell political disaster for revenue.
The impact on business confidence could be compounded by the decision to impose higher taxes. Businesses claim they already face some of the highest taxes in the nation. On Tuesday, the business reaction to the budget was visceral.
The danger is the increased tax burden starts to hit private sector employment, with employers effectively given a green light to lay off staff or delay hiring by the government’s own decision to cut public service numbers.
As Victorian Chamber of Commerce and Industry chief executive Paul Guerra put it, the imposition of new and increased taxes and levies will hit medium to large businesses and property owners, directly affecting jobs and investment.
“These additional taxes on medium to large businesses in particular will be difficult to absorb given they are already operating in a tough economic climate with increased costs in energy and supply chain,” he said.
Elinor Kasapidis, senior tax policy manager, CPA Australia, said the budget could make a bad situation worse. “Victoria is the nation’s least attractive state to run a business or buy an investment property,” she said.
Illustration: Matt GoldingCredit:
Urban Development Institute of Australia state president Tom Trevaskis said the new land tax levy for Victorian landowners would hurt housing affordability, which is already at crisis point.
According to the budget papers, the government’s tax haul is expected to rise by 28 per cent over the next four years, from about $31.5 billion currently, to $40.4 billion in 2026-27. The danger is that growth turns out to be lower than expected and unemployment higher.
That would only compound the budget’s problems.
In its discussion of risks, Treasury reckons an economic slowdown could add $2.1 billion to the state’s net debt burden over four years, adding $674 million to the state’s cumulative deficits over four years.
In other words, it is a risky time, economically and politically, to be burdening the state with major new taxes.
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