Victoria’s budget forecasts have missed the mark for more than a decade with a new analysis showing the state repeatedly spending more than projected, setting up a fresh test of credibility for the Allan government before Tuesday’s pre-election budget.
Research by the e61 Institute finds every Victorian budget since 2010 has assumed spending would fall as a share of the economy over the forward estimates, but in reality has risen, off the back of soaring health costs and the increase in interest payments on the state’s growing debt.
The Allan government’s spending is running about two percentage points of gross state product (GSP) higher than what it has forecast, despite net debt tracking towards $200bn by the end of the decade.
Victoria’s budgets have consistently estimated spending to ease back towards the pre-pandemic levels of 15 per cent of GSP.
Instead, it has been running at 17 per cent in the years since the pandemic, with little evidence of a correction.
The findings highlight the challenge facing Premier Jacinta Allan and Treasurer Jaclyn Symes as they prepare to spruik a budget expected to show a smaller operating surplus next year and cash deficits throughout the forward estimates.
They have already announced billions of dollars in new spending in the budget, including free public transport for two months, half-priced fares for the rest of the year and a rebate on car registration, as the government looks for a bounce in the polls before the November election.
e61 Institute chief executive Michael Brennan, a former chair of the Productivity Commission, said Victoria “is not broke, but it is increasingly boxed in”.
“The finances are weak, with limited room to manoeuvre. This isn’t the moment for the kind of pre-election spend-up we’d normally expect six months out from a poll,” he said.
“Successive Victorian governments have promised fiscal restraint without delivering it. The situation now necessitates a real shift from past fiscal habits.”
The analysis finds that rising health costs and interest repayments interest have left the government limited room to move, with these two items alone accounting for roughly two-thirds of the increase in total government spending as a share of the economy since 2019.
Health spending has risen from about 4.25 per cent to 5 per cent of economy, while interest repayments have doubled from 0.6 per cent to 1.2 per cent of GSP as pandemic-era debt is refinanced at higher rates.
The Australian reported last week that more than $25bn of Victoria’s cheap pandemic-era debt is set to expire by the end of the decade, which has heightened concern that the state’s interest bill will surge as it refinances at today’s higher rates.
The state’s projections warn that interest expenses are forecast to climb to between $10.5bn and $10.6bn a year by 2028-29, up from $7.5bn to $7.6bn in 2025-26, with the maturing of more low-interest bonds from 2030 likely to add to the bill.
Compounding the strain are escalating infrastructure costs, which risk undermining the argument that borrowing is funding productive, future-focused investment.
The North East Link’s estimated cost has blown out from $8.7bn to about $26bn, against initial projected benefits of $10.8bn.
The Suburban Rail Loop, still to meaningfully hit the budget, carries an even larger price tag, with the first stage put at $34.5bn but feared to be much higher.
At the same time, Victoria’s hospital costs per patient have risen faster than in comparable states – despite assessments suggesting it should rank among the most efficient jurisdictions in delivering acute care.
“Treasurer Symes has the unenviable task of maintaining a credible fiscal trajectory, repairing past fiscal damage, and dealing with the health and hospitals juggernaut, all while Victorians face another cost-of-living shock,” Mr Brennan said.
Ms Allan on Sunday defended her government’s spending while announcing the budget will include an additional $50.1 million to deliver 4000 additional planned surgeries for children.
“The budget announcements we have made to date, and the commitments we will deliver when the budget is fully handed down on Tuesday, will reflect the priorities and choices of our Labor government,” she said.
“We’ve made decisions that are delivering an operating surplus this year and next year. Decisions that are growing the economy – and as a consequences of those actions we will see the percentage of net debt as a share of our economy go down.
“I accept that others may have alternatives … the approach that our Labor government has taken is one that supports people, has the budget settings right so that we can provide this help right now, but also too, continue to make those ongoing investments.”
Anthony GallowayVictorian political editor