Victorian government to spend 10 per cent of public revenue servicing interest repayments by 2030, Moody’s forecasts

Victoria will spend 10 per cent of its public revenue servicing interest repayments by 2030, a major credit ratings agency predicted as the Iran war exposes states to economic shock.

Recent analysis from Moody’s showed weaker growth and rising cost pressures have heaped pressure on state and federal budgets.

It warned that states are less capable of handling their debt under these dire economic conditions while public spending programs remain large.

Victoria will spend 10 per cent of its public sector revenue on interest by 2030 – a massive increase from about 3.5 per cent the state spent in 2019.

South Australia will spend about nine per cent of its revenue on interest by 2030, while Queensland will spend about 8.5 per cent.

Public sector spending has skyrocketed in recent years as state governments have overseen total state debt rising from $266 billion in the 2019 financial year to $650 billion in the 2027 financial year.

Moody’s report said higher fuel costs from the Iran war, alongside higher underlying inflation, has added to wage and contractor cost pressures.

“These cost pressures add to structurally rising expenditure demands driven by population growth and increasing reliance on government services,” the report said.

“Despite efforts to strengthen project governance and re-profile capital programs, sustained input-cost pressures increase the risk of cost overruns and project delays, extending the period of elevated infrastructure spending and debt accumulation.”

Victoria’s debt makes up more than 30 per cent of its gross state product – the state equivalent of GDP.

It also has the highest state debt in Australia, despite its economy being 25 per cent smaller than NSW’s.

The Allan government unveiled more spending promises at this year’s budget as it looks to win a historic fourth term in government.

This included $13.8 billion of new spending, including hefty cost of living packages such as free and half-price public transport.

Budget figures show the state’s net debt will reach a record $199.3 billion by mid-2030 – an increase of $31.7 billion over the next four years.

Victoria’s interest repayments surging means taxpayers will have to fork out $32.4 million every day by 2029-30.

This is despite Victoria’s tax bill climbing from $41.7 billion to $50.2 billion over the same period.

The skyrocketing debt figures are due to persistent cash deficits, starting at $7.7 billion in 2026-27.

Unlike the operating surpluses, these include the full cost of the state’s infrastructure spending.

Victoria’s rising interest repayments come as several institutions have criticised overly optimistic state budget forecasts.

“This year’s state budgets continue to project that operating expense growth will moderate across the four-year forecast horizon,” S&P’s director of Asia-Pacific public finance Martin Foo said.

“These spending projections appear optimistic.”