Since the goldrush of the 1850s and throughout the bulk of the 20th century, Victoria has been the economic and cultural centre of Australia.
Victoria’s vast wealth was generated by an abundance of natural resources, agriculture and the ability for manufacturers to access affordable and reliable energy from the Latrobe Valley.
The recession of the early 1990s was followed by a period of growth and rejuvenation owing, in part, to significant structural and institutional reform implemented by the Victorian state government throughout the mid-1990s.
Yet in 2022, on all critical indicators of financial management, Victoria is now the worst performing state in Australia by a significant and growing margin.
Today, Victoria has the largest state budget deficit in the nation and the largest state government debt level in absolute terms and as a share of the economy.
Victoria also has the highest level of taxation as a share of the economy, the fastest growing state government spending rate as a share of the economy in the nation, the fastest growing public sector wages in the nation, as well as the fastest growing public sector workforce on mainland Australia.
Victoria’s debt, in both absolute terms and as a share of the economy, is now higher than at the peak of the economic fallout from the early-1990s’ Cain-Kirner economic collapse.
Specifically, Victorian state government debt already sits at $101 billion, which is over five times higher than the post-Cain-Kirner recession peak of $18.8 billion in 1995. And debt is expected to increase even further, to $259 billion by 2035.
Debt per Victorian is now approximately $15,000 and is expected to increase to at least $30,000 by the year 2035, up from $3,500 in 2014.
Victoria’s debt exposure is particularly of concern at a time when rising interest rates will lead to significant increases in the costs of servicing the debt.
Every extra dollar needed for debt servicing will be at the expense of alternative and productive uses. Conversely, if the Victorian Government does not address the budget deficit and the rising debt levels, Victoria could face a debt trap in which even more drastic action is required.
The Suburban Rail Loop is the critical tipping point which will make Victorian state debt unsustainable. Without the rail loop, debt by the middle of next decade – while far too high – is expected to plateau at approximately $209 billion in year 2035.
But even just stage one of the three-staged loop will push debt to at least $259 billion by 2035, instead of $209 billion without the loop, and with an unsustainable upward trajectory.
And this is just for stage one. Modelling prepared by the Victorian Parliamentary Budget Office estimated the total cost of the first two stages of the Suburban Rail Loop to be $200.2 billion.
Economic vision and leadership will be required to address these significant challenges.
Unlike the 1990’s, the sale of public assets to pay down the debt and reduce the deficit is not available as an option, as major public assets have already been sold and their proceeds spent.
The Australian economy faces the greatest series of financial risks in decades, as the odds of a global recession continue to increase. The crisis in Ukraine, the energy crisis in Europe and Australia, the after-effects of COVID-related measures, and continued disruptions to global supply chains are darkening the economic outlook. Inflation expectations are being reset and interest rates are rising, with market expectations of future interest rates well beyond official forecasts.
As this paper demonstrates, the Victorian economy is particularly vulnerable to the economic shocks that are coming its way, because of the growth in the size of the state and the dramatic increase in the public sector wage roll, financed in part by increased taxes and asset sales, but also by a massive increase in the level of debt.