Heavily indebted Victoria has avoided any budget repair, leaving the state highly vulnerable to inflation, interest rate and possible COVID-19 shocks.
It took just 90 minutes for the Victorian government’s optimistic budget forecasts to begin to look less rosy, after the Reserve Bank raised its cash target, pushing the key three-year bond rate to above 3 per cent.
Although interest expenses remain at a modest 6 per cent of total revenue, the latest budget specifically avoids any fiscal repair. This means the state’s fragile public finances are held hostage to Victoria’s economy returning to its pre-pandemic growth trajectory.Instead of committing to spending savings, the government has instead promised another $29 billion in new spending initiatives, as part of its “COVID-19 recovery program” ahead of the November state election.
State Treasury readily admits the risks to the state outlook are “greater than normal” meaning the forecasts are “subject to a higher degree of uncertainty”., easily the biggest risk is the re-emergence of a more virulent, vaccine-resistant variant. Not included is the impact higher inflation would have on the state’s $37 billion public sector wage bill, more than a third of all public spending. The budget assumed an annual 2.2 per cent wage increase, but with Labor pushing for real wage rises, Mr Pallas indicated this number would need to be reviewed—upward.
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