Victoria’s crippled finances are all Daniel Andrews’ fault

If Victoria’s Premier Dan Andrews is begging for the federal government’s help for his state’s crippled budget, he at least deserves full marks for audacity.

For while it is true that Victoria’s state finances are in poor shape, it is also true that this is the state government’s own fault.

Andrews blames the pandemic; but that hit the finances of all states and territories. If the hit was worse in Victoria, it was because of mismanagement and the government’s extreme lockdown remedies. Having resisted any appeals from the federal government for moderation in 2020 and 2021, it is a bit rich for Andrews to look to Canberra now for help in fixing his budget black hole.

In any case, the deterioration in Victoria’s finances was well under way before the pandemic.

In responding to Andrews, Prime Minister Anthony Albanese should start with a lecture on the history of Commonwealth-state financial agreements. The Commonwealth once borrowed on behalf of the states, but since the disastrous mismanagement of the late 1980s and early 1990s, the states have been fully responsible for their own financing, borrowing independently and under their own credit ratings. Any talk of ‘bail-outs’ today is totally retro.

Victoria featured prominently in the late 80s/early 90s fiascos – remember the State Bank of Victoria – but emerged strong from the course of stiff medicine administered by the Kennett government from 1992 to 1999.

The lessons of this experience stuck with the subsequent Labor governments of Bracks and Brumby – which, by and large, ran a disciplined fiscal policy up to 2010 – and the one-termLiberal government that followed.

However, Victoria’s finances began to unravel after the election of the first Andrews government in 2014. The new government was apparently itching to use the strong fiscal position it had inherited as a platform to spend up big.

In the eight years to 2022, the number of state public sector employees rose by 26 per cent and the state payroll by 70 per cent. The comparable figures for other states and territories excluding Victoria were 14 and 38 per cent.

This operating expenditure largesse was then joined by a surge in infrastructure spending with the usual cost over-runs.

The fiscal consequences were masked by strong revenue growth for a time. But by about 2017,deficits and debt started to increase, and then exploded with the arrival of the pandemic in 2020.Deficits are now coming down, but the official projection of a surplus by 2025-26 should be taken with a large ladle of salt.

As a result, Victoria has recorded the largest fiscal deterioration of any state or territory and has gone from enjoying one of the strongest fiscal positions to the weakest in the space of a few years.

The broadest measure of debt – gross debt of the non-financial public sector – has risen from 73 per cent of revenue in 2019 to 150 per cent in 2022 and a projected 230 per cent in 2026. The corresponding figures for all states and territories combined are 80, 123 and 163 per cent.(Percentages of revenue are more meaningful than percentages of gross state product.)

The Prime Minister should tell Andrews to go away and get his own house in order. The ‘I stand with Dan’ crowd will suffer along with everyone else. The pain doesn’t have to last forever; just as it didn’t in the 1990s fiscal consolidation, which set Victoria up for a long period of strong growth with financial stability.

The longer–term benefits of fiscal consolidation now will far outweigh any short-term drag on growth.

But the worry is that the government won’t want to – or won’t know how to – do anything other than increase state taxes to repair the budget and will repel the business investment that is essential to a revival of growth with stability.

It has already demonstrated its taxing prowess with a payroll tax increase in last year’s budget,spuriously linked to mental health programs. It seems likely to be repeated as the key strategy.

Robert Carling is a Senior Fellow at the Centre for Independent Studies and a former International Monetary Fund, World Bank, and federal and state Treasury economist.

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