There’s no denying the mood within the Victorian government is unusually upbeat ahead of Tuesday’s state budget.
Instead of the usual warnings of “tough” or “challenging” decisions in the lead-up – as has been the case in recent years – the premier,Jacinta Allan, has spent the week unveiling a string of big-ticket announcements, each accompanied by a press release headed with the budget’s title: “Focused on what matters most”.
The government has committed$5bn for public transport,$727m for prisons, $61m in stamp duty concessions, $167.3m to support school excursions and camp and $976m for regional roads.
The biggest announcement, though, Allan saved for the weekend, announcing plans to make public transport free for Victorians under 18 on Sunday and for seniors on Saturday.
The cost-of-living measure will no doubt form the centrepiece of both the budget and Labor’s election campaign next year. While funding for the initiative has been locked in for four years, the government warn it may not survive under the Coalition.
And more good news is expected to come, including anticipated $1.6bn operating surplus, as forecastin December’s mid-year economic update.
If it eventuates, it will be Victoria’s first since before the onset of the Covid-19 pandemic.
Though it carries political weight, the surplus is modest – and economists warn it doesn’t tell the full story.
For economist Saul Eslake, one of his bugbears is state treasurers’ use of the net operating surplus as a measure of their budget’s bottom line.
“My suspicion is, if you ask Jim Chalmers what was his net operating surplus, he wouldn’t have a clue,” Eslake says.
“And don’t be fooled by it.”
He says the figure excludes the government’s infrastructure and other capital spending, and in Victoria both are “unsustainable”.
Once both are taken into account, Eslake says the state is in a much more “precarious position” – with the mid-year budget update forecasting cash deficits of $9.4bn in 2025–26, $7.7bn in 2026–27 and $6.8bn in 2027–28.
Eslake says the state’s employee costs alone make up 38% of the budget – vastly higher than the commonwealth’s 7%, as it delivers many more frontline services.
The mid-year update forecast employee expenses to reach $38.4bn in 2025–26, a figure likely to grow as new enterprise bargaining agreements come into effect.
And it’s not a new challenge. Former treasurer Tim Pallas made several failed attempts to reign in the public sector.
One of the first acts of his successor, Jaclyn Symes, was to appoint Helen Silver, a former secretary of the Department of Premier and Cabinet, to lead areview aimed at reigning in public sector spending.
Silver’s interim recommendations are expected to be reflected in Tuesday’s budget, ahead of a final report due in June.
There have already been signs of cuts to come. Guardian Australia has previously reported significant reductions in court resources, community crime prevention initiatives and funding for organisations such as the RSPCA.
Programs created during the pandemic that survived earlier budget culls are now also facing the axe.
For economist Zac Gross from Monash University, the biggest concern is the state’s infrastructure bill.
The December update shows infrastructure spending peaking at $21.7bn in 2025–26, then tapering slightly. But debt remains stubbornly high – forecast to hit $168.5bn this financial year and climb to $187.3bn by 2027–28.
“That’s rising without any sign of hitting a peak,” Gross says. “If we get a sense of a peak in Tuesday’s budget, I’ll feel a bit more optimistic.”
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The government is understood to be desperate to avoid hitting the $200bn debt threshold.
Michael Brennan, a former deputy secretary of Victoria’s Treasury and chair of the Productivity Commission, has warned the state’s fiscal strategy needs a “course correction”.
In arecent blogpostfor research firm e61, he said the state’s interest bill – forecast to cost $7.4bn in 2025-26 – will rise 40% over the next four years due to higher rates and the need to refinance of mature debt.
“Victoria already pays more in interest than it spends on police. But this is only the beginning,” Brennan wrote.
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Another factor behind the upbeat pre-budget tone could be the state’s $7bn GST windfall over the next two years, along with billions more in infrastructure funding from the federal Labor government, as promised during the election campaign. The state delayed its budget by two weeks to see what it could secure.
Eslake says the windfall should be used to shore up the bottom line rather than spent.
“If all they do is rely on that extra $7bn from the GST and don’t make structural changes, I’d be marking them down,” he says.
There’s also been a softening in tone from credit ratings agencies. In one of his final acts as treasurer, Pallas visited New York to brief credit ratings agencies on Victoria’s position.
Recent public statements, while not glowing, have been more forgiving than in previous years.
Rebecca Hrvatin, an analyst with S&P Global Ratings based in Melbourne, said Victoria’s performance is “on an improving trend” but cautioned further progress depended on discipline.
“What we’ll be looking for in the next budget is the state’s commitment to controlling operating costs and stabilising debt levels,” she said. “Fiscal discipline will be key to maintaining the ratings and containing the costs of the state’s large infrastructure program.”
Internally, Labor MPs have been urging Allan and Symes to show restraint and deliver structural improvements to the budget bottom line in time for the 2026 state election – rather than resorting to any more new or increased taxes.
One MP points to the controversial newemergency services property levythat passed parliament this week despite fierce opposition. During the debate, some CFA volunteer firefighters walked off the job in protest.
“We cannot afford more of that closer to the election,” the MP says.
That MP, along with others, hope discipline now will give the government more room to spend in 2026, which they say will be needed to secure a historic fourth term.
But holding the line for the next 18 months won’t be easy, and the challenge is significant. Among Allan’s cabinet, though, Labor sources say no one is more up to the task than Symes.