Victorian State Budget FY25 – now “caged” by its past policies
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David Clark, Partner - Investment Management

Eric Boesten, Senior Analyst

The Victorian Budget for FY25 has been released, and we see a State Government which finds itself trapped in a costly battle against spiralling expenses and fiscal balance pressures (somewhat alleviated by additional GST grant revenue). It is largely a continuation of past policy with some deferral tweaks. Government continues to get bigger in the Victorian economy, and stabilisation of net debt as a percentage of Gross State Product is premised on the economy growing from $600bn to over $750bn in 2027-28. This is overly ambitious and highly unlikely.
Posted 08 May 2024

The budgeted Net Operating Balance is forecast in FY24-25 at -$2.2bn but net borrowing is forecast at $22.95bn, ostensibly funding infrastructure spending at $20bn.  Why the extra $20bn in new debt?  This is largely attributed to capital spending on balance sheet and does not operate through the operating account.  The program is the ‘Big Build’, though there are other capex programs.  Whether this government-directed capex adds to productive capacity (and growth in Gross State Product) in the future, only time will tell. The Victorian Government has been rightly criticised for its inadequate economic benefits analysis of its capex projects.  In this budget, the recognised economic benefits of an Airport Rail link with both Federal and Melbourne Airport co-funding are essentially ‘moth-balled’, whereas the dubious Suburban Rail Loop continues to receive funding (Cheltenham to Box Hill to cost $35bn, of which the State has funded $11bn so far). Again, we would question whether Victorian Gross Product can grow as forecast to justify the economic benefits of the ‘Big Build’ capex. 

Revenue continues to grow $101.1bn from 96.1bn, though no new taxes have been announced (which is a relief for the property sector). Net spending has likewise grown by $1.1bn but moving through the forward estimates reaches $105bn in 2027-28.  The Public Service wages cost continues to burgeon (in 2014 it was $18.7bn and in 2027-28 it is forecast at $42bn).  Again, this has been explained as acceptable based on Gross State Product also growing by 25% over the next 4 years.  As noted, we find these assumptions somewhat concerning.   

Net debt over the forward estimates is expected to rise from $156bn to $188bn in 2027-28. This is 25% of Gross State Product and is forecasted to remain at these levels over the forward estimates.  The annual interest bill is forecast at $9.37 bn in 2027-28.  

Below is a brief summary of key points mentioned in this year’s State budget: 

The State’s intent to recalibrate infrastructure spending to pre-COVID levels warrants attention. Against the backdrop of significantly higher project delivery costs compared to budget, certain projects have been re-prioritised.  This austerity through deferral is referenced more to political spending priorities than robust, independent economic benefits analysis.   

We can see the inefficiency in project delivery underscored by the delay in the completion of the Melbourne Airport Rail Link, now postponed to 2033, and an allocation of $964 million towards maintaining Victorian roads. The Suburban Rail Loop remains intact despite widespread criticism. Such developments suggest a reactive rather than proactive approach to infrastructure management.  The fact that multiple projects are being undertaken concurrently is economically irresponsible and adds further to inflation and cost pressures. 

The budget also articulates a focus on alleviating cost-of-living pressures for Victorian families. However, the strategy to increase disposable income through transfer payments could paradoxically fuel inflation through demand-pull mechanisms. The substantial financial outlays, including $400 for school-related expenses and $200 for sporting activities (both across ~700,000 Victorian families), bear considerable weight on the budget. These costs will be compounded by the implicit administrative costs involved in the disbursement and maintenance of the program.

The FY25 Budget has seen the most substantial investment in the state’s healthcare infrastructure to date, with notable expenditures including $900 million for the Austin Hospital’s emergency department and $500 million for the expansion of the Monash Medical Centre. While these investments are commendable, they reflect the ongoing struggle to scale healthcare services in line with demographic demands. 

Addressing the housing crisis, the budget proposes an augmentation of the Victorian Homebuyer’s Fund by $700 million. However, this initiative may inadvertently escalate housing prices by stoking demand without adequately addressing the supply constraints, especially when juxtaposed against the significant pace of net immigration. 

While the Victorian state budget for FY25 attempts to address immediate challenges, there remains an underlying tension between fiscal ambitions and demographic realities. The effectiveness of the budgetary measures will thus hinge significantly on the government’s ability to manage these complexities in a harsher economic landscape. 

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Victoria State Budget 2025; Photo by iStock