New data has put Victoria’s alarming debt crisis into perspective, with the state currently owing the most out of 17 similar vicinities across the world.
An analysis by credit rating agency Standard and Poor (S&P) revealed Victoria outranks not only all Australian states but has acquired more debt than 10 other states and provinces in Canada and Germany.
The state’s lost its AAA credit rating in 2020, dropping down to AA, with tax-supported debt estimates for next year now sitting at almost 203 per cent of operating revenues.
And while the state’s debt situation is predicted to improve off the back of the May budget, S&P said Victorians can expect their state to be in deficit until at least 2025.
Because of this, analysts say it’s unlikely the state’s credit rating will improve within the next two to three years, leaving Victoria to lag behind the rest of Australia.
Western Australia and the ACT currently have AAA credit ratings, while Tasmania, Queensland and NSW sit slightly higher than Victoria with AA+ credit ratings.
“Underpinning our AA rating [for Victoria] is our belief that economic growth is recovering and that the state’s economy remains structurally wealthy and diverse,” analysts Rebecca Hrvatin and Anthony Walker wrote in their February 2023 State of Victoria credit report.
“The stable outlook reflects our expectation that Victoria’s operating balance will improve across our base-case period, after-capital deficits will narrow, and debt growth will slow, even though debt remains high compared with that of peers.”
This outlook could change for the worse if the state’s after-capital account deficit breaches 25 per cent of “total revenues on a structural basis”, which would drive tax-supported debt beyond 240 per cent.
Alternatively, the rating could improve if the state’s economy bounces back “considerably stronger” than forecasted and can be achieved by reaching “strong operating surpluses” among other factors.
Ways Victoria can make a comeback
While Victoria’s debt is currently worse than Canada’s Quebec province and Germany’s North Rhine-Westphalia, analysts Mr Walker, Ms Hrvatin and Martin J Foo said there’s still hope Victoria can make a comeback.
“[Tuesday’s] budget is in line with our fiscal forecasts. It shows the Government’s cash operating balance, at the non-financial public sector level, could reach surplus in 2025, for the first time since 2019,” they wrote.
The analysts acknowledged Victoria’s fiscal outlook still remained “weak” compared to other Australian states, however if forecasts are correct, the state will cut its after-capital account deficit by about half in the next two years.
In saying this – and as the Andrews Government acknowledged – funding for “Big Build” projects will see the cash deficit remain high.
“Victoria’s debt is the highest among the Australian states due to these accumulated deficits,” the report said.
“By 2024, we expect Victoria’s gross debt as a proportion of revenues to be about 200 per cent of operating revenues or three times more than it was at the start of the pandemic.”
Positive outlook at the cost of Victorians
While the analysts say the Government’s “Covid debt repayment plan” will be a saving grace in Victoria’s debt recovery, it still comes as a cost to some Victorians.
The levy is tipped to raise an estimated $8.6 billion by 2026-27 and will wipe off $30 billion in Covid debt over the next decade, with the new Covid tax due to end in 2033.
However those who own a second property will be hit the hardest, and will be expected to fork out $5000 over the next 10 years if their property has a land value between $50,000 and $100,000.
The payment will increase from an annual fee of $500 to $975 for homes on land valued between $100,000 and $300,000, while an extra 0.1 per cent of the land value will be applied to properties worth more than $300,000.
Victorian Treasurer Tim Pallas said roughly 860,000 owners would be affected by the land tax change.
Meanwhile, businesses with a national payroll of more than $10 million will also be forced to pay extra payroll tax of 0.5 per cent, or 1 per cent if their national payroll is more than $100 million.
The payroll increase will impact around 5 per cent of businesses in the state, and Mr Pallas argued they were in a good position to handle the increase.
“We think big business has the capacity to make a modest additional contribution over the next 10 years to assist in repaying the Covid debt,” he said
The S&P analysts added the higher payroll and land taxes, WorkCover reforms and the state’s strong financial management will work in the Government’s favour to decrease debt.
Additionally, its access to global capital markets will provide the State Government with an avenue to fall back on if any “acute stress scenarios” were to arise, with interest rates barely making a dent.
“The state is largely shielded from rising interest rates in the immediate future because it mainly funds itself through fixed-rate, long-term borrowings,” they added.
Despite the optimism, it’s clear Victoria still has a long way to go before another state, province or territory from Australia, Germany or Canada can take its place on the list.
– with Alexis Carey