By Chip Le Grand
Jeff Kennett says Daniel Andrews’ approach to state finances is not sustainable – but he has picked the public mood.Credit: Marija Ercegovac
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Whether Daniel Andrews leaves parliament before the next budget, before the next election, or at another time of his choosing, he’ll know he has rewritten the political rule book on how Victorians think about debt, taxes and the measure of a good government.
Levels of debt unimaginable until recent years are now baked into the budget as a permanent feature of Victoria’s finances. Higher payroll and land taxes, to be imposed on large businesses and landlords for the next 10 years, are presented as a take-it-or-leave cost of doing business in a large, fast-growing state.
Despite Treasurer Tim Pallas describing the budget as his most difficult in nine years in the job, it makes a virtue of doing little to curtail either the size of government or its spending. Instead, Pallas on Tuesday signalled a “post-COVID era for the state and its finances”, where what a government builds and provides matters more than what it owes.
Dr David Hayward, the RMIT’s emeritus professor of public policy and the social economy, says this underscores a significant change in Victorian politics.
“Their big contribution to public finance in Victoria is to allow debt to be used to fund a big chunk of capital spending,” he explains. “After the Kennett years it was deemed to be something you wouldn’t do. That is a big shift, and it matches other governments around the world.
“What they are planning is that people don’t see the debt – they see what is being delivered through it.”
Jeff Kennett, the former Liberal premier who relentlessly vilified debt as a financial and political vice, admits that the approach of the Andrews government – although unsustainable in his view – is in tune with the prevailing public mood.
Jeff Kennett says the approach of the Andrews government is in tune with the prevailing public mood.Credit: AAP
“I think debt does matter but society, particularly the under-40s, have grown into a generation of entitlement,” he says. “The ones who worry are more mature and heading towards the grave.
“But there will come a day of reckoning because you simply cannot support debt at a level at interest rates that require a great deal of your recurrent income to service.”
With a cup of tea in hand, Andrews mingled with journalists during the budget lock-up with confidence.Credit: Joe Armao
If that day is coming, Andrews is showing no signs of worry. During Tuesday’s budget lock-up of journalists and bureaucrats, Andrews worked the room with a confidence that belies a political leader announcing two more years of deficits and a $171 billion mountain of debt.
At the centre of this budget is a financial artifice called the “COVID debt repayment plan”. The nominal plan is to carve out $31.5 billion in debt accumulated at the height of the pandemic, which the government is promising to pay off over the next 10 years with targeted tax hikes and saving measures.
Whether any tax impost that lasts for 10 years can fairly be described as “temporary” is an open question. As economist Saul Eslake puts it, “it is temporary in the sense that it is due to come off, but it is stretching the common understanding of the word.”
In accounting terms, the entire construction is bunk.
Eslake points out that when this budget is lined up against Pallas’ pre-election financial update outlined six months ago, the new revenue revealed on Tuesday more or less matches the cost of new policy initiatives announced during the election campaign. “Although it is not presented in this way, it looks as though the revenue from the COVID levy is basically covering spending on new election commitments,” he says.
Credit: Matt Golding
So is COVID debt any different from other debt? The premier would have us think so. “Before COVID, we had the sort of debt that you take on to build, to invest, to grow an economy for the future,” he says. “But with the pandemic response, we borrowed to keep Victorians safe.
“These two reasons to borrow will be understood by any homeowner with both a mortgage and a credit card. We’re not going to cut back the mortgage that’s funding our Big Build. But we are going to pay off our COVID credit card.”
The published records of the Treasury Corporation of Victoria tell a different story. They show that when Victoria took on more debt to bolster its hospitals, rebuild its neglected public health system and support its stricken economy, interest rates were next to zero.
The state’s credit card debt, like its mortgage, is financed by government bonds that in some cases won’t mature for 30 years. In Victoria, everything is on the same mortgage – a mortgage that is still growing.
Steve Bracks (left) governed with a fiscal restraint. Jeff Kennett (right) relentlessly vilified debt.Credit: Asanka Ratnayake
The budget papers show that any debt repayment the government makes over the next four years will be outstripped by new borrowings. Although the speed of Victoria’s debt accumulation will slow, it is still forecast to grow by an average of $10 billion a year from June 2025 until June 2027.
If the COVID repayment plan makes little sense to accountants, it sends clear political message about Labor’s new philosophy about debt.
For nearly 30 years after the demise of the Cain/Kirner government, debt was a dirty word on Spring Street, particularly among Labor leaders. For 11 years after Labor returned to power, Steve Bracks and John Brumby governed with a fiscal restraint that would make most conservative treasurers blush.
The Andrews government has now freely embraced debt it as a means to keep building new things without having to find savings elsewhere. “You can see that debt is now being used as a significant component of financing of state government activity,” Hayward says.
For as long as interests rates remain relatively low, there are no major global financial shocks and Victoria’s debt financiers remain comfortable with what they are seeing, it is a formula that will keep voters happy and Labor in power.
And if Kennett is right and a day of reckoning comes? Andrews will be long gone by then.
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