Victorian budget: Soaring debt and deficit, but no need to panic

We haven’t seen a lot of Treasurer Tim Pallas over the last six months and tomorrow we will see why. When he delivers his sixth budget he will make one jaw-dropping announcement after another. No other budget in Victoria’s history will come close to matching the fireworks that will be on display.

State Treasurer Tim Pallas will announce the budget on Tuesday.Credit:Luis Ascui

Included in a stunningly long list of new initiatives will be a new airport rail link, 12,000 more social housing units, a new suburban rail loop through the middle suburbs, fast trains to Geelong, a massive expansion of support for students with a disability, almost $1 billion for new mental health initiatives, a $1 billion energy package for low-income households and $200 vouchers for Melburnians who want to holiday in the regions.

Underpinning all this new spending will be the need to turbo-charge the economy out of its recession, which is as deep as the most pessimistic of forecasters had predicted.

The goal will be to jolt the economy back to life, while restructuring and growing new jobs to make up for old ones that may have gone forever. For the next year, there will be little of the international migration that has helped Victoria grow strongly in recent decades, and it will be at least a year before international students return in large numbers to our shores. Cafes, restaurants, pubs and clubs are in for a long slog, especially those in the city.

The budget deficit will be as much as $26 billion, compared to a surplus of $1 billion in 2018-19. That is a massive injection of cash in any language. State debt will soar, climbing from $22 billion last year, to more than $80 billion by the middle of next year and almost double that again in four years.

Spending on social housing is one of the budget promises. Credit:Paul Rovere

Debts and deficits will dwarf the levels reached under the Cain/Kirner Labor government in 1992. Back then all that red ink caused a panic, and Labor got the boot in a landslide.

Is it time to panic? There is nothing wrong with governments borrowing, especially when it is used to compensate for falls in private spending. Far better for the government to balance the economy, rather than the budget.

There will be some who clasp their hands in horror and demand budget cuts, more deregulation and privatisation.

We know what happens when we follow that path.

That’s what the Kennett government did in the 1990s. It cut state debt to near zero by selling the family silver, but created indebted private companies that have pushed electricity and gas prices to amongst the highest in the world. We ended up with a private toll road monster that insists on cranking up prices, even on vehicles delivering the essentials we need in these difficult times. We privatised our metropolitan rail and bus systems yet spend more on them today than we did when we ran them ourselves, with profits flowing to operators domiciled overseas. We got a monopoly casino that is knee-deep in claims of money laundering. And let’s not forget all those awful electronic gaming machines that have left a mountain of social damage in the low-income suburbs in which they are concentrated.

Deregulation has left us with a $1 billion bill to fix fire-prone buildings, and a dwelling stock riddled with structural flaws. Then there’s all that contracting out that has left government agencies almost permanent seats at the Corruption Commission, and which was behind the hotel quarantine debacle that caused our second costly lockdown. Would we really want to create that sort of mess again?

There is another reason not to panic. Interest rates are near zero, so borrowing costs to the budget will remain largely unchanged. With the Reserve Bank gearing up for its biggest purchase of Australian government bonds in our history, and a Governor urging the states to spend, we will see one part of the public sector financing another part at dirt cheap rates.

Tomorrow’s budget is part of a bigger political story. Worldwide, an old model called neoliberalism is giving way to something new. From the bizarre Trumpian conservativism in the US, to the hyperactive One Nation Toryism of Boris Johnson in the UK, and the wellness social democracy of Jacinda Ardern in New Zealand, the only thing for certain is that deficits, debts and big government are back in fashion.

The budget promises Victoria a new political economy, but it’s way too early to say whether it will be successful. Let’s not forget that the government’s strong suit has not been policy implementation, and after tomorrow there will be an awful lot to do, and go wrong.

But for all the risks, let’s applaud tomorrow’s budget for being bold in order to fix the economy when it would have been so much easier for Treasurer Tim to have crafted one that was timid.

Professor David Hayward is Emeritus Professor of Public Policy at RMIT University.

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