And this is why we can’t have nice things. Or rather, nice new things.
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In the next 12-24 months, taxpayers will finally benefit from Melbourne’s Metro rail tunnel and the West Gate Tunnel project. Both city-shaping projects have faced massive cost blowouts that stretch into the tens of millions respectively.
To achieve Labor’s infrastructure dream, the state government borrowed a lot of money hoping that the projects would help improve the lives of Melburnians and deliver a nice economic benefit along the way.
Problematically, though, much of the state’s debt was accrued when interest rates were nearly zero. From this year, Treasury will need to start refinancing about $90.8 billion in debt, further jacking up the state’s interest bill.
With parliament returning in a little over three weeks, Allan and the three other members of cabinet’s slimmed-down Expenditure Review Committee – Tim Pallas, Danny Pearson and Jaclyn Symes – have started preparing for May’s budget.
Last year, the government recruited big businesses and landlords to help it tackle budget repair. But Pallas didn’t start paying down debt, and instead banked on a “growth strategy” with “stabilised debt” as a way of bringing down the relative level of debt.
It was a strategy, as it turns out, that may have worked in times of strong economic growth and lower borrowing costs, but one that appears to be struggling in the current financial climate.
According to the pre-Christmas budget update, an apparently unexpected drop in consumer spending has hurt the state’s tax take and derailed its plan.
Alarmingly, the update also revealed that government spending had ramped up in the six months following the budget, injecting hundreds of millions of dollars into housing, education programs, compensation for the Commonwealth Games and financial help for forestry workers.
Nice things, sure, but ones we really can’t afford.
With the growth strategy struggling, the government is now left with one option: it must rein in the spending and start to tackle the debt meaningfully.
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This may mean cancelling or delaying more of its infrastructure pipeline. It could also look at selling off what’s left of the state’s assets, despite being a hard political sell for a Labor government, particularly at a time when it is rehabilitating Victoria’s State Electricity Commission.
The other option is to reduce access to public services, many of which are already under enormous pressure, or further whack up taxes which will have both economic and electoral consequences.
None of these are particularly palatable options for a premier still in her first year. But with Treasury warning that the risks to the state’s economic outlook are greater than normal, the premier must lay out her plan to make bigger inroads to reduce debt, and fast.
Allan, who is dismissive of comparisons between herself and the state’s first female premier Joan Kirner, who was burdened with years of economic mismanagement, is keen to carve her own legacy.
While she’d probably prefer to be remembered for city-shaping projects and social reforms, her most pressing and important task will be paying down the state’s debt, so we can continue to have nice things.
Annika Smethurst is the state political editor.
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