In Tuesday’s state budget, the Andrews administration will outline a $31.5 billion “COVID-19 Debt Repayment Plan” to pay back emergency funds borrowed at the height of the worldwide crisis. Victorians will be responsible for paying the cost of the state’s extended pandemic response.
The ninth and most challenging budget presented by Treasurer Tim Pallas will center on the COVID repayment plan, which is likely to include both savings and additional revenue measures as higher than anticipated interest rates start to bite.
As part of the government’s COVID reaction, the budget will attempt to differentiate between “emergency” debt used to pay the state’s extensive infrastructure projects and more productive borrowings used to prepare the health system and support the economy.
The government hopes that by giving assurances, it will also reassure credit rating agencies that it is serious about fixing its finances and preventing the debt from rising to unmanageable levels. These agencies will be closely examining this year’s budget for signs of this.
Additionally, it has been making an effort to shift responsibility for the extent and expense of its debt to the Reserve Bank, which has raised the official cash rate 11 times in the last 12 months.
The Reserve Bank Governor Phillip Lowe reportedly told state leaders that it was likely he would “never sign off on an interest increase” during his seven-year term when Australia was dealing with the worst effects of the pandemic, according to a senior government source who spoke on the condition of anonymity to reveal private discussions from national cabinet.
Together with federal Treasury secretary Steven Kennedy, Lowe attended a number of national cabinet meetings throughout the COVID crisis to offer advice on the expected effects of the epidemic on fiscal and monetary policy.
According to the government source, Lowe gave Victoria “incredibly direct” and “emphatic” instructions to borrow and spend in order to prevent a generational increase in unemployment that may leave the state with long-term damage.
According to the source, Lowe said: “In my term I’ve never increased interest rates and I don’t think I’ll ever sign off on an interest rate increase.”
The governorship of Lowe expires in September. The RBA spokesperson said the governor was unable to discuss any items before national cabinet but neither acknowledged nor refuted the statement attributed to Lowe.
The allegedly made remarks to state officials are in line with what Lowe has said in the past about interest rates. He expressed “high degree of confidence” in the stability of interest rates through 2024, when inflation would return to the Reserve’s goal range of two to three percent, in February 2021.
Since the previous Victorian budget was presented, the Federal Reserve has aggressively tightened monetary policy, which means that by 2025, a projected 8 cents of every dollar earned by the government will be used to pay interest.
Victoria has, however, so far been protected from the full effects of rising rates by the Treasury Corporation of Victoria (TCV), the state’s central financing body, which made the unusual choice to issue fixed-term government bonds with terms up to 30 years as part of its debt funding program when the cash rate was close to zero.
The TCV, which oversees Victoria’s borrowing, will have to refinance over $5.5 billion in debt this year, with more debt maturing at $8.2 billion in 2023–24 and $9.2 billion in 2025–26.
“The people who manage that debt are very good operators,” said interest rate strategist Martin Whetton, the Commonwealth Bank’s former head of fixed income. “The stuff they borrowed during the pandemic is not falling due.”
Victoria already has a weaker credit rating than the other states, but according to Darren Langer, co-head of Australian fixed-income at Yarra Capital Management, this hasn’t hurt the market for government bonds. According to him, TCV is currently able to sell $2 billion worth of Victorian treasury bonds each week. He remarked, “They are not having trouble raising money.
“There is nothing there at the moment to concern us, but we would hope to see a lot of the state governments start to address the amount of debt they are borrowing for general government revenue.”
Before the Andrews government implemented two years of rolling public health lockdowns and caused Victoria to suspend its two greatest exports, tourism and education, as a result of Australia’s border closures, Victoria’s net debt was $25.4 billion, or 5.5% of the state’s GDP, in June 2019.
At the beginning of this month, TCV had borrowed a total of $140 billion to pay off the debt owed by the state government and state-owned businesses. The state’s net government net debt is anticipated to total $116 billion at the end of this fiscal year, or nearly one fifth of the state economy, and rise to $166 billion by mid-2026, according to the state Treasury’s most recent projections, which were made public just before last year’s election.
In its most current analysis of Victoria’s financial situation, S&P Global Ratings anticipated that the state’s total tax-supported debt will amount to $194 billion by 2025. Victoria’s rating has remained at AA, one notch below that of NSW, Queensland, and South Australia.
Victoria’s budget, according to S&P rate analyst Anthony Walker, is “very weak” in comparison to other Australian governments. According to him, Victoria’s debt is predicted to quadruple from its level at the beginning of the epidemic and reach 210 percent of operating revenues in 2025, making it the state with the largest debt among Australian governments.