In 2020, like all states and territories, the pandemic severely affected Victoria’s financial position and outlook. The impact of the latest outbreak has also been significant, but at this stage the Victorian economy is in the process of recovering from the consequences of 2020 caused by the COVID-19 pandemic.

Activity rebounded strongly in the December quarter 2020 and this momentum carried through into 2021. Household balance sheets are strong in aggregate, interest rates are low, and government assistance is supporting economic activity and jobs.

Victoria’s economy is forecast to grow by 6.5 per cent in 2021/22, after an estimated decline of 2 per cent in 2020/21. Economic growth is expected to be broad-based in 2021/22, with private-sector activity rebounding led by household consumption. All major components of GSP, except for net trade, are forecast to contribute to growth in 2021/22.

Risks to Victoria’s economic outlook remain greater than normal and continue to be dominated by the pandemic, including risks related to the global roll-out of vaccines and further policy responses to support ongoing global and domestic economic recoveries.

A number of key assumptions underpin the economic forecast. The first is that migrant flows remain low until mid-2022 before gradually picking up, with international students slowly returning from early 2022 and tourist numbers picking up throughout next year as further safe travel zones emerge and international borders reopen.

We are also assuming that any further onset of COVID-19, in Victoria and nationally, is contained and only results in localised, short-term restrictions.

The Victorian government will provide additional support for businesses in greater Melbourne that continue to be affected by necessary health restrictions.

We are now in a place where we can continue to ease restrictions and reopen more businesses safely. Nonetheless, those businesses that will still be affected by restrictions will share a new injection of A$8.4 million (US$6.4 million).

This takes total support announced to support business through the most recent circuit-breaker lockdown beyond A$500 million. The government has previously announced A$492.2 million of support for SMEs and sole traders, including the business-costs assistance programme, licensed hospitality-venue fund and regional tourism support package. Up to 90,000 businesses will benefit from the support packages announced in June.

Employment has continued to improve since its trough in September 2020 and has already exceeded the government’s interim jobs target of 200,000 more jobs by 2022.

While the withdrawal of JobKeeper on 28 March 2021 still poses some risk to employment, the current strength in the labour market and leading indicators of employment suggest these risks have reduced since the 2020/21 budget.

The government is also giving Victoria’s thriving SMEs a boost with new research and development cash-flow loans to support our state’s best and brightest innovations. Successful applicants will be able to borrow between A$250,000 and A$4 million in low-interest loans, with total funding under the two-year initiative capped at A$50 million. Victorian SMEs that currently qualify for a refundable tax offset under the Commonwealth’s R&D tax incentive are eligible to apply for these loans.

Given the relatively short period of restrictions, the economy is expected to recover quickly – as appears to have occurred after the circuit-breaker restrictions in February 2021.

The budget forecasts assumed that any further onset of COVID-19 in Victoria and nationally is contained and only results in localised, short-term restrictions.

Localised restrictions could cover greater Melbourne, regional Victoria, or more targeted locations. The nature of the COVID-19 pandemic means the risks to the outlook are higher than usual, as outlined in the budget.

The 2021/22 budget invests in priority infrastructure that will drive economic recovery and support increased private-sector productivity and long-term competitiveness.

This sustained investment responds to demand created by population growth over the past decade. The investment pipeline will give confidence to industry and employers to continue to train and recruit staff with the knowledge that Victoria’s infrastructure investment will remain strong and will continue to support services.

The COVID-19 pandemic has demonstrated the value of having a world-class health system that is able to respond to crises. Continuing to invest in the state’s health, social and community infrastructure remains a priority for the government.

New investments in the health system include A$556 million toward the construction and expansion of 10 community hospitals. This investment will increase capacity and ensure patient access to high-quality healthcare services throughout the state.

In response to the recommendations of the Royal Commission into Victoria’s mental-health system, the government is investing A$507 million in capital projects to add capacity to the Victorian mental-health system and help rebuild it from the ground up.

The 2021/22 budget continues the government’s capital investment in education and skills, with A$1.6 billion provided for new schools, and maintenance and upgrades to existing schools, as well as A$72 million to redevelop and upgrade TAFEs.

New investment for schools has increased significantly over time, providing world-class facilities, creating jobs and meeting the expectations of families in growing communities. A total of 52 schools across Victoria will receive funding for upgrades to improve educational outcomes through the provision of high-quality classrooms and facilities for learning and community use.

The government has a record of tax reform that ensures everyone makes a fair contribution to the investments needed to grow our state. We are continuing this record in this budget.

The Royal Commission provides a blueprint to help fix the broken mental-health system. The mental-health and wellbeing levy will provide a new dedicated source of long-term funding to support our transformational investment that will fundamentally reform how mental-health care is offered in Victoria.

We are asking the largest 5 per cent of employers to increase their contribution to funding government services, so all Victorians – including businesses – can benefit from the mental-health system reform.

The Royal Commission found that a 15 per cent reduction in the level of need experienced by Victorians diagnosed with mental illness would deliver A$1.1 billion in additional economic activity in the Victorian economy every year. Businesses will also see the benefits of our investment, as mental illness is a massive and ongoing cost to our economy.

The Royal Commission estimated that the economic cost of poor mental health to Victoria was A$14.2 billion each year. This included a cost of A$1.9 billion a year to employers – A$1.6 billion in lost productivity and A$300 million due to workplace injuries.

The government is delivering a historically large programme of capital investments aimed at supporting jobs for economic recovery as well as improving productivity and the quality of public-service delivery. In addition to the existing projects in construction, there is a substantial amount of new investment in this budget. This will be delivered in the short-to-medium term.

In total, the 2021/22 budget includes A$7.1 billion total estimated investment in new infrastructure. This adds to the investment currently underway with a total of A$144 billion in new and existing projects.

Elevated infrastructure investment in Victoria coincides with similar increases in other Australian jurisdictions. Investment is expected to remain high over the medium term and also to constrain some parts of the construction industry and supply chains, placing pressure on delivery timetables and costs.

To mitigate the impact of these constraints, the government has implemented a range of strategies to support growth in the construction industry, including freeing up supply chains, an extractive resources strategy and increasing investment in skills.

Skills investment has been a major focus for the government. The 2021/22 budget consolidates this investment with the establishment of the Victorian Skills Authority, which will facilitate improved engagement with industry in skills planning. Funding is also provided for TAFEs to upgrade facilities and equipment to support training for apprentices and trainees.

Net debt is projected to be A$102.1 billion at June 2022 and is forecast to increase to A$156.3 billion by June 2025. The 2020/21 budget outlines that substantial government funding of essential services and economic support is required to respond to the pandemic. The government prioritised the use of its balance sheet to support the Victorian community.

This approach is consistent with stimulus approaches in Australia and around the world and was supported by the governor of the Reserve Bank of Australia (RBA). The reserve bank encouraged governments to stimulate the economy through increasing borrowing.

The 2021/22 budget forecasts significant improvement in the state’s key fiscal aggregates. Net debt is lower in each year than forecast in the 2020/21 budget, in part due to the improved operating position. The increase in debt is manageable, as current low interest rates mean interest expense as a proportion of total budget revenue is much lower than previously. The RBA has indicated that interest rates are expected to remain low for an extended period.

Stabilising debt – the last step in the government’s fiscal strategy – is important as debt will continue to grow as a percentage of GSP until operating surpluses are level, which limits growth in debt to the growth rate of GSP.

In its report, S&P states that the rating may be raised if the economic recovery results in Victoria’s fiscal metrics being considerably stronger than its forecasts. This could occur if the state achieves operating surpluses and reduces its after-capital-account deficits materially. This would prompt a review of the state’s financial-management performance standard, which is an important consideration for a re-rating of the state.

The Moody’s report highlights that the state’s large and diverse economy will remain resilient to pandemic-related disruptions and will continue to underpin Victoria’s capacity to service its growing debt burden over the next three-to-four years.

The fiscal settings of the of latest budget have improved materially compared with the 2020/21 budget estimates. The operating cash-flow position is estimated to be positive by 2022/23 and the growth rate in net debt is declining over the forward estimates. Rating agencies will view these as credit positives.

Over recent months, long-term Treasury Corporation of Victoria (TCV) bond yields have increased in line with movement in global long-term bond yields, where investors have priced in the risk of an increase in inflationary pressure due to the expected impact of stimulatory monetary and fiscal policies on economic activity and growth. The interest rate on TCV bonds remains in line with other states, and the spread to Commonwealth bonds is at a long-term historic low.

The government’s key rating-related aspiration is ultimately to stabilise the state’s debt burden in line with its fiscal strategy. This is expected to result in an improvement to the state’s credit rating over time.