The road back

Victoria’s latest state budget outlined a significant improvement in forecast state finances following the troubled environment of the pandemic. The state’s Melbourne-based treasurer, Tim Pallas, shares his view on the outlook.

The latest Victorian state budget sets out a roadmap back to operating surplus by 2025/26. How important is the headline surplus number to the state government relative to its other commitments?

The Victorian economy continues its recovery from the peak of the COVID-19 pandemic, with more than 318,000 jobs created since September 2020. This strong economic and jobs recovery is supporting a return to an operating surplus in 2025/26.

The headline number is important because it demonstrates the government’s commitment to robust financial management and shows clear progress on our four step fiscal strategy. But whit is more important is that Victoria’s people and economy have proven to be resilient and are in a healthy position heading into 2022/23.

The pandemic is not over and there are other uncertainties in the global economy, but this resilience – and the clear and robust fiscal framework the government committed to in 2020 and has been delivering on ever since – ensures Victoria is well placed to respond to whatever comes.

Is the budget forecast largely a revenue-side shock and recovery? Does this limit the state government’s ability to respond?

When the pandemic hit, the Victorian government moved quickly to protect Victorians while vaccines and treatments were being ordered by the Commonwealth. It used its balance sheet to support businesses and household budgets. It put tutors in schools, provided grants and hardship relief, and delivered more than A$44 billion (US$30.6 billion) to protect health, save jobs and respond to the pandemic.

Throughout it all, the government never lost focus on what it was bound to deliver for Victorians: health, education, infrastructure, jobs. The government dealt with the crisis while keeping its eyes on the long-term goal: making this state a prosperous and fair place to live.

The government is continuing to make the big investments that will transform Victoria into a better place – such as our commitment to “best start, best life”: an ambitious overhaul of early childhood education and care that will save families money, boost labour force participation and drive long-term productivity gains.

Australia is now in the unusual position of having a central bank that is in policy tightening territory while federal and state governments are mainly still effectively providing stimulus by running substantial deficits. How concerned is the Victorian government that its outlook might be negatively affected by policy tightening, for instance stamp duty receipts being reduced by a slowing housing market?

The slowdown of the residential property market has so far been concentrated in greater Melbourne. Regional Victorian dwelling price growth remained strong in the March quarter 2022. The rise in interest rates and deteriorating housing affordability, among other factors, are expected to moderate dwelling prices and demand for new housing.

The 2022/23 budget forecasts factored in market expectations for increases in interest rates and an expected slowdown in the property market, with dwelling prices to peak during the 2022 calendar year and then decline by 4 per cent in 2023. Construction growth is expected to slow in the second half of 2022/23 but activity is expected to remain at elevated levels.

Is the Victorian government considering measures to alleviate cost of living pressures?

The government knows the cost of living is going up and that many Victorians are paying too much for their power bills. The recent state budget gives a oneoff payment of A$250 to every single Victorian family that uses the Victorian Energy Compare website.

But that’s not all. The “power saving bonus” is part of the Victorian government’s A$797 million household energy affordability package. It is delivered through the Victorian Energy Compare website, which helps people find the best energy deal. There is also the Victorian government utility relief grant scheme, administered by the Department of Families, Fairness and Housing.

The government is also easing the pressure on families by making kinder free across the state. This means families with a three- or four-year-old will pay nothing for kinder from 2023 – a saving of up to A$2,500 per child every year.

“Before the pandemic, this government delivered strong surpluses while investing at record levels in improved services and new infrastructure. The state government’s priority through the pandemic was to protect lives and to save jobs. The government used its balance sheet to do this, but it also had a clear four-step fiscal strategy to recover.”

What signs is the state government seeing in the early months of economic reopening, particularly in the key area of inward migration?

Population growth is expected to pick up in all jurisdictions by 2022/23. Victoria is forecast to have the highest population growth of any jurisdiction by 2023/24, as overseas migration moves toward pre-pandemic levels and interstate migration swings from a net loss to a net gain.

With border restrictions now eased, the flow of migrants and foreign students to Victoria is expected to increase gradually over the course of 2022, reaching roughly pre-pandemic levels by 2023/24.

Victoria’s strong labour market, highly ranked education sector, welcoming and diverse multicultural community, and liveability should once again attract an outsized share of Australia’s overall migrant intake. Recent overseas arrivals data indicate a steady increase in international population flow, which should support education exports and the tourism economy going forward.

Net state debt is now set to reach nearly A$200 billion by 2025/26. What are the state government’s debt stabilisation plans – including the role of the Victorian Future Fund?

Before the pandemic, this government delivered strong surpluses while investing at record levels in improved services and new infrastructure. The state government’s priority through the pandemic was to protect lives and to save jobs. The government used its balance sheet to do this, but it also had a clear four-step fiscal strategy to recover – a strategy unveiled in the 2020/21 budget, that the government has been delivering on ever since.

The first step was to create jobs and restore economic growth. The second step was to reach an operating cash surplus, which the government delivered a path to in last year’s budget and which it will deliver in full this coming financial year.

The third step was to reach an operating surplus. In this budget, the government is delivering on step three with an operating surplus of more than A$650 million forecast in 2025/26. The budget will recover by an impressive A$18 billion in just four years.

Importantly, the budget is delivering a path back to surplus without jeopardising Victoria’s economic recovery or cutting the services on which Victorians rely. The government is establishing the Victorian Future Fund to manage the fiscal impact of COVID-19 and deliver positive outcomes for Victorians by reducing the debt burden on future generations. The fund will support the state’s debt stabilisation strategy and will initially be established using proceeds from the VicRoads Modernisation joint venture.

Investment returns from the fund will be quarantined and returned so its balance will grow over time to offset borrowings. The initial investment and future returns will be used to repay COVID-19 borrowings, with the fund projected to have a balance of about A$10 billion in the medium term.

Treasury Corporation of Victoria (TCV) has outlined a flexible approach to issuance. How comfortable is the state government to have more substantial foreign-currency liabilities should this prove to be a costeffective borrowing option?

We certainly applaud TCV’s efforts in managing the state’s funding requirement during what has been a difficult market environment. I note that the flexibility of TCV to respond to various market events has been the key to its success, whether this be efforts to extend the maturity profile of the state’s issuance, the establishment of the TCV sustainability-bond issue or the issuance of a mix of fixed- and floating-rate instruments over the year.

We will continue to take TCV’s advice on managing the debt book and funding task, including whether foreign currency liabilities represent a cost effective means of issuance for TCV. I should note that it is TCV’s and the state’s policy that any foreign currency liabilities are swapped back into Australian dollars and that all foreign currency risk is neutralised.

Does the state government expect growth in TCV’s green, social and sustainability debt issuance?

TCV’s sustainability-bond framework allows it the flexibility to issue multiformat labelled bonds – green, social or sustainable – and is supported by the government’s investments in these areas.

The Victorian government is taking strong and lasting action to reduce Victoria’s emissions to net zero by 2050 and ensure communities, businesses and institutions are better prepared to deal with the impacts of climate change. Victoria was one of the first jurisdictions in the world to legislate a net-zero emissions target, with the Climate Change Act 2017 and set a strong foundation for future investments in climate resilience.

In addition, the government’s historic A$5.3 billion “big housing build” is delivering more than 12,000 new homes – which will boost Victoria’s social housing supply by 10 per cent – while generating 10,000 jobs each year over the four-year programme. We continue to invest in these areas and support TCV’s efforts to maintain a sustainable-bond programme.