New budget figures set ‘Herculean task’ for Victoria’s next government

Deteriorating state finances and a bleak economic forecast revealed in Victoria’s budget update have prompted a leading rating agency to warn that the Coalition’s promise of a cash surplus will be “very difficult” to deliver.

The challenging set of numbers, which predict cash deficits of $33.3 billion over the life of the next government and anaemic economic growth propped up by construction of new data centres, prompted economist Saul Eslake to declare budget repair a “Herculean task”.

The final budget update before the November 28 election, released on Thursday, showed a modest improvement to the state’s operating surpluses since the last fiscal report in October due to a surprise $1.3 billion dividend from WorkSafe.

Once capital spending is taken into account, Victoria’s general government sector will post annual deficits of between $7.9 billion and $9.1 billion between now and the end of June 2030 – a deterioration of $2.8 billion since the books were last done.

Revised forecasts predict Victoria’s economy to grow by just 1 per cent this financial year – down from 1.5 per cent predicted in the May state budget – and underperform budget expectations in the two following years. Economic growth is now not due to hit 2.5 per cent until 2029-30, when Victoria will be nearing the next state election.

The 2026-27 financial year is forecast to record the lowest rate of growth outside the pandemic since 2008-09, when the global financial crisis rocked world markets. Instead of a global credit crunch, Victoria’s economy is being battered by high inflation and cuts to immigration.

S&P Global Ratings lead analyst Anthony Walker said Victoria’s economy was heavily reliant on new migrants and population growth, which are both falling due to policy decisions taken in Canberra. Given these headwinds, he expressed scepticism towards the opposition’s promise to return the budget to a cash surplus by 2032.

“It’s going to be very difficult to achieve unless there’s a significant amount of savings throughout the operating accounts or a major reduction in capital,” Walker told The Age. “It would take many years of hard work to get close to a balanced budget.”

Eslake says a cash surplus is an essential first step towards debt reduction but is similarly unconvinced by Opposition Leader Jess Wilson’s blueprint for fiscal recovery. He says Wilson’s claimed savings, once new spending measures and tax cuts are subtracted from the total, are “chump change” compared to the forecast deficits.

“There is a Herculean task ahead,” he said. “It will require significant cuts in government spending, not necessarily from current levels, but certainly from what is projected over the four years. And the way things are going, whoever wins the election will not have a mandate from the public to do it because they haven’t spelled out what they’re going to do.”

Unemployment in Victoria will be higher than expected over the next two years, sitting at 5.25 per cent compared to 4.75 per cent forecast in the budget.

Treasury blamed this and projected falls in consumer spending on lower population growth, “persistent” inflation and the Reserve Bank of Australia’s monetary policy response which has produced five cash rate hikes since February.

Treasurer Colin Brooks said the department’s modelling showed the federal government’s changes to migration policy – which have already crunched international student numbers – would deliver a $7 billion hit to the state economy and cost 20,000 jobs over the next four years. “This is a serious concern for us as Victorians because international education is one of our key exports,” he said.

Victoria’s economic growth would be “primarily driven by data centre investment”, the budget update said, along with investment in renewable energy projects.

This presents a dilemma for Victoria’s next government. Although data centres help the economy, their rollout has been met with local pushback. The expansion plans of NextDC’s M3 centre in West Footscray is facing a major delay after local protests prompted energy network operator Jemena to pause plans to install 15-metre-high industrial power poles on suburban streets.

Before the election campaign, Labor unveiled a policy requiring a 150-metre buffer zone between data centre buildings and homes, along with requirements for them to source their own renewable energy and recycled water. Wilson has promised that if the Coalition wins the election, no data centres will be built in or next to residential areas or in green wedge zones.

The pre-election budget update confirmed an operating surplus of $700 million for this financial year and $800 million in 2027-28. This is an improvement of $300 million for the outlook of both years compared to Treasury’s previous financial statement published last month.

The change was primarily driven by $1.3 billion in previously undisclosed revenue from WorkSafe, the state’s workers compensation scheme. Treasury reported the income had been reclassified from “capital repatriations to dividend revenue”.

The accounting was slammed by Victorian Trades Hall Council Secretary Luke Hilakari, who said the proceeds should be invested back into WorkSafe. He accused Premier Ben Carroll of building a surplus by “ripping away” money from people injured at work.

“Ben Carroll has abandoned promises made to injured workers that all funds would be used to ensure better outcomes for workers,” he said.

“When the Baillieu government did this in the 2011 midyear budget update, we marched the streets, Labor spoke at the rally and Labor MPs decried this cash grab in parliament. Today they are committing the same crimes against injured workers.”

WorkSafe was declared “fundamentally broken” by the Andrews government in 2023 and received additional funds of $1.3 billion to remain solvent. To prevent the need for further bailouts, the government hiked average premiums on businesses by 42 per cent and legislated to exclude claims for stress and burnout.

Brooks said it was reasonable for dividend to be returned to taxpayers. “That provides a buffer over the forward estimates for our surplus figures,” he said.

Victoria’s annual interest repayment will top $12 billion by the end of the next term of government, when net debt is forecast to reach $196 billion. A $4.7 billion improvement in the final net debt figure for 2025-26 means the 2030 peak will be lower than previously forecast.

Despite this, Victoria will accumulate further debt over the next four years, faster than Treasury calculated in May.

Wilson said the budget update showed interest and debt were growing while the budget deteriorated. She also accused the government of dishonesty because the update did not reflect a decision taken last month to claw back more than $200 million previously earmarked for non-government schools.

“You simply cannot trust Ben Carroll or this Labor government or anything that is contained in the pre-election budget update,” Wilson said. “We understand it is going to be difficult and challenging, and that’s exactly why we’ve committed to a budget update within our first 100 days to be transparent.”

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