Lotto windfall boosts state budget amid warnings about election-year spending splurge

A $13.8 billion spending spree has been unleashed by the Allan government in an election-year pitch focused on tackling the cost of living even as the state’s debt spirals towards $200 billion.

While Treasurer Jaclyn Symes was able to lock in a $727 million operating surplus, the first since before the pandemic, ratings agencies and Victoria’s auditor-general warned that the budget was at the mercy of the war in the Middle East, which has already forced economic growth forecasts to be slashed.

In a surprise twist, next year’s projected $1 billion surplus was underpinned by a controversial $1.14 billion lottery licence deal that was also announced on Tuesday.

Less than seven months before the state election, the budget hands Victorians public transport fare discounts, registration rebates and major investments in hospitals and schools, as the government splurged $5 billion in new revenue this year and banked just $607 million in fresh savings measures over the next four years.

The state’s annual bill for interest repayments on the debt pile is forecast to be $11.8 billion by the end of the decade, up from $6.8 billion in 2026-27, as net debt hits a record $199.3 billion in 2030.

This will largely be driven by the refinancing of existing loans and the additional debt Victoria will take on over the next four years to continue paying for infrastructure projects such as the Suburban Rail Loop

On top of the $13.8 billion in new spending over the next four years, the budget also sets aside billions of dollars for unallocated contingencies including “decisions made but not announced”, which may include election announcements to be rolled out later this year.

In total, $12.5 billion has been saved for “future growth” in services plus another $4.1 billion for future growth in assets spending.

Not all of this is for election sweeteners, with the unallocated money including funding for Thriving Kids – a replacement program for NDIS recipients with autism – and teacher pay rises which are still being negotiated.

The Lottery Corporation’s agreement, unveiled on Tuesday, included a $1.14 billion upfront payment to secure a 40-year extension to its exclusive licence to operate in Victoria. The deal was not detailed directly in the budget and the negotiations did not appear to be part of a public tender process. The existing licence was due to expire in 2028.

In parliament, Premier Jacinta Allan defended the process and said her government had used “appropriate probity advice” and oversight.

Shadow attorney-general James Newbury accused Allan of doing a secret deal to keep net debt below $200 billion. “Labor has serious questions to answer about this bad deal that was done behind closed doors,” he said.

Symes said the government was always going to focus on the cost of living, but that the oil-price shock sparked by the war in the Middle East cemented transport discounts as the best way to tackle this.

“You can’t go to a barbecue without someone talking about how much it costs to fill up petrol,” she said.

The budget includes $2.5 billion in cost-of-living measures overall, also among them $120 million for school uniforms, glasses and breakfast programs, alongside the 20 per cent car registration discount and six months of half-price public transport fares.

An $860 million commitment to add 7000 social houses over the next decade has been included in this figure.

Another $3.9 billion will go towards health, including $1.6 billion to help services keep up with demand, and an extra $1.6 billion for new schools, upgrades and maintenance. About $2.2 billion will bankroll support for children with disabilities in schools.

Allowances for foster, kinship and permanent carers, which have long lagged other states, will be boosted by at least $400 a year.

But the budget also contains grim economic warnings for a government whose fiscal strategy is to expand the economy to the point that its debt represents a small portion of gross state product.

Victoria’s economy is forecast to grow by 1.5 per cent in 2026-27, close to half of the 2.75 per cent forecast last year. The rate remains 0.25 points lower than expected over the forward estimates.

Although net debt is projected to grow to $199.3 billion, this growth would still be enough for the government to claim it is gradually easing as a percentage of the economy, as net debt to gross state product is predicted to peak at 24.9 per cent in 2026-27 before falling to 24.4 per cent by 2030.

The Victorian Auditor-General’s Office emphasised that, according to the budget’s own estimates, there were elevated risks to the economy because of the Middle East conflict. It pointed to a budget note which said the forecasts were “subject to a higher than usual degree of uncertainty”.

“For example, goods and services tax (GST) revenue, land transfer duty revenue and interest expense are significantly linked to changes in economic growth, inflation and/or interest rates,” the budget papers said.

Rebecca Hrvatin, an analyst at S&P Global Ratings, raised questions about Victoria’s economic assumptions.

“For instance, Victoria’s oil and gas price forecasts are lower than ours, and they assume a faster normalisation following the war in the Middle East. A more prolonged disruption could undermine the government’s fiscal forecasts through higher interest rates, lower consumption, and higher unemployment,” Hrvatin said.

Fitch Ratings international public finance senior director Paul Norris said state coffers had benefited from more GST money and additional federal support.

“These gains appear to be offset by further spending commitments, including higher public sector wage payments, leaving operating outcomes slightly weaker on balance than the state’s mid-year budget update.

“The state economy remains on a stable footing and continues to underpin Victoria’s credit profile, an important strength amid ongoing downside risks in the global economy.”

Symes argued budget estimates were typically conservative, as she defended the state’s finances by comparing government debt to the size of the overall budget.

“The budget costs around $115 billion each year … Debt is nearly $200 billion, at the end of the forwards, that’s less than half our revenue,” she said. “So in terms of the household, if your mortgage is less than half your annual wage generally, you’re doing OK.”

She also defended the decision not to put this year’s $5 billion revenue windfall into retiring debt.

“What you are asking to do is to identify out of the government expenditure, where you remove $5 billion,” she said. “We made choices to spend that, 58 per cent on health and education for example.”

Victoria’s operating surplus does not include capital expenditure, which can be financed by loans and adds to net debt, such as for roads and hospitals. When this is accounted for, the state is forecast to spend $10 billion more than it brings in across 2026-27, and these annual deficits continue to be above $7 billion over the forward estimates.

Opposition Leader Jess Wilson said the budget delivered higher debt and taxes but no plan to expand the economy any faster. She pointed out Victoria would soon spend more on debt repayments than funding Victoria Police, Ambulance Victoria and all kindergarten services combined.

“This budget fails the basic test. It spends big, plans little, and leaves the next generation to pick up the bill,” Wilson said.

Government expenditure is forecast to increase from $114.5 billion next financial year to $123 billion by 2030.

Victorian Chamber of Commerce and Industry chief executive Sally Curtain said the budget did not live up to its slogan of making life safer, easier and more affordable. She said the chamber was concerned Victoria’s $199 billion in debt by 2030 would dent investment and confidence.

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