How economists think Victoria can put its finances back on track

Returning the budget to a cash surplus in the next term of government, setting a debt cap and commissioning an independent review of spending would help repair Victoria’s finances, say four of Australia’s top economists.

Independent economist Saul Eslake, former Reserve Bank board member Ian Harper, Australian National University economics professor Bob Breunig and UNSW chief societal economist Richard Holden have warned that by “virtually every measure, Victoria’s fiscal position is dire and needs repair”.

Their joint statement comes at the outset of the campaign for the November 28 election, in which debt is a major concern for voters and a threat to the state’s economic prosperity. During the 25-day campaign, Victoria will borrow $870 million and pay $610 million in interest, according to analysis by debt reduction advocacy group AMPLIFY.

“We recognise that Victoria’s fiscal position will not be turned around overnight,” the economists said in the statement as part of AMPLIFY’s campaign. “But it also won’t be turned around if major political parties adopt a business-as-usual approach to this election.”

Harper and Eslake said the priority should be delivering a cash surplus, which there has not been in Victoria since 2008-09 during the global financial crisis.

“Setting in place a medium-term strategy for managing public debt secures the future of public services needed to meet the demands of a growing population,” Harper said.

“Returning the budget to cash surplus is the first leg of this journey.”

Opposition Leader Jess Wilson has campaigned on fiscal repair and pledged to deliver a cash surplus by 2032. The plan is heavily reliant on a decade-long hiring freeze across parts of the public service, and is complicated by the Coalition’s promised tax cuts, which would deliver a hit to revenue of about $5 billion in its first term.

Premier Ben Carroll has not laid out a similar plan, but has continually positioned himself as “financially responsible, socially progressive”, and pointed to savings he has made since taking power in July.

He told ABC Radio on Wednesday that the Coalition’s promised spending and tax cuts would “100 per cent” induce a recession in Victoria, which Wilson called “desperate lies”.

To return the budget to a cash surplus, Eslake said Victoria would need to cut spending, as increasing taxes and selling public assets were no longer options.

Most of the state’s public assets were sold off under Jeff Kennett, with Daniel Andrews’ $9.7 billion sale of the Port of Melbourne essentially emptying the cupboard. Victorians are the highest taxed citizens of any state, and Eslake said further increasing taxes “would probably be damaging to employment and investment”.

He pointed to recent data from the Commonwealth Grants Commission, which revealed Victoria was spending 7 per cent more per person than other states to provide an average level of government services, and 10 per cent more per person to deliver average infrastructure.

“If you convert those percentages into millions of dollars, they basically suggest that by reducing spending … from the levels that are forecast, you could reduce operating expenditure by about $5.5 billion and [capital expenditure] by about $1.75 billion, which is just about enough to get you back to a cash balance,” Eslake said.

Eslake said the problem with the Liberal plan for a cash surplus was their announced cuts did not go far enough, and if the Coalition did not win a majority in the upper house, it might have legislation for further cuts shot down.

“The parties that collectively constitute a majority in the upper house would be … entitled to block it.”

But Labor is already attacking the Coalition over $40 billion in supposed cuts, and announcing further reductions to spending would be politically tricky for Wilson.

Holden said the only way Victoria could achieve a fiscal reset was through an independent audit.

“If there’s an iron law of public finance it’s this: revenues may come and go, but spending is forever,” he said.

When Kennett was elected in 1992, partly on a platform for fixing the state’s debt crisis, he called a commission of audit to extensively review the state’s public finances. Following the report, his government aggressively privatised state agencies and made public sector cuts.

Breunig said legislating fiscal rules and frameworks would give clarity to government spending and help rein in debt.

“They provide guidelines for policymakers and a benchmark against which excessive government spending can be identified and curtailed,” Breunig said. “Victoria clearly needs these rules to help restore discipline and balance to their budgetary situation.”

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