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Victoria keeps nearly $2 billion in debt rather than paying it off
Victoria has had to refinance almost $2 billion in debt that was due to be paid off over the past two years, highlighting the state’s parlous financial situation.
The move comes just weeks after the state auditor-general warned the refinancing of debt – at a significantly higher interest rate – posed a significant financial challenge for the state.
Credit: Joe Armao
In the past two budgets, the government said it had allocated $1 billion in each of the 2022-23 and 2023-24 financial years to debt retirement, or paying off debt so that it no longer sits on the government’s books.
But the Department of Treasury and Finance’s latest annual report shows that the state fell significantly short of these targets.
In 2022-23 the government retired just $28.7 million in debt, and in 2023-24 it paid off $26 million.
By choosing not to pay off the nearly $2 billion and spending the money elsewhere, the government kept more debt on its books at a time when it has been warned about the cost of refinancing at higher interest rates.
AMP chief economist Dr Shane Oliver said there was an argument for holding on to cash rather than paying debt off, if the government could make a greater return with the money than it spent paying interest.
“I suspect that argument may be wearing thin,” he said.
“Maybe the government is thinking that they’ll find some use for it [the leftover money] politically. I think financially they’d be better off paying down the debt as quickly as they can, if they’ve got spare cash.”
Oliver said that before the pandemic there was little urgency to pay off debt because the interest rates on government bonds were low.
But he said it now made more sense to pay off debt quickly, with Victoria paying marginally higher interest than the federal government because of its lower credit rating.
Treasury’s annual report said decisions about debt retirement could be made based on future funding requirements for the government and the state’s cash reserves at any time.
“These decisions are part of broader decisions taken in terms of managing the budget sector debt portfolio in the most efficient manner (reduce debt and interest expenses even at shorter time frames) and maximising the available liquidity,” it said.
A government spokesman insisted its debt strategy smooths the impact of interest rate changes by using fixed rate loans and spreading the date when loans mature out more evenly.
“We are delivering on our fiscal strategy - with net debt to GSP levels forecast to fall for the first time since 2017,” they said.
“The Victorian economy is strong - over the past three years, business investment has surged by more than 30 per cent, this is the highest level of business investment on record.”
Victoria’s auditor-general last month warned that that rising interest costs for new and refinanced debts posed a financial problem for the government.
The annual financial report found that the Treasury Corporation of Victoria was projected to refinance $52.1 billion over the next four years, which was originally borrowed when interest rates were at low levels.
“In the current high-interest rate environment it is likely these refinanced borrowings will come at higher interest rates, as will any new borrowings entered into,” the report said.
“This presents a significant financial sustainability challenge because it reduces the proportion of revenue and income earned for use on public service delivery.”
The auditor-general said interest rates for 10-year Victorian bonds were 4.8 per cent in September, compared with an average rate of 3.6 per cent for existing debts.
A government bond is a loan provided to the state for a certain period. They have regular interest payments and are repaid in full when they “mature” at the end of their life.
By the middle of 2028, the state is forecast to be paying $9 billion annually in interest, with new and refinance debt contributing to $5.2 billion of this.
The Allan government has been contacted for comment.
Opposition finance spokeswoman Jess Wilson said the government had effectively suspended paying off debt.
“Instead of retiring Victoria’s debts as they fall due, Labor is refinancing and rolling over bonds at a higher cost – meaning even more money wasted on interest repayments and less for frontline services,” she said.
“By giving up on retiring bonds once they reach maturity, Labor is flying the white flag on reducing Victoria’s record debt, which continues to grow by $80 million a day.”
The Age has previously revealed that Treasurer Tim Pallas had canvassed offloading Melbourne’s wholesale fruit and vegetable market and a joint venture partnership for Births, Deaths and Marriages. The treasurer later ruled out the partnership.
The Australian Financial Review revealed on Thursday that the government had paid consultants more than $2 million to investigate possible asset sales or other sources of revenue.
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