Victoria is the nation’s debt dunce but the competition is hotting up

Nearly 100 years ago, a thumping majority voted to change the Constitution to stop the states borrowing crazy amounts of money.

The Roaring ’20s had fuelled roaring state spending on new railways, roads, housing projects and electricity commissions, all against a backdrop of rising inflation and increasingly nervous lenders.

If this sounds familiar, what happened next seems quaintly removed from contemporary Australian politics.

The state premiers and the prime minister sat around a table, considered a difficult problem and came up with a solution.

Part of the fix, known as the Financial Agreement, was the establishment of a loan council which in effect, gave the Commonwealth a veto over state borrowing. The 1928 referendum, which was backed by a majority in all states including a whopping 87.8 per cent of voters in Victoria, removed constitutional hurdles to the agreement.

The loan council was abolished long ago by the Hawke government but economist Saul Eslake believes the story has relevance today, at a time when runaway state borrowing and spending are the $900 billion elephant in the room at Treasurer Jim Chalmers’ economic reform roundtable.

As Eslake points out, any serious conversation about tax reform needs to include the states and territories and an examination of how our broken federal/state financial arrangements are contributing to the debt binge unfolding up and down Australia’s east coast.

GST changes, including increasing the rate and removing exemptions to boost the revenue it generates, would be at the centre of this but Eslake is also advocating for the introduction of federal land tax, with the revenue to go back to the states in exchange for scrapping stamp duty on property.

Victorian Premier Jacinta Allan has previously indicated she is up for a conversation about how to broaden the tax base of states that don’t have access to lucrative resource royalties. It may surprise some to learn that if you mention vertical fiscal imbalance, the premier can talk the leg off a chair.

She also understands the urgency.

Although a national agreement on health funding – the biggest expense items within her government’s budget – commits the Commonwealth to eventually provide what the states consider a fair share, that day is still 10 years away. In the meantime, the state must find savings elsewhere or keep borrowing to make up the shortfall. This year the funding gap is $1.6 billion in a $22 billion health budget.

(This column’s earlier, unsolicited advice for the premier to dump her pet infrastructure project, the Suburban Rail Loop, has so far gone unheeded.)

The state premiers didn’t make it onto Chalmers’ guest list and state/federal finances aren’t on the agenda of his three-day powwow in Canberra next week.

Eslake doesn’t criticise these omissions from an already jam-packed roundtable program but he wonders how bad things need to get before Australia turns its mind to the thorny problem of rebalancing how money is spent and how revenue is raised across the Commonwealth.

“I think federal/state financial relations is an important issue, but I don’t have a lot of company,” he laments.

So, what exactly is this $900 billion elephant?

According to the latest budget figures compiled by S&P Global Ratings, an international rating company that keeps a close eye on the fiscal position of the federal and state governments, this is the combined, gross debt of Australian states and territories forecast for the end of this decade.

If we include the gross debt forecast to be on the federal government’s own books by that stage, Australia’s debt mountain will reach a $2.1 trillion base camp by June 30, 2029 along the way to a still unknown peak.

Victoria, by its own budget figures, is the most indebted state in Australia. The $213 billion gross debt it has amassed as of July 1 this year represents nearly one third of the total debt currently owed by all states and territories combined.

The best news for Victoria is that, in its push towards fiscal profligacy, it has some serious competition from Queensland and Tasmania.

S&P lead analyst Martin Foo says while Victoria still has the weakest balance sheet of all state and territory governments, its raft of new property and payroll taxes unpopular with business has at least stabilised its fiscal position.

“We have pointed out consistently that a lot of the fiscal challenges Australia faces right now are at the state level, rather than federal level,” he says. “Victoria has been the focus of attention for the last couple of years. Maybe it has flown under the radar a bit but some of the mid-sized and smaller states, particularly Tasmania and Queensland, are accumulating debt at a very rapid pace.”

Eslake reckons his home state of Tasmania, which remains without a functioning government after two elections in the space of 15 months, already deserves Victoria’s mantle as Australia’s fiscal dunce. In 2019, Tasmania’s gross debt was just $3.2 billion. That figure is forecast to treble this year and to increase more than six-fold from its pre-pandemic level by 2029.

Queensland is sharply accelerating the amount of debt it is taking on, with last year’s figure of $106.6 billion forecast to nearly double by the end of the decade as the state prepares for the 2032 Olympics.

Although these numbers look scarier the further you look into the future, the source of the problem is more immediate. The S&P figures show that in the last financial year, the states and territories posted a combined cash deficit of $55 billion.

State and territory governments, for every Australian they represent, spent $2000 more than they raised.

As Treasurer Jim Chalmers prepares to greet his guests, we are burning money like it’s 1925.

Chip Le Grand is state political editor.

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