How much trouble is Victoria in?

Dan Andrews might have killed the Commonwealth Games. It’s been ninety great years celebrating the British Empire, but the Victorian premier's decision that hosting the 2026 games in Geelong, Ballarat and other regional areas would be too expensive could be the death knell.

There’s a mad scramble to find an alternative, Durban (South Africa) and the Gold Coast have been suggested, but some people think the Games might be finished.

Commonwealth Games CEO Craig Phillips called Mr Andrews' decision ‘beyond disappointing,’ a ‘comprehensive let down’ and said the stated costs were a ‘gross exaggeration’. Federal Opposition MP Dan Tehan said Victoria had been ‘embarrassed’ on the global stage, while Liberal senator Jane Hume called Victoria a ‘failed state’.

Mr Andrews, however, has been unapologetic, despite making a $380 million compensation payment to games organisers.

“I've made a lot of difficult decisions in this job, this is not one of them,” he said when the decision was announced.

“It's just quite obvious, we are not going to spend six to seven billion dollars on a 12-day sporting event.”

Anyone up to date with the economic situation Australia’s second-biggest state faces would probably agree the government made the right call. This is the current projection for debt/revenue from the 2023 Victoria budget.

That’s a debt-to-revenue ratio of more than 170% by 2027, and credit agency Standard & Poors (S&P) believe even that is optimistic, expecting the ratio to reach 200%.

For context, neither the Queensland nor NSW treasuries anticipate debt to revenue to exceed 100% in their respective states in the forecastable future.

Victoria’s latest budget, described by Tim Pallas as the ‘most difficult’ he had handed down in his time as Treasurer, introduced several temporary taxes aimed to pay down the state's debts. Unsurprisingly, those targeted aren’t thrilled about this idea, and have voiced fairly rigorous concerns.

So what’s happened? Is the situation really that bad?

A mountain of Covid debt

Mr Pallas said one of the priorities of the 2023 budget was to “repay the impact of the spending that kept Victoria moving during the pandemic.” The Treasurer said there was a $31.5 billion debt from the various cash injections the government pumped in to keep the state moving during the Covid era, that now needs repaying.

.According to the Victorian Treasury Department, total actual government expenditure in response to Covid was about $35.85 billion. This is slightly more than New South Wales, despite the population of NSW being about 2 million greater than Victoria.

At the same time, Victoria also was locked down for 262 days in total between 2020 and 2021. Some of the lockdowns lasted for several months and Victoria was locked down for longer than anywhere else in Australia. At one stage, Melbourne was the city that spent the longest time in lockdown of anywhere on earth. Some residents of public housing blocks in Melbourne have even just settled for $5 million worth of compensation for damages caused by some of the more sudden lockdowns. When you combine this drastic drop in productivity with government spending the opposition called irresponsible, its easier to understand how the debt problem came about.

Taxing their way out

The solution announced in the budget was the ‘Covid debt repayment plan’. There were a few different aspects of the plan, which aimed to target those Victorians who ended up benefitting from the pandemic. The most controversial measure was a temporary addition to land tax on investment properties and second homes.

As you’d expect, the property industry didn’t react well to this. Ben Kingsley, Chairman of the Property Investors Council of Australia (PICA), said it was a natural consequence of such high debt levels combined with “economic mismanagement and self serving governance”.

“It’s a classic case of which policy is going to cause the least amount of political damage, so they go after the aspiring and hard working Australian,” Mr Kingsley said.

“Aspiration in Victoria is officially dead under the Labor Government.”

The Government estimates this tax will bring in $4.7 billion to go towards paying down the Covid debt in the next four years, so Mr Andrews and Pallas are likely to be unmoved by the hostile response.

Also introduced was an additional payroll tax, targeting businesses whose national payroll is above $10 million annually. A 0.5% extra rate will apply to businesses whose payroll is between $10 and $100 million, with those over $100 million incurring an additional 0.5%. This is estimated to translate to another $3.9 billion to keep chipping away at the bulging deficit.

The $10 million threshold was criticised by the President of the Business Council of Australia, Tim Reed, who said this was not a tax on big business.

“There are many local and family businesses that fit that criteria,” Mr Reed said.

A property market set to collapse?

An upcoming housing package is expected to contain additional restrictions on rent increases, another move heavily criticised by property groups. Victoria is expected to limit rent increases to once every two years, and put a cap on how much it can be moved up by.

Many tenants across the state will doubtless be relieved, but some within the property industry say the move is likely to cause further housing supply issues.

On top of the land tax, there are fears a cap on rent would be the last straw for investment property owners in Victoria who might sell up en masse, hurting the rental supply.

Real Estate Institute of Victoria CEO Quentin Kilian said this could mean “untold damage to an already fragile rental market”.

“The result will be an increased and sizeable departure of rental providers, leading to much less rental stock available, much higher prices and more homelessness.”

Could anything else go wrong?

Another problem facing Victoria is the high risk of a gas shortage in the Bass Strait.

ExxonMobil, one of Australia’s largest gas producers, warned earlier this year it expects the number of wells it operates in the Bass Strait to almost halve by the time winter 2024 rolls around. Unless new supply sources are found quickly, Victoria is on track to become a net gas importer by the winter of 2027.

A lot of people are concerned about this, particularly given Dan Andrews' vocal opposition to gas exploration, which is currently banned in Victoria. Mr Andrews has been firm in his commitment to renewable energy like wind and solar, and was very clear when asked whether the government would consider lifting the moratorium on fracking and other means to extract gas.

“If you want us to frack the place, ah, no, that’s not happening. That is not happening. And we couldn’t have been clearer,” Mr Andrews said.

Federal Resources Minister Madeleine King was asked whether Victoria should lift its moratorium on fracking and other ways to extract gas, and was non committal, but said Victoria faces a “challenge” as the Bass Strait depletes.

“But [Victoria has] clearly got a challenge, as has New South Wales…there’s a long journey for Victoria to move from a principally brown coal‑based power generation jurisdiction to renewables, and they’re working on that pathway and I really respect that.”

The 2023 budget included a $1 billion investment into re-establishing the State Electricity Commission (SEC) and new sources of renewable energy, but if gas prices don’t stop going up, pressure to reintroduce more conventional sources could intensify.

Victorians have already had to grapple with gas bills that have risen up to 70% in recent times, although the $250 energy subsidy all of the state's residents are eligible for offers some relief.

Much ado about nothing?

Victoria faces unique challenges in the coming years, with concerning debt levels, a potentially vulnerable property market and energy shortages. However, other evidence suggests Victoria might not be such a ‘failed state'.

Removalist company Muval say for the past 15 months, Melbourne has been the most in-demand city for internal migration in Australia. In May, 25% of all inbound metro moving enquiries they received were Aussies looking to move to the Victorian capital. A Proptrack report also found that six out of the top ten suburbs in Australia ranked by buyer interest were in Victoria.

Melbourne also consistently ranks among the most liveable cities on earth, finishing 3rd in the most recent Economist Intelligence Unit (EIU) list. Healthcare, education and infrastructure scored a perfect 100, and it’s only fair to point out the 2023 Victorian budget included substantial investment in these areas, including billions of dollars into the mental healthcare system and upgrades to hospitals throughout the state.

For Dan Andrews, his popularity has taken a hit after the Commonwealth games decision. A recent Roy Morgan poll found for the first time in his time as premier, fewer Victorians approved of him than did not. It’s worth pointing out though this is a tenure that stretches back to 2014, and he’s consistently been among the most popular politicians in Australia in that time.

Despite the criticism he is facing, there are plenty of people in Victoria and the rest of Australia who continue to believe he is the right man to turn things around.

Image by Felix Haumann via Pexels

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