Opinion: how bad is Victoria’s financial position? Let’s count the ways

By Stephen Mayne

Monday September 14, 2020

(AAP/JAMES ROSS)

If Scott Morrison and Josh Frydenberg really want to pressure Dan Andrews to lift Victoria’s lockdown early, they’ve got a very big card they could play: financial support.

The Victorian budget and balance sheet is in more strife than any other Australian government because the pandemic has forced it to spend like never before as its revenues have plummeted.

And now the Morrison government is using the not-so-subtle pages of The Australian to loudly proclaim that Canberra is waiting for Dan Andrews to unveil Victoria’s fiscal plan to keep the private sector afloat.

Unfortunately, Victoria has very little capacity left in the tank.

Dan Andrews and Treasurer Tim Pallis have progressively blown the budget during their first five years in office, ramping up gross debt to a record $55 billion, even after raising $9.7 billion privatising the Port of Melbourne in 2015 and $2.9 billion selling off the land titles office in 2018.

They’re already battling massive cost over-runs on key projects like Transurban’s $6.7 billion West Gate Tunnel project, which could reportedly now cost up to $10 billion, and the $11 billion Metro Rail project.

After his landslide victory over the Liberals in 2018, Andrews was continuing to think big with contracts soon to be signed for the $16 billion North East Link and planning under way for the 90km Suburban Rail Loop that will take 25 years to build and cost more than $50 billion.

After making too many big infrastructure promises and failing to contain the size and cost of the public sector workforce, Victoria’s budget was already stretched before COVID hit so they have very little wriggle room to respond.

Victoria’s increasingly precarious public sector financial position is the strongest argument as to why the federal government should have had a seat at the table ahead of Sunday’s controversial announcement of extended lockdowns.

Canberra has been directly picking up the tab through programs such as JobKeeper, and is also providing direct financing support by greenlighting the Reserve Bank (RBA) to use its money-printing capacity to directly buy up Victorian bonds.

For instance, an RBA spreadsheet detailing monetary policy operations shows that the RBA bought Treasury Corporation of Victoria (TCV) bonds with a face value of $260 million in three transactions on May 6.

If the Reserve Bank suddenly announced that it was selling Victorian government bonds rather than buying them, the yield would quickly spike. If you believe in continuous disclosure, investors in Victorian government bonds are being poorly treated and denied basic information.

It is simply unacceptable that Andrews has delayed the state budget from May until October, when all 79 of Victoria’s councils have been forced to complete their normal budgeting processes by now.

No journalist has yet asked Andrews what Victoria’s monthly cash burn rate during lockdown is. That’s in stark contrast to Crown Resorts, which advised investors in April that it was burning $20 million to $30 million a month in cash while its gaming operations were closed.

The federal government’s centralised borrowing authority the Australian Office of Financial Management makes a public announcement with every bond tender and publishes total outstanding debt on its home page. It’s currently $775.6 billion.

Due to excellent real-time transparency, we already know that Monday’s $2 billion offer of nine year bonds cleared at a yield of 0.92% with 43 bids, 13 of which were successful for an average investment of $154 million.

Compare that with the TCV which has said nothing since an April 24 update when it warned that its 2020-21 borrowing requirement would be between $10 billion and $14 billion higher than the previously advised $10.2 billion.

Back in the early 1990s, Jeff Kennett and his treasurer Alan Stockdale were belly-aching about Labor’s $33 billion state debt and $18 billion unfunded superannuation liability, which triggered a famous double-downgrade by Moody’s shortly after Labor’s 1992 landslide defeat.

Now Kennett is writing columns in the Herald Sun predicting Victoria’s gross debt could hit $100 billion within two years.

The biggest mistake of the Cain-Kirner government was spending up big during the 1980s boom and leaving nothing in the tank for Paul Keating’s “recession we had to have”. Labor was forced to sell the State Bank of Victoria to the Commonwealth Bank (CBA) in a fire sale after its merchant banking subsidiary Tricontinental racked up almost $2 billion in losses. CBA shares were floated at $5.40 in late 1991 and closed last night at $66.79.

It was no surprise when Labor was turfed out in a landslide, ushering in the Kennett government with its dramatic austerity program which involved axing more than 100,000 Victorian public sector workers and privatising about $33 billion worth of state assets between 1992 and 1999.

This fixed both the budget and balance sheet but there is now nothing left to sell, save for the water sector and Victoria’s compulsory third party insurer the Transport Accident Commission.

Pallis has only occasionally features at the daily press conferences, and the premier himself, a long-time warrior from the Socialist Left faction, rarely mentions budgets or financing challenges as he makes announcements and deals with media questions.

It’s well beyond time for financial transparency to become front and centre in this debate. Victoria just doesn’t have the capacity to cope with the full costs of one of the world’s toughest lockdowns without significant federal support.

This article is curated from our sister publication Crikey.

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