The 2022–23 budget is like all the other budgets this government has introduced over the past eight years: it is essentially a document of fantasy. I say it is a document of fantasy because we have consistently seen the budgets produced by this government fail to deliver in reality. We see projections over four years which are never met. We see commitments made by this government which are never met, year on year on year. The Treasurer has made commitments around the direction of the budget and made commitments around constraints on spending, and he consistently fails to achieve them.
In this year’s budget we see probably the most outlandish commitment around spending, because the government is proposing in the budget year to cut expenditure by roughly 10 per cent. In previous years they have claimed they would cut spending by 1 per cent or 2 per cent, and they have never achieved it, yet we are to believe that in an election year this government is going to cut spending by 10 per cent to try and rein in what has been a series of massive deficits. There is no reason to believe that is going to be achieved.
We have seen year after year after year the government unable to hit its own targets, and the suggestion that this year it will achieve a 10 per cent cut in spending is simply laughable. As a consequence, the size of government in Victoria has grown and grown and grown.
When the government came to office in 2014 government spending as a share of the economy was around 14.4 per cent. In the year we are about to finish, the 2021–22 year, it has grown to 19 per cent of gross state product—a massive increase in the size of government in this state.
Of course the biggest area we have seen growth in has been the public sector payroll. Just three years ago, in 2018–19, leading up to the election in the pre-election budget update Treasury forecast the size of the public sector payroll at $24.9 billion. In the budget for 2021–22 that is now $33 billion. In three years there has been a 33 per cent increase in the public sector payroll, which is absolutely unsustainable. We have seen the size of the public service grow enormously in headcount. Central government, the government departments, had grown from 37 900 people in 2015 to 58 000 people by June 2021. In the broader public sector outside the core departments the growth has been from 277 000 people to 345 000 people and more than 23 000 people were added last year alone—23 000 additional public sector workers in Victoria in just 12 months. So for the government to now suggest it is going to cut spending by 10 per cent in this year, an election year, is simply unbelievable—absolutely farcical.
Of course because we have been seeing such enormous and sustained growth in spending we have seen a massive blowout in the state’s debt profile, in general government net borrowings, which are now forecast to hit $167 billion by the 2025–26 financial year. Now, the government likes to say this is funding our infrastructure program, that we are borrowing to fund infrastructure, but in reality, when you look more closely at the government’s forecasts you will see that in fact the government has pared back its own spending on infrastructure while continuing to borrow. The best example of this is to compare this year’s budget papers with last year’s for the 2021–22 year, where the Treasurer said infrastructure spending was going to be $24 billion and as a consequence net debt was going to increase to $102 billion. This year the figures have been revised and the infrastructure spend has in fact been cut. Rather than spend the $24 billion on infrastructure that the Treasurer said he would spend, only $18.9 billion is being spent on infrastructure, yet debt is still going to hit $102 billion. So debt continues to rise even though the spending on infrastructure has been pared back, and of course that is so the debt can fund the ever-growing deficits that we are seeing year on year on year.
The government likes to say it is fine that we are having these additional borrowings, that we can afford the repayments within the operating statement and that we can afford to service that debt over the forward estimates, but of course as the debt has ramped up from I think $44 billion in the year before last to $167 billion in the out years, that debt servicing cost has increased enormously. In 2019–20 we were only spending about 3.5 per cent of total expenditure on servicing debt. In 2025–26 that is going to hit nearly 7 per cent of total spending, and that assumes we do not have increases in borrowing costs, that we do not have increases in interest rates. So we are going from 3.5 per cent of total spend just to pay the interest bill to 7 per cent just to pay the interest bill in six short years, without allowing for interest rate rises. In fact that assumes an interest rate or borrowing cost of around 4 per cent consistently as the debt profile rises, and we have seen already this week a very substantial increase in the cash rate as a consequence of the decision of the Reserve Bank on Tuesday, which raised the cash rate to 0.85 per cent. So we have gone from 0.1 per cent to 0.85 per cent in just on a month, with other rises expected, and that is going to flow through to government bonds. So it is highly questionable whether the government can constrain its borrowing cost at the same level over the forward estimates period when other borrowing costs in Australia and around the world are rising.
If that is not the case, if we see those borrowing costs rise, then the forecast 7 per cent of total spending to service our debt is going to increase rapidly, and that either means we will have bigger deficits in the future or government is going to have to pare back its spending, something it has consistently failed to do despite its claims that it would.
We talk about the budget and we talk about what the government is spending, but we cannot look at that in isolation. We need to also look at what this budget means and what the government’s economic settings mean for the broader Victorian economy. What are the policy settings, what are the economic objectives the government has put in place to drive the Victorian economy? We have seen the economy in Victoria has been in long-term decline. Over the last 20 years, and I point out that a Labor government has been in office for 19 of the last 23 years, we have seen Victoria’s share of national output decline. Back in 1999 Victoria accounted for a bit over 25 per cent of total national output in this country. Last year, 2021, that had declined to just under 23 per cent. So while we are still about 25 per cent of the national population, we no longer produce 25 per cent of national output—we are only producing about 23 per cent of national output.
We have seen over that period of time productivity growth in this state stagnate, and the reality is that productivity is the only game in town if we want to improve the living standards of the Victorian population. Over the last decade productivity growth in Australia has been poor. It has only been about 7 per cent in total over the last decade, and much of that has been driven by resources in Western Australia. We have seen population growth in Australia, we have seen population growth in Victoria, which has driven economic growth, but it has masked the fact that we have had no real productivity growth and therefore no real improvement in standard of living. Over the last decade New South Wales has managed to generate productivity growth of a bit under 7 per cent. In Victoria it has been just 0.5 per cent, so effectively no real improvement in productivity and no real improvement in standard of living, and that is simply not sustainable. If we want to improve the lives of Victorian citizens, we need to get productivity growth moving in this state.
Of course one of the big drivers of that is going to be investment, getting the private sector to invest in this state, and we have seen in recent years Victoria fall further and further behind New South Wales as we have an environment which is less friendly to investment, an environment which is more complex to invest in. The regulatory burden is greater. The tax burden is greater. It is a disincentive for investment. Consequently last year when I spoke about this point I referred to the fact that private sector investment in Victoria was $12 billion lower than in New South Wales. This year the latest set of data from the ABS shows that gap has blown out from $12 billion to now more than $16.5 billion. In the year to June 2021 New South Wales was able to attract more than $16.5 billion more in private sector investment than Victoria did. In Victoria’s case we attracted a bit under $48 billion of private sector investment, New South Wales nearly $65 billion.
That differential is going to mean the differential in living standards between Victoria and New South Wales is going to continue to grow. Last year it was around $8000 per person—New South Wales generated $8000 more in output per person than Victoria—and that reflects the standard of living. If we continue to fall behind New South Wales in attracting investment, that differential is going to grow between our two states. Victoria will fall further and further behind, and we will see the best and brightest leave Victoria. We have already seen that in the last two years. We have seen our population growth plummet. We were growing at around 1.8 per cent per annum in population year on year prior to COVID. That has dropped away. We have had population shrink, and it is continuing to shrink. The best and brightest are leaving Victoria, and that is going to have long-term consequences. Unless we get the policy settings right, unless we get the budget settings right and create an environment which attracts investment and attracts talent, we are going to see Victoria fall further and further behind.
The last two years have demonstrated that Australia has been caught napping—not just Victoria but Australia as a whole. We have seen fractured supply chains. We have seen shortages in imports. We have seen our export markets challenged, particularly where we have had high concentrations in some destinations. And now we are seeing that situation become worse. What was bubbling along as the early stages of inflation a year ago, with some shortages in some areas, has now turned into major shortages in all sorts of areas across the economy and of course massive price rises—and that situation is only going to become worse.
We are seeing our fuel situation becoming very difficult. Last year the federal government decided to back in the two fuel refineries which remain in Australia, down from seven previously, to provide some element of fuel security, but of course that is limited and short term. Earlier this year, in February, we actually saw a shortage of avgas on the east coast of Australia, with a maintenance-related shutdown of the refinery at Geelong. We saw bowsers across eastern Australia start to run out of avgas, and that was within only 24 hours of happening when the plant reopened after an extended—it was about 14 days—shutdown. But bowsers were running dry, and it was only at the last minute that the fuel supply was restored. That highlights the challenge we have with fuel in Australia and the challenge we will continue to have with fuel in Australia.
Likewise with energy, we are seeing now the consequences of energy policy in this state. I have talked previously about how the government’s energy policies are going to ensure in summer we have a shortage of power and in winter we have a shortage of gas, and we have been seeing that in the last couple of weeks as we have had a particularly cold period of weather. Now, it is fine for the government to have a policy of shifting to renewable energy. It is not fine to have no transition plan, and that is what we have seen—a policy platform which has discouraged investment and continuing maintenance in existing infrastructure, be it coal power generation in Latrobe Valley or be it gas reserves or gas supply in a transition phase. Consequently we are now in a situation of critical energy shortages where we should not have them. In a nation which has so many energy resources, we should not be in a situation where we are struggling to get gas supply and in summer we are struggling for electricity supply.
This budget does not contain the vision and the direction to meet the challenges that Victoria faces. It is a budget with some very dubious numbers, and consistently year on year the government has not been able to meet its numbers in the past. We have no confidence that the budget will deliver the 10 per cent cut in spending that the government claimed it will deliver in an election year, but most importantly it does not have the vision and it does not have the direction to meet the challenges Victoria faces in this century.