Key budget investments in health, education, transport and housing are guiding the way the Victorian government is rising to the economic challenge in the aftermath of the COVID-19 pandemic, but this will come with some pain for its own public service workforce.
Handing down the 2024-25 budget on Tuesday, Treasurer Tim Pallas said capacity constraints seen across the world were also affecting how Victoria could respond to economic pressures.
This year’s budget was led by “fiscal discipline” and “sensible decisions”, he said, to keep the economy prosperous and strong.
“Expenses are growing at 2.2% per year on average in this budget, below average nominal growth at 5.3% — so we’re shrinking the size of government as a share of the economy,” Pallas told parliament.
“We’re also winding up COVID-era programs that are no longer needed, as we move into a new phase.”
The rub for public servants? Well, “shrinking government” means less office space, less money to spend on advertising, and a shift to deliver more consolidated services befitting the post-COVID non-emergency climate.
Where last year’s budget was concerned with managing the increase in debt “in a sustainable manner” (including a COVID debt levy to offset the cost of government COVID measures and steps to improve the efficiency and effectiveness of department spending), this year’s targets government service delivery, departmental expenditure and the capital works program.
Whole of government savings and efficiencies ear-marked for 2024-25 are seriously more aggressive than last year’s budget measures, with $297.5 million in total savings compared to $62.3 million in 2023-24.
To achieve the nearly $300 million in savings this year, six high-level expenditure-reducing reforms were highlighted in Budget Paper 3 across the health, justice and finance portfolios.
The measures included less advertising money; concluding the sick pay guarantee; reducing public sector office accommodation costs; consolidating Supercare pharmacy services in priority primary care centres; and consolidating Court Services Victoria (CSV) “strategic sourcing and procurement”.
Some pandemic initiatives, however, like the Breakthrough Victoria fund to boost economic recovery and jobs growth, have been gifted an extension. The fund’s investment profile in the 2024-25 budget was extended from 10 to 15 years so that the bureaucrats managing the program have more time to review and select quality investments.
Government confident fiscal strategy is working
Pallas said the government’s four-step strategy to ensure Victoria’s economy survived and emerged “stronger than ever” after the pandemic was working, with the state’s economy estimated to be 11% larger in real terms than before the pandemic.
“The first and most important step [after the raging pandemic], was to let the Victorian government’s balance sheet absorb the blow of the pandemic — protecting jobs, businesses, families and the community,” Pallas said.
“Our [previous steps] were about returning to surpluses… the government is forecasting operating surpluses of $1.5 billion in the 2025-26 and $1.6 billion in 2026-27, an improvement from the 2023-24 budget update.”
“The operating surplus is then forecast to increase further to $1.9 billion in 2027-2028.
“As a proportion of GSP, net debt is projected to be 24.4% in June 2025 before reaching 25.2% in 2026-27 and then declining to 25.1% in 2027-28.”
The mission of the government in this budget, Pallas added, was to reckon with two big problems — high inflation and workforce shortages.
Victoria has been implementing a four-prong fiscal strategy to respond to the economic complexity the state faces:
- Investing in workers’ skills to tackle shortages;
- Supporting families with targeted cost-of-living help;
- Aligning the workforce capacity with the government’s infrastructure program; and
- A strategy to stabilise net debt as a percentage of GSP by improving operating cash flow surpluses while growing the economy.
Labor has now added another fifth prong to its fiscal strategy: to drive new growth and reduce net debt to GSP.
According to the state government, this will transform today’s $600 billion economy to nearly three-quarters of a trillion dollars by the end of the forward estimates.
“The annual growth rate of net debt to GSP increased across the three years from 2019-20 due to the impact of the pandemic. Net debt to GSP is forecast to reach 25.3% in 2026-27,” Budget Paper 2 read.
Government sector revenue and expenditure
The 2024-25 budget forecast total revenue for Victoria’s general government sector will be $96.1 billion. This figure is an upgrade on last year’s forecast by $2.6 billion.
Over the forward estimates, the government expects revenue growth to average 3.6% annually to reach $106.9 billion in 2027-28.
“Total general government sector expenditure is expected to be $98.3 billion in 2024-25 and is expected to grow by an average of $2.2 billion a year over the forward estimates, reaching $105 billion in 2027-28,” Budget Paper No. 2 read.
“Net debt is expected to be $156.2 billion at June 2025 and increase to $187.8 billion by June 2028. As a proportion of GSP, net debt is projected to be 24.4% at June 2025 before reaching 25.2% in 2026-27 and then declining to 25.1% in 2027-28.”
Meanwhile, government infrastructure investment is expected to peak at $24 billion this financial year, averaging $19.3 billion a year over the budget and forward estimates period — lower than last year’s reported average for 2023-24.
“The government is progressively returning its capital program towards pre-COVID levels by the end of the forward estimates to take account of the strength of the Victorian economy as well as supply of constraints in labour and materials in the construction sector,” the budget paper read.
Effects of a limited workforce encourage slower program roll-out
The treasurer said families and the economy were being negatively impacted by high inflation. While unemployment enjoyed historical lows compared to the past 50 years, he noted how constrained the government’s options were given limited workforce capacity.
“Times are tough for many Australians. Indeed, for many around the world. Inflation is hurting. Interest rates are higher, and the cost of groceries, petrol and bills continues to rise,” Pallas said.
“Our agenda [in the past decade] has launched careers and jobs for thousands of people, and we can be proud that the Victorian economy powers the nation.
“We have steered this state through natural disasters and a global pandemic, and shown we can navigate any terrain, with strong leadership and compassion.
“Only with clear-headed and firm decisions can we ensure the best future not just for us, but for our children, and our grandchildren,” he said.
Pallas said the nation overall was short 229,000 workers relative to demand.
In Victoria, he said this worker shortage was impacting across sectors including construction projects, care and social sectors.
“Rising prices of materials, labour and transportation have pushed up construction costs by around 22% since 2021… and Infrastructure Australia estimates the demand for workers exceeds the current national public infrastructure workforce by 129%,” Pallas said.
“Early childhood worker vacancies are three times higher than in 2019.”
The extent to which workforce constraints impact the output of Victorian public servants will be a conscious decision to roll out programs more slowly. This includes the early childhood and free kinder initiative ‘Best Start, Best Life’, as well as the mental health and wellbeing locals initiative.
“With sustained low employment continuing to impact our workforce capacity, we’re going to roll these reforms out a bit more gradually, ensuring we give the workforce time to build up and skill up,” Pallas said.
“This budget pursues a more gradual approach to the rollout of our mental health and wellbeing locals. That gives us the opportunity to train and recruit the required workforce.”
Growth propelled by building sustainable infrastructure
Pointing to forecasts by Deloitte Access Economics, Pallas said Victoria’s economy was expected to outpace all other Australian jurisdictions in the next five years.
Victorian business investment was also leading the nation, recording investment growth 6% higher than the national average.
“At the height of the pandemic, we stepped in and used our state’s balance sheet to protect household budgets. This underlaid our strong economic recovery,” Pallas said.
“With high global inflation, the International Monetary Fund (IMF), in its recent report on Australia, says now is the time for governments to adapt infrastructure investment to economic capacity.”
The treasurer went on to explain that 2024-25 changes to management of the government’s capital program were not the equivalent of “going from feast to famine”, but that the budget laid out the plan to return the state’s capital program to pre-COVID levels.
This adjustment would help the government deliver for the economy, he said, also underscoring delays in major projects such as the Melbourne airport railway project, which is four years behind.
“Infrastructure investment is expected to decline from a peak of $24 billion in 2023-24 to $15.6 billion by the end of the forward estimates,” Pallas said.
“A sustainable, ongoing pipeline will provide certainty to the construction industry, and help them to build critical social and economic infrastructure for all Victorians.”
Existing projects such as the Metro Tunnel and West Gate Tunnel scheduled to open in 2025 were ambitious examples of laying the foundations for the state’s future liveability and economic growth.
The budget papers also announced new targeted investment in critical areas such as hospitals, redevelopments, new schools, and road and essential community infrastructure maintenance works.
The treasurer said these were all “measured and proportional” responses to workforce, supply chain and inflationary challenges.
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