Victorian Premier Daniel Andrews has warned some “very difficult” budget decisions must be made.

Victorian Premier Daniel Andrews has warned some “very difficult” budget decisions must be made.Credit:Justin McManus

“That money now has to get paid back,and I’m not going to have a situation where we simply ignore the reality that interest rates have gone up,” Andrews said.

“They have gone up for ordinary,hard-working Victorians across the state,and they have gone up for the government too,and we will cut our costs accordingly.”

Treasurer Tim Pallas’ office has confirmed the budget would deliver on election commitments yet also respond to rising inflation and interest rates,but the Community and Public Sector Union warned cuts to the public service would have a crippling impact on government services.

Andrews’ warning followsrevelations inThe Age that rising interest costs ripped more than $400 million extra out of the state budget in the first half of this financial year alone.

According to a budget update released by Treasury earlier this month,the interest bill on government borrowing topped$1.8 billion during the final six months of 2022,as Victoria’s net debt edged over $100 billion for the first time. That compares with an interest bill of $1.39 billion for the same six-month period in 2021.

But according to a senior government source unable to speak publicly,more pain is in store,through a further hit from rising interest rates over the four-year budget period,beyond the expectations previously built into the government’s forecasts.

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That suggests higher interest rates could add as much as $2 billion extra to expected costs over four years,prompting growing concern about the government’s ability to afford Labor’s crowdedsocial policy and infrastructure agenda.

Labor now has to deliver on $3.3 billion worth of recurrentelection spending promises made in the lead-up to November’s election,and about $8.4 billion worth of capital spending announcements. That is in addition to a rising interest bill from government borrowing and other cost pressures linked to soaring inflation.

The size ofVictoria’s public sector has climbed as the Andrews government implements big infrastructure projects like level crossing removals and theWest Gate andMetro tunnels,and grappled with the pandemic.

The wage bill has risen sharply in recent years,and the latest Department of Treasury predictions show the government is expecting to spend about $33.5 billion on wages this financial year,soaking up the equivalent of about 39.5 per cent of total revenue.

That is up from a pre-pandemic level of $25.4 billion in 2018-19,which was equivalent to 36.5 per cent of revenue.

A spokesman for Pallas confirmed the May 23 budget would deliver on the government election commitments. But he said the budget would also respond to rising inflation and interest rates.

Treasurer Tim Pallas is preparing for the May 23 state budget,and says election promises will be honoured.

Treasurer Tim Pallas is preparing for the May 23 state budget,and says election promises will be honoured.Credit:Nine

“Just as all Victorians are facing cost of living challenges with rising interest rates and inflation,the Victorian budget will also take into account current economic conditions,” the spokesman said.

“We’ll continue to consult with unions and employees as we deliver savings identified in previous budgets,ensuring that key services are maintained.”

Community and Public Sector Union Victorian secretary Karen Batt said inflicting public service job cuts to deal with the state’s systemic budget problems,including the impact of rising interest rates,would have a crippling impact on services.

“It’s an indictment on a government where it’s as if public servants are a throw-away commodity,” Batt said.

Community and Public Sector Union Victorian secretary Karen Batt.

Community and Public Sector Union Victorian secretary Karen Batt.Credit:Eddie Jim

“The ability to deliver services requires staff that are trained to work for government. They do the research,the policy design,they roll out the programs,the budget settings. It[the public service] should not be disregarded as it has been.”

The Reserve Bank has come under sustained criticism after indicating in early 2021,when its official cash rate was still at a historic low of just 0.1 per cent,that it did not expect interest rates would need to be increased “until 2024 at the earliest”.

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Despite this,the Reserve has now lifted interest rates 10 times since May last year in an aggressive push to quash inflation,with the latest quarter of a percentage point move this month taking the cash rate 3.6 per cent,the highest since December 2008.

Like households,Victoria appears to have been caught off guard by the rapidity of the interest rate increases.

Some government agencies have already announced job losses ahead of the May budget.

Staff at the Victorian Equal Opportunity and Human Rights Commission,for example,were informed in an email of a sweeping restructure earlier this month,due to a “significantly smaller budget for the foreseeable future”.

Asked about those particular job cuts,Andrews has said it was time for a budget reset following months of emergency borrowings during the coronavirus pandemic.

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