New fund to pay down billions in Vic debt

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Victoria will set up a future fund to pay down its rising debt as it pushes for a modest return to surplus in the post-pandemic era.

The 2022/23 Victorian budget, handed down by Treasurer Tim Pallas on Tuesday, projects a return to surplus by mid-2026 following two years of COVID-19 pain.

Treasury forecasts a narrow $650 million surplus by 2025/26, after gradually reducing deficits of $7.9 billion, $3.3 billion and $1.1 billion in the proceeding three financial years.

Despite the potential return to black, the state is still facing rising public debt for years to come.

Net debt currently sits at $101.9 billion, $7.8 billion lower than forecast in last year's budget after the Victorian economy grew by 5.5 per cent this financial year, slightly better than expected.

With population growth tipped to rise, Gross State Product (GSP) is predicted to hover between 3.25 per cent and 2.25 per cent over the forward estimates but net debt is still set to hit $167.5 billion in June 2026, or 26.5 per cent of GSP.

The final pillar of the government's recovery plan is the creation of a Victorian Future Fund to begin paying down its public borrowings.

It will initially be funded with cash gleaned from the commercialisation of VicRoads through a joint venture model.

Mr Pallas said the fund has a projected medium-term balance of $10 billion, with a proportion of future surpluses and selected land sales to be added to the pool.

The Victorian Funds Management Corporation will invest the money, with returns to go towards debt repayment.

With inflation pushing up interest rates, Victoria's debt payments are projected to rise from $3.9 billion in 2022/23 to $6.4 billion by 2025/26.

Infrastructure spending remains high at $21.3 billion per annum over the next four years, creating further pressure on the budget bottom line.

It has not been helped by cost blowouts, such as the $3.9 billion more needed for the problem-plagued West Gate Tunnel - of which, the government will foot $1.9 billion - as well as an extra $503.6 million and $512.9 million respectively on new hospitals in Footscray and Frankston.

Global ratings agencies Moody's and Standard and Poor's praised Victoria's economic recovery but cited infrastructure spending and rising interest rates as downside risks to its already downgraded credit scores.

"We expect Victoria's debt burden will not stabilise before the end of fiscal 2027, further increasing negative pressure on the state's rating," Moody's Investors Service Vice President John Manning said.

In his speech to parliament, Mr Pallas once again took aim at the federal government for "short-changing" Victoria on infrastructure spending, the proposed GST carve-up and the end of a 50/50 split on COVID-related health costs in September.

Opposition Leader Matthew Guy said the state's infrastructure cost blowouts and "mountainous" debt levels would have consequences for all Victorians.

"(It's) going to have a really challenging affect on our economy and our way of life, and potentially impacting our cost of living and the delivery of services into the future," he told reporters.

Only a handful of budget measures were announced in the lead-up to Tuesday, including a forecast $30 million a year tax hike on Crown Casino's Melbourne pokies.

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