The arithmetic of Victoria: The pothole state
In public finance, there is a simple truth that ideologues spend years trying to evade: Eventually, the numbers catch up with you.
Back in the late 1980s and early 1990s, when I was studying at University in Melbourne, the economic mismanagement of the Kane and Kirner Labor governments reduced what was then called the Garden State to an economic basket case.
Decades later and Labor has done it again, hitting Victoria hard.
When Labor came to power there in 2014, the state’s debt was $21.8 billion. Today, it exceeds $160 billion and is rapidly approaching $200 billion, making Victoria one of Australia’s heaviest financial ball-and-chains.
The state now carries a debt burden higher than that of several sovereign nations, supported by taxpayers who are being levied the highest state tax regime in the country.
To put $200 billion into perspective, it represents approximately $28,000 of debt for every single Victorian man, woman and child. That’s not money spent on wealth-generating assets that pay for themselves; it’s debt accumulated through massive infrastructure cost overruns, spiralling public sector wage bills, and structural budget deficits that worsen every single year.
How did Victoria reach this point? And more importantly, is there a realistic roadmap out?
Last week, former Treasurer Peter Costello reminded the public that state governments need to “do less and do it better.”
The primary responsibility of any state government is fundamentally straightforward: build and maintain roads, run efficient hospitals, support a functional police force, and deliver high-quality basic education.
Instead, over the last decade, Victorians have watched their state government transform it into a laboratory for ideological experimentation and administrative bloat.
While the Vic government was busy trying to sign international Belt and Road treaties, rename lakes and mountains, establish parallel indigenous treaty frameworks, and facilitate endless work-from-home public sector entitlements, the basics fell by the wayside.
And as Prime Minister Albanese funnels around 27.5 per cent of federal GST revenue back to Victoria (or $1.06 for $1.00 of GST raised within the state), taxpayers in productive, fiscally disciplined states are asking why they should underwrite Victoria’s reckless spending.
The message to Victorians seems to be: “You voted for it; you clean it up!”
The myth of “growing out of debt”
For years, the narrative out of Victoria’s Treasury Place was comforting. Victorians were told the state’s high population growth and massive infrastructure pipeline would generate enough economic activity to easily cover the borrowing costs. They were told debt was cheap, manageable, and necessary for the ‘Big Build.’
But that narrative has completely collapsed.
You can’t borrow your way out of a debt trap when interest rates rise, construction costs inflate, and project management is plagued by ‘affiliated’ union featherbedding and administrative waste.
The state’s revenue sources – primarily payroll tax, stamp duty, land tax and traffic fines– are already maxed out. Pushing those taxes higher doesn’t create economic growth; it drives capital, business, and skilled labour interstate.
No quick fixes today
When Labor orchestrated Victoria’s last financial crisis in the early 1990s, the incoming Kennett government had tools at its disposal that no longer exist today. They were able to stabilise the balance sheet by privatising state-owned assets – electricity utilities, gas networks, and state infrastructure – and use the proceeds to pay down debt.
Similarly, when the Howard-Costello Federal Government wiped out $96 billion in Commonwealth net debt between 1996 and 2006, they utilised asset sales (such as Telstra) alongside strict expenditure limits to create the Future Fund and secure Australia’s AAA credit rating.
Victoria today has no such luxury. Almost everything that can be sold has already been sold. There are no massive state assets left. The state can’t rely on asset sales to offset its operational deficits.
The only levers left are the hard ones: cutting spending and boosting economic productivity.
A five-point recovery plan for Victoria
If a new administration wants to restore fiscal viability and sanity to Victoria, it has to throw out ideology and adopt a back-to-basics strategy.
- Audit and right-size the ‘Big Build’
Not all infrastructure is equal. Projects that deliver clear supply-chain productivity gains have to be prioritised, while multi-billion-dollar ‘vanity’ projects – I’m thinking the Suburban Rail Loop (SRL) – have to be paused, re-evaluated, or scrapped.
The first stage (SRL East) of Victoria’s Suburban Rail Loop is officially budgeted at between $30 billion and $34.5 billion, with completion targeted by 2035. However, independent estimates project that the total cost of constructing and operating the broader multi-stage project will exceed $125 billion and may reach over $200 billion.
This is madness.
- Get back to basics
Stop funding ideological activism including;
Projects like state-negotiated international trade compacts (e.g., Victoria’s former Belt and Road initiative) or state-funded global climate delegations.
Advisory panels, statutory bodies, and state-level treaties or “Voice” commissions that duplicate federal responsibilities or add layers of compliance.
Department resources and staff time directed toward internal diversity, equity, and workplace activism consultants rather than direct public administration.
Instead, when facing a severe debt burden, the government needs to strictly limit state operations to essential public goods, reduce its total overhead, slash administrative payroll costs, and ensure that tax revenues directly benefit the population’s physical and operational needs.
For the immediate future, Victoria needs to focus its expenditures on essential services:
Health
Directly fund the operations of emergency departments, regional clinics, and front-line doctors/nurses – rather than health department administration or health-policy advisory groups.
Roads
Fix regional road networks by eliminating dangerous intersections and maintaining existing freight links.
Safety
Boost operational police presence on the streets, fund corrections facilities, and improve emergency response times. Change the ideology that sees courts hand out suspended sentences to criminals because they might be deported if convicted.
Education
Redirect funds directly into classroom infrastructure, teacher retention, and essential literacy/numeracy programs rather than central curriculum oversight committees or non-frontline public service roles.
- Restructure the public sector payroll
Between 2014 and 2026, state government expenditure on public sector employment outpaced population growth by a staggering margin.
Between 2014 and 2024/2025, Victoria’s population grew by roughly 13 per cent to 15 per cent (from about 5.8 million in 2014 to circa 7.1 million). Over the same period, total public sector employment (including healthcare workers, teachers, and police) grew by about 38 per cent. However, growth in central state government departments (the non-frontline public service) exploded by 51.1 per cent between 2015 and June 2024, and has continued to grow since.
A complete freeze on non-essential administrative hiring, combined with the consolidation or abolition of redundant statutory authorities and ‘quangos,’ is necessary. The focus has to return strictly to frontline service delivery: doctors, nurses, teachers, and police.
- Unlock Victoria’s energy potential
It might surprise many to know that Victoria sits on massive, untapped natural gas reserves in the Gippsland and Otway basins. However, ideological bans (Victorians are prohibited from installing gas appliances in new builds) and regulatory hurdles mean the state imports gas and endures some of the most volatile energy prices in the country.
Unlocking domestic natural gas would immediately provide cheap, reliable base-load energy for local industry, stop the flight of manufacturing, and generate massive royalties.
- Broaden the tax base by reducing the tax burden
Capital goes where it is welcomed; currently, capital is fleeing Victoria as high tax rates erode, if not destroy, the total tax base. By replacing punitive, anti-business measures – such as the payroll tax surcharges and commercial land tax spikes – with a stable, predictable, and competitive tax framework, Victoria can attract commercial investment again.
Political courage
I reckon the hardest part of fixing the debt crisis isn’t designing the economic policy – it’s having the courage of one’s convictions to stand the political fallout.
Fixing Victoria won’t happen overnight, and it won’t be painless. It will require an electorate willing to accept hard realities over comfortable illusions, and leaders courageous enough to tell the truth.
What I can guarantee is that when a new Victorian government attempts to enforce spending restraint, the vested interests will resist.
Unions will threaten strikes, public sector bodies will disparage and condemn the cuts, and the media will latch on to “austerity” headlines.
The danger is that voters, who have grown soft through profligate, unaffordable government spending, reject the necessary economic medicine after just one term, re-electing the very party that created the mess.
This is the cycle Victorians have to break. Political leadership isn’t about promising “more free stuff”. It’s about integrity and common sense.
Victoria remains a state with incredible human capital, rich natural resources, and a proud industrial heritage. But until its leaders learn to “do less but do it better,” the economic storm will continue, and Victorians will keep driving down potholed roads, wondering how a state with so much potential managed to trade its future for a mountain of debt.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
