On May 5, the Victorian Labor government announced in its 2026/27 budget that it had achieved its first fiscal surplus in seven years, describing it as the result of “disciplined financial management.” Official figures indicate that the state expects a surplus of approximately AUD 1.048 billion, while emphasising that no new taxes have been introduced this year in an effort to ease cost-of-living pressures.
From a political messaging perspective, this narrative is clearly appealing: a post-pandemic fiscal recovery, maintained public services, and no additional tax burden. For voters, this combination is naturally attractive. However, when this “surplus” is examined within the broader fiscal structure, it reveals a far more complex reality—one shaped by underlying debt pressures and long-term fiscal risks.
Where does the surplus come from?
From a structural fiscal perspective, the so-called “surplus” is not the result of a sustained improvement in the government’s financial position. Instead, it relies largely on two types of one-off or non-recurring revenue.
The first is additional funding from the federal government. Budget figures show that Victoria received around AUD 4 billion more in federal transfers than originally expected this financial year. Under Australia’s federal system, state governments are already highly dependent on such transfers, particularly in areas like healthcare, education and infrastructure. While legitimate, this funding essentially represents external support rather than a reflection of Victoria’s own economic strength.
The second source is one-off revenue from assets and licensing arrangements, particularly in the gambling sector. For example, the operator of Keno and The Lott paid approximately AUD 1.15 billion to the state government in exchange for extending its licence for another 40 years. In simple terms, this approach brings forward revenue that would otherwise have been collected gradually over decades.
From a fiscal standpoint, such income does not improve the government’s long-term financial capacity. It merely shifts future revenue into the present, making the current balance sheet appear stronger than it actually is.
As such, this “surplus” is less a sign of improved fiscal health than a timing adjustment—an accounting outcome created by bringing future income forward.
The real issue: debt and future fiscal pressure
The budget does not fully reflect Victoria’s overall fiscal position. Major infrastructure spending is not directly accounted for in the operating balance, as it is largely funded through borrowing. This allows headline figures to appear relatively stable, even as total debt continues to grow.
According to budget projections, the government expects to borrow an additional AUD 40 billion over the next four years, indicating that debt has not yet peaked and will continue to expand. By 2029–30, net debt is projected to reach approximately AUD 199.3 billion, with annual interest payments rising to around AUD 11.8 billion—equivalent to roughly AUD 32 million per day. In other words, even without any new spending, the government will still face a substantial daily cost simply to service past borrowing.
Historical comparisons make the trend even clearer. In 2014, Victoria’s net debt stood at around AUD 21.8 billion. By 2029–30, it is expected to approach AUD 200 billion—an almost tenfold increase. Over the same period, annual interest payments are projected to rise from approximately AUD 2.1 billion to AUD 11.8 billion, more than five times higher.
To manage these pressures, the government is relying heavily on continued growth in future tax revenue. Payroll tax—currently the largest revenue source—is projected to increase by around 15% by 2029–30, while land tax revenues are also expected to rise.
However, this reveals a deeper structural issue. Much of the economic activity driving higher tax revenues is itself supported by debt-funded infrastructure spending. In other words, employment growth and revenue increases are, to a significant extent, built on borrowing rather than purely organic economic expansion. As a result, even rising revenues struggle to keep pace with the compounding growth of debt and interest obligations.
In effect, fiscal pressure has not disappeared—it has simply been deferred into the future. As for how this debt will ultimately be repaid, the government has yet to provide a clear plan. Treasurer Jaclyn Symes has not outlined any concrete timeline for repaying principal, instead stating that the current priority is to “stabilise” debt rather than reduce it.
How did Victoria reach such high debt levels?
To understand Victoria’s current debt position, it is necessary to look back to the period under former Premier Daniel Andrews. At the time, interest rates were historically low, making borrowing relatively inexpensive. The government adopted an approach that treated debt as an “investment tool”: as long as borrowed funds were directed toward infrastructure capable of generating long-term economic returns, short-term borrowing was seen as justified.
Under this logic, the government accelerated a range of major infrastructure projects, including the Metro Tunnel, the Level Crossing Removal Project, the North East Link, and later the Suburban Rail Loop. These projects aimed to address long-standing infrastructure gaps, improve transport efficiency, and stimulate employment and economic activity in the short term.
However, most of these investments were not funded through current revenue, but through long-term borrowing—effectively shifting the cost burden into the future.
The problem is that economic conditions do not remain static. As interest rates rise, previously manageable borrowing costs can escalate quickly. This model came under further strain during the COVID-19 pandemic. Faced with prolonged lockdowns and economic disruption, the government significantly increased spending to support businesses and employment, relying heavily on debt as a short-term stabilisation tool. While this helped cushion the immediate impact, it also accelerated the growth of public debt to one of the highest levels in the country.
Victoria’s fiscal structure further compounds the issue. Unlike resource-rich states such as Western Australia, which benefit from substantial mining royalties, Victoria relies heavily on property-related taxes and payroll tax. This makes government revenue more sensitive to fluctuations in the housing market and economic growth, weakening its capacity to manage high debt levels during downturns.
In modern public finance, high debt is not inherently problematic. What matters is whether borrowed funds generate sustainable long-term returns and whether there is a credible plan for repayment. The issue is not simply how much is owed, but why the debt was incurred and how it will be repaid. On this front, Victoria has yet to provide a clear and convincing answer.
Relief measures: shifting the focus
Rather than directly addressing structural fiscal challenges, the government has shifted its policy focus toward cost-of-living measures aimed at improving public perception. These include free or discounted public transport, vehicle registration rebates, and the continuation of vision care services for school students. These policies are highly visible and easily felt by the public, offering immediate relief in daily life.
At the same time, the budget sets aside approximately AUD 5 billion in reserves, part of which is expected to be used to reach wage agreements with teachers—likely to minimise the risk of industrial action ahead of the November state election.
These measures can be seen not only as social support, but also as a strategic allocation of resources—prioritising short-term, tangible benefits to maintain public support in the lead-up to an election, even as longer-term fiscal pressures remain unresolved.
The government has also emphasised that “no new taxes” have been introduced this year. While this is politically appealing, the broader context tells a more complex story. Since Labor came to power in 2014, Victoria’s overall tax burden has risen significantly. Data shows that combined state and local government tax revenue per capita increased from around AUD 4,066 to approximately AUD 6,605—an increase of more than 60%, making Victoria one of the highest-taxed jurisdictions in Australia.
In recent years, the government has expanded its tax base through various measures, including higher payroll taxes for large businesses to fund mental health services, the introduction of a windfall gains tax, additional levies on businesses to repay COVID-19 debt, as well as increases in land tax and the expansion of emergency services levies.
Against this backdrop, the claim of “no new taxes” is less a sign of tax relief than an indication that the government may have reached the limits of its capacity to impose further tax increases.
What should a responsible government do?
As Opposition Leader Jess Wilson has argued, the budget reveals a cash deficit of approximately AUD 7.7 billion, alongside rising debt, increasing tax burdens and growing interest repayments. This stands in clear contrast to the government’s emphasis on a “surplus,” and highlights the absence of a coherent plan to address underlying fiscal challenges.
In the face of expanding debt, a responsible government should not focus on presenting favourable headline figures or shifting attention elsewhere. Instead, it should openly acknowledge the scale of the problem and clearly communicate the associated risks and trade-offs to the public. Without transparency about where debt comes from, how it is being used, and how it will be repaid, the issue becomes not just economic, but one of public trust and governance.
A credible fiscal strategy should include clear timelines and pathways—outlining how debt growth will be managed, when and how principal repayments will begin, and how the revenue base can be strengthened without placing excessive burden on taxpayers. At the same time, greater transparency is needed in explaining the relationship between borrowing and spending, so the public can distinguish between long-term investments and short-term fiscal support.