Victoria’s 2025‑26 Mid‑Year Financial Report was released on Friday and showed that the state’s net debt has increased by $10 billion in six months, reaching $160.9 billion:
Net debt as a share of the state economy has risen from 23.7% to 24.2% in six months.
Interest costs are also escalating. $3.8 billion was spent on interest in the first half of the year, $522 million more than the same period last year.
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Interest repayments are on track to reach $1 million per hour.
Tax revenue increased by $2.1 billion compared with the same period last year, driven by:
Stamp duty was up $923 million, driven by higher settlement volumes and transaction values. Introduction of the Emergency Services Levy. Broader payroll and economic activity supporting tax growth.
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Despite this uplift, revenue growth did not keep pace with the combined pressures of wages, interest, and infrastructure spending.
In particular, employee expenses rose by $1 billion year‑on‑year, reflecting new enterprise bargaining agreements and higher staffing levels.
Employee expenses reached $23 billion in the first six months, already 52% of the full‑year budget estimate, signalling the annual wages bill will again exceed forecasts.
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This continues a long‑running pattern with wage growth remaining structurally higher than government forecasts.
The Parliamentary Budget Office has found that while Labor governments forecast annual wage growth of 3.1–5.2%, actual growth has been 5.7–8.7% since 2014.
Treasurer Symes says the economy remains strong and the government is providing “real relief” to households.
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“Our economy is strong and we are on track to deliver a budget surplus”, Symes said. “We know there are Victorians who are struggling which is why we’re providing real relief to save people time and money”.
Opposition Leader Jess Wilson argues that interest repayments—soon to reach $1 million per hour—are crowding out basic services such as road maintenance, school funding, and police station operations.
“With interest repayments on Labor’s record debt soon to hit $1 million every single hour, is it any wonder why we can’t fill potholes, properly fund our schools or keep local police stations open?”, she said.
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With 2026 being an election year, Victoria’s upcoming May budget is being shaped by two opposing forces: the political pressure to deliver cost‑of‑living relief in an election year and the economic pressure to avoid worsening inflation and protect the state’s AA credit rating.
The government has signalled that cost‑of‑living support will be a major feature of the May 4 budget. However, economists and ratings agencies warn that:
Additional spending could fuel inflation, especially while the economy is capacity‑constrained. Any new relief measures must be offset by savings or revenue increases to avoid worsening the state’s fiscal position. The RBA has already said government spending contributed to the recent rise in inflation, prompting a rate hike from 3.6% to 3.85%.
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Independent economist Saul Eslake argues that pre‑election incentives may take priority over budget repair, increasing the risk that the state drifts further from a sustainable fiscal path.
“That’s not consistent with putting Victoria on a path back to a sustainable position … Victoria has implemented some revenue increases, but they need to do more or cut more operating or capital expenditure”, Eslake said.
“When government spends money at a time when the economy is capacity-constrained and exceeding its speed limit, that adds to inflation. The likelihood is whatever the Victorian government decides to give people by way of cost-of-living relief, the [RBA] is likely to take away in the form of higher interest rates.”
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The global ratings agencies are also watching Victoria closely.
“Pre‑election spending pressures remain a clear downside risk if savings or offsets don’t materialise”, S&P analyst Rebecca Hrvatin said. “Victoria has a wealthy, diversified economy and strong market access – those are strengths – but spending decisions that materially weaken operating margins could pressure the rating”.
Fitch analyst Paul Norris also cautioned that increased election spending “could potentially weigh on the rating, particularly amid ongoing global economic uncertainty”.
The last thing that Victorians need is for the government to add to the debt pile via “cost of living” measures while also prompting the RBA to hike rates.
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