Victoria has one of the worst debt burdens of comparable jurisdictions around the world and is on track to pass a critical threshold for a potential downgrade of its credit rating within five years.
An analysis by ratings agency S&P Global shows Victoria, which has the lowest credit rating in the country, carries a greater debt burden than 17 sub-sovereign jurisdictions in Canada, Germany and Australia – the three countries with a similar federated model of government.
Victoria’s gross debt is forecast to make up 202.6 per cent of its operating revenue in the 2026 financial year and balloon to 213.1 per cent the following year, despite the state’s borrowings slowing over the past few years.
The only jurisdictions with higher liabilities than Victoria were the Canadian provinces of Manitoba, Newfoundland and Labrador, Quebec and Ontario.
“At least the pace of growth of debt has slowed down a little bit, but the general trend is still upward, so that is still a concern from the rating perspective,” S&P analyst Martin Foo told The Australian Financial Review.
“Which means the state has maybe bought itself more time before it starts to cross those critical thresholds. One of the reasons that has happened is because … [the government has] managed to implement a whole raft of new taxes … so that has helped to improve the denominator of that ratio and slow down growth of debt.”
Victoria’s credit rating was downgraded by two notches from AAA to AA in December 2020 and the state was warned two years ago it faced another downgrade to AA- if debt reached 240 per cent of operating revenues or if interest repayment reached 10 per cent.
The Allan government budget last month showed Victoria’s interest bill was projected to climb to $10.5 billion in 2029 – when net debt reaches $194 billion and gross debt $237 billion – representing about 8 per cent of government revenue.
Foo said if the debt-to-revenue ratio continued rising at 5 or 10 percentage points a year, the state could pass the threshold for a potential downgrade “toward the end of the decade”. The agency makes assessments based on a two-year horizon.
In 2023, Victoria’s gross debt made up 170 per cent of its operating revenue. It rose to 181.9 per cent in 2024, and is expected to climb to 190.8 per cent at the end of this financial year.
The debt-to-revenue ratio between 2023 and 2027 is rising by an average of 10.73 percentage points, S&P’s analysis shows. If the trajectory continues beyond 2027 gross debt will make up 245 per cent of revenue in 2030.
S&P, with Moody’s and Fitch, retained a “stable” outlook for Victoria following the budget, but criticised the Labor government for spending additional revenue instead of improving the bottom line. It also expressed scepticism about Victoria’s capacity to retain fiscal discipline heading into next year’s state election.
The Victorian government has a five-step fiscal strategy that relies heavily on growing the state’s economy to pay down debt, which is the highest of any state or territory and will make up 24.9 per cent of the economy by 2029.
A Victorian government spokesman said the state had achieved its third step of delivering a budget surplus and was on track to achieve its fifth step of reducing net debt as a proportion of the economy by 2027.
“Our fiscal strategy is working – we’re delivering the services and infrastructure Victorians rely on while reducing debt and growing our state’s economy,” he said.
“Victoria is one of only three states in Australia to deliver an operating surplus this year.”
Foo said the agency still believed Victoria had strong institutions, a wealthy and diverse economy, and its liquidity was “still very strong”.
All states and territories have now handed down 2025-26 budgets after NSW, Queensland and the Australian Capital Territory unveiled theirs last week.
The jurisdictions forecasting a surplus next financial year include Victoria ($600 million), Western Australia ($3.1 billion) and South Australia ($179 million). While NSW ($3.4 billion), Queensland ($8.6 billion), Tasmania ($1 billion), Northern Territory ($265 million) and the ACT ($425 million) all projected a deficit for 2025-26.
Independent economist Saul Eslake said states and territories generally had higher credit ratings than they otherwise should as the ratings agencies assumed the federal government would bail them out if necessary.
He said one of the threats to Australia’s AAA credit rating now is the rapid growth of debt among all states and territories.
“If the feds’ rating were to be downgraded, then all the states would be as well – and so would the Australian banks’, because the banks can’t have higher credit rating than the sovereign,” Eslake said.
Victorian Opposition Leader Brad Battin said the ratings agencies had put the Labor government on notice.
“Victoria’s debt is weighing down business confidence,” he said. “It’s time for a real plan to restore confidence in Victoria’s economy. And it starts with getting spiralling debt under control.”
Australia Financial Review