2025 Victorian State Budget – Economic Outlook

The Victorian Government announces an operating surplus for the first time since 2019, however falls far short of the projected surplus touted just six months ago, with proponents warning that an operating surplus and cost-of-living handouts glosses over continually increasing state debt and a longer-term plan to manage this debt and reinstate Victoria’s AAA credit rating.

Economic growth in Victoria is forecast to increase to 2.5%, and to reach 2.75% in line with national average forecasts, underpinned by expected wages growth, lower inflation and an anticipated easing of interest rates.

Despite this slight increase in overall economic growth, unemployment is predicted to increase from 4% to 4.75% over the next two years but is also expected to peak at 4.75%, well under the pre-pandemic levels of 5.5%.

The Victorian government project that outflows for major infrastructure spending – notably projects such as the Metro Rail Tunnel and West Gate Freeway Tunnel, which are planned to be finalised this year – will reduce in 2025-26 and continue to decrease over the next four years. At the height of infrastructure spending in 2024 and 2025, this was close to $24 billion but is projected to come down to $21.3 billion this year, with subsequent drops to $18.8 billion and then plateau at approximately $15 billion, though this will still be higher than the pre-pandemic levels of spending, which averaged out at $12 billion per year.

The levels of state debt currently stand at $133 billion, and are projected to grow to $194 billion by 2029, which will need to be serviced by continuing operating surpluses and a gradual decrease in public service and infrastructure spending. Net debt is not projected to reduce significantly as a proportion of Gross State Product but will require robust plans to reduce this debt over time, remembering that the average debt for the decade prior to 2020 did not exceed $20 billion, resulting in a tenfold increase by the end of this decade.

It is also worth observing that whilst international trade has not yet been impacted by proposed tariffs from the US, that Victorian exports could be impacted by the introduction of these cost barriers. Whilst exports from Victoria remain traditionally lower than other states, 17% of total state exports, or roughly $6 billion of pharmaceuticals, beef and other meat exports head to the US, and will be exposed to tariffs should these measures proceed in their current proposed form.

Growth in tax collection is expected in the forward estimates, with particular note that the slow land value growth in 2024 will take an upturn, resulting in projected annual increases to land taxes by an average 5.7% per annum, and increases in stamp duty collections on residential property sales as dwelling prices increase due to demand and a downward shift in borrowing interest rates, but will be tempered by last year’s changes to stamp duty on commercial property transfers, which shift from an upfront stamp duty cost to an annual 1% charge on the commercial site value over ten years.

In 2025, Victoria was the beneficiary of a windfall gain in its share of national GST revenue of $3.6 billion, taking its total share of GST revenues to $26.1 billion (out of a total national revenue pool of $95.1 billion), giving it the highest proportion of GST revenue by any state (27.5%) compared to its closest neighbour NSW at a total share of 26.8%, and Queensland at 17.4%. One of the key reasons for this higher proportion of GST funding stems from the state’s inability to raise revenue from other sources.

The Commonwealth Grant Commission (CGC) highlights that Victoria raises only $32 per person from mining royalites compared to a national average of $1,305 (which stem from increasing market coal prices), and raises only $259 per person from insurance taxes, compared to the national average of $314.

Despite having a below average cost of providing services per person, the gap in revenue raising underscores the state’s dependence on GST funding to manage above average population density growth.

The Victorian government have received some sharp criticism for not banking this windfall GST gain to assist with reducing overall state debt, rather than using it to supplement cost-of-living concessions in this year’s budget.

S & P Global estimates that Victoria’s debt will increased to 214% of its annual operating revenues, compared to just 70% in 2019, pre-Covid, raising questions about how short-term budgetary measures in 2025 will provide a pathway to reducing existing and future debt.

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Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.