In Victoria, the early 1990s were difficult. The economy was in serious decline, the population was declining, jobs were being lost, and the unemployment rate was soaring to the highest level in the nation. The blame was placed on a long-term Labour government for letting the state debt get out of control. “Australia’s Mexico without the sunshine” was a common joke at the time about Victoria.
Is it happening all over again?
The Victorian economy is in trouble, according to business leaders quoted in a piece published in December 2024 as part of a series on the state by the Australian Financial Review.
The most recent unemployment statistics were cited as evidence. Victoria has the highest unemployment rate in the nation at 4%, having increased over the past year. Stunting home prices and an increase in business failures were also mentioned.
One article in the Financial Review looked at the decline in conferences, while another earlier in the month highlighted data indicating a declining rate of Victorian business start-ups. All this was referred to as evidence of a state struggling under the weight of $8.6 billion in levies imposed in the Labour Party’s 2023 budget to curb a mountain of state debt that is forecast to reach $188 billion by 2028.
The same themes were echoed in a feature on Victoria that was published by The Australian.
“What the hell has gone wrong with Victoria?” was the question posed to the readers. Taxation and public debt were major contributors to the impending economic disaster. The Australian deemed the state to be at best, trapped in stagnation, forcing it to cover falling private investment and expenditure with ever greater public largesse. And at worst as the spending and debt build-up sets off the alarms, a vicious spiral is triggered until the whole Ponzi scheme collapses.
However, are things really that bad? What is the real picture of the economy?
Some positive signs
Indeed, Victoria’s unemployment rate is high when compared to the rest of the nation and is on the rise. However, it has remained steady for the past four months, which is indicative of the effects of interest rate hikes over the preceding two years.
In addition, the increase over the past 40 years has come from a very low base and is still at a historically low level, far below the 1990s highs.
The population in the labour force is still increasing at a steady rate. Now, the participation rate is at its highest level ever. In seasonally adjusted terms, the labour force grew by 20,000 last month, and nearly all the new hires found work.
There has been a noticeable increase in employment since the pandemic ended. In seasonally adjusted terms, employment has grown by 268,000, or 8%, since January 2023. This growth represents 37% of the total number of jobs created in Australia during that period.
Although the percentage of jobs created is declining, it still exceeds the population share of the state and is based on an incredibly high starting point. In July, Victoria accounted for 55% of all jobs created nationally.
According to the Australian Financial Review, the most recent employment figures were “unexpectedly strong.”
What about business insolvencies?
Insolvencies in Victoria have increased, rising 61% in September over the same month the previous year. In Australia, however, they are also growing at a faster rate, with the national number increasing by 70%.
We cannot determine whether the number of conferences in Victoria is increasing or decreasing because there is no reliable database to make that determination.
Furthermore, although Victoria may have lagged behind other states in terms of the number of new start-ups per 1,000 businesses, the total number of businesses has grown by over 31,000, or 3%, since the year started.
How are house prices and rents holding up?
Indeed, the cost of homes is falling. Several new property taxes included in the 2023–2024 state budget to help pay for pandemic-related debt are at least partially to blame for the fact that they are currently about 20% below their peak during the pandemic.
High interest rates have made housing more affordable than ever before, which is good news for those who are eager to purchase their first home. This decline in home values contrasts with a rise in rental income during the same time frame.
The median rents in Victoria have risen by 13.3% in the past 12 months and by 4.3% in the following quarter. Perhaps helping those who believe that the economy is in trouble, the rental stock dropped for the first time in the March quarter.
However, that decline only amounted to 2.7% of the stock, or hardly 10,000 homes. Someone had to buy those properties, and most of them were probably sold to first-time purchasers who had no overall impact on the rental market due to their changing tenure. Such a wealth redistribution might not be a bad thing.
Debt is high – but so is infrastructure spending
Victoria’s economy, like the rest of the nation, has undoubtedly been slowing down. When it raised interest rates last year, the Reserve Bank aimed for precisely that result. However, there is scant evidence that Victoria is reverting to the catastrophic course of the early 1990s.
Because of a severe recession at the time, state debt increased alarmingly. This time, the state’s debt has increased significantly, primarily to finance a pipeline project of a magnitude never before seen in the state.
Spending on infrastructure has increased fivefold in the last ten years, reaching $25 billion annually. Many jobs are included in those figures, and soon, a large portion of that infrastructure will be operational, increasing the state’s economic potential.
The surprisingly strong economy of Victoria is influenced by several factors. One key element is the return of international students, which has contributed to a net increase in international migration of 152,000 people in the year ending March 2024. This figure represents nearly 30% of the total population growth in Australia.
However, some people argue that Victoria has become a “poor state” due to rapid population growth driven by migration, a lack of output growth, and a long-term decline in household income per capita.
To address these issues, Treasurer Tim Pallas is hopeful that the increased investment in debt-funded infrastructure will provide the necessary boost in productivity.
While various indicators show that the economy of Victoria is slowing, this trend is consistent with a national pattern. A closer examination of the data reveals some growth indicators, suggesting that there is no immediate cause for concern.