tasmania’s debt dilemma: discipline without denial
Tasmania’s debt dilemma: discipline without denial
Hobart August 2025
In Tasmania’s Assembly, the confidence vote scheduled for 19 August looms less as a political moment and more as a fiscal reckoning. Behind the speeches and strategic alliances lies austere arithmetic: net debt projected to surge from roughly A$4.2 billion in 2024-25 to nearly A$13 billion by 2027-28, with annual interest payments ballooning toward A$700 million—enough to fund the entire police budget or build ten primary schools 1. These are not abstract fiscal figures; they are the real opportunity costs that threaten service delivery, infrastructure and the adequacy of public institutions.
Debt, in itself, is not malign. On the contrary—when deployed for productive investment within a framework of prudent governance, it raises long-term prosperity. But Tasmania’s challenge is not the level of debt: it is the lack of control—rising interest expenditures, eroding fiscal anchors, and election-fuelled commitments outpacing revenues. The question is no longer whether to borrow, but how to regain mastery over the borrowing already committed.
What’s changed—and why it matters
Tasmania’s June 2025 Pre‑Election Financial Outlook (PEFO) supplied new urgency: net debt now projected to blow out to A$13 billion by 2028, roughly A$3 billion worse than the numbers in the May budget suggested. The annual interest burden, already mounting, is expected to rise nearly threefold, approaching A$700 million by 2028‑29, a jump that stretches the state’s fiscal elasticity to breaking point.
The 2025‑26 budget foresees a net operating deficit of around A$1 billion, trimming slightly to A$850 million in 2026‑27. Tasmania remains heavily dependent on Commonwealth-sourced GST revenue, which constitutes roughly 40% of total state receipts.
But debt is more than a number—it’s a profile. TASCORP, the state’s bond issuer, faces a series of debt maturity events over the next several years where cheap, older debt will be replaced by bonds issued at today’s higher yields, pushing up average interest costs.
Despite these pressures, credit ratings remain high, but they’re not immutable. A downgrade would raise borrowing costs and reflect a deeper loss of confidence—risking a vicious cycle where higher costs feed larger deficits and erode further credibility.
Is there relief on the horizon? The Reserve Bank of Australia cut rates to 3.60% on 12 August 2025, the third such cut this year, but stressed that productivity weaknesses justify a cautious pace. It’s modest relief, not salvation—especially when broader structural issues remain unaddressed.
Smaller economies like Tasmania have limited resilience. As debt costs grow, the state’s capacity to invest in health, schools, housing, and infrastructure shrinks. Every slash or deferral becomes a political choice with human impact.
Tasmania’s fiscal architecture: Small base, big commitments
Tasmania’s Gross State Product (GSP) stood at approximately A$40.6 billion in 2023‑24, having grown at just 1.4%. A narrow economic base leaves it relying disproportionately on Commonwealth transfers—particularly through GST—via the Commonwealth Grants Commission (CGC). While current relativities are generous, the forthcoming 2025 methodology review creates uncertainty ahead.
On the demand side, Tasmania’s health system has become the largest—and most insatiable—claimant on recurrent spending. Auditor‑General investigations and media reporting point to systemic inefficiencies: over‑reliance on costly agency nursing, uncoordinated procurement practices, and unchecked cost drift contributing to unsustainable baseline growth.
The political economy hasn’t helped. A series of recent elections (2018, 2021, 2024) saw campaign promises baked into budgets without offsetting revenue increases—a common trap in fiscally vulnerable states.
Not all debt is created equal
There needs to be a distinction between “good debt” (productive, growth-enhancing) and “bad debt” (consumptive or vanity-driven).
Take Project Marinus, the long-talked interconnector linking Tasmania to mainland Australia. Its business case argues that cheaper, cleaner electricity would raise long-run productivity, although the short-term cost impact on industry is “very large”. Managed through a properly structured project‑level financing vehicle, ideally with Commonwealth cost-sharing, this borrowing could be defensible.
Contrast that with the Hobart stadium at Macquarie Point, a politically popular project whose economic rationale is contested, where cost escalations and optimistic visitation multipliers raise red flags. Such debt piles onto liabilities without creating sustainable assets.
Globally, experts agree: debt per se is less relevant than context and management. The IMF promotes fiscal anchors based on public‑sector net worth (assets minus liabilities), not just gross debt, because they preserve capacity for productive investment while mitigating unsustainable borrowing patterns. The OECDsimilarly warns that rigid debt ceilings can stifle capital investment and impede growth—especially in infrastructure‑light states.
How Tasmania got here: Five drivers
1. Election-cycle spending: Frequent polls generate one-off commitments that become structural expenses. Since 2016-17, budget deficits have averaged ~$527 million a year, with recent elections amplifying the trend.
2. Healthcare cost inflation and inefficiency: Including expensive agency staffing and inconsistent procurement, driving persistent overspend.
3. Infrastructure overreach: Projects like TT‑Line ferries and Devonport wharf have exceeded budgets, creating fiscal headaches before they’re operational.
4. Interest rate repricing: The low-rate era is over. As old bonds mature, refinancing occurs at higher rates, permanently raising borrowing costs.
5. Narrow revenue base: Tasmania’s tax mix lacks elasticity; GST dependence makes it vulnerable to federal redistributions, and local taxes are unlikely to compensate.
What a credible repair plan looks like
1. Dual fiscal anchors
Tasmania’s current fiscal strategy is framed around returning the net operating balance to surplus “over the cycle.” This is too vague to bind political behaviour. The state needs two anchors:
- (a) Primary Operating Surplus within 2–3 Budgets
Set a legislated path to a primary operating surplus—operating balance before interest—by 2027-28.
Limit real expenditure growth to the sum of trend GSP growth (~2%) plus population growth (~0.6%). Any policy measure breaching that ceiling must be offset elsewhere.
Precedent: New South Wales adopted similar caps after its 2011 fiscal reset, trimming net debt from 17% of GSP to under 12% before the pandemic. - (b) Public-Sector Net Worth Target with Interest-to-Revenue Cap
Move beyond debt/GSP toward a net-worth trajectory, factoring in asset growth. Set a hard cap: net interest ≤ 8% of general government revenue.
Rationale: This preserves capacity for high-return investment while automatically constraining low-return borrowing. IMF modelling suggests such a cap, if enforced, could cut Tasmania’s projected 2028 interest bill by $150–200 million compared with baseline.
2. Independent fiscal council
Create a statutory Tasmanian Fiscal Council with three core functions:
- Pre-election costing of all significant policy commitments (mirroring the Parliamentary Budget Office model used federally).
- Stress-testing debt and revenue forecasts under alternative economic scenarios—e.g., a one-point fall in GST relativity.
- Post-budget auditing of announced savings.
Precedent: The UK’s Office for Budget Responsibility (OBR) increased forecast accuracy and reduced politically-motivated optimism bias in GDP and borrowing assumptions.
3. Rolling expenditure review — Starting with health
Borrow the Commonwealth “efficiency dividend” model, but apply it selectively to the most structurally expensive sectors.
For health:
- Agency Staffing Reform: Shift from casual/agency coverage to permanent rosters. Queensland’s 2019 conversion program reduced locum spend by 22% in year one.
- Centralised Procurement: Pool purchasing across the health service; NSW Health saved ~$60 m annually through centralised medical equipment tenders.
- Activity-Based Funding Optimisation: Shorten average length of stay to the national best-quartile standard, freeing up beds without capital outlay.
Estimated saving: $80–100 m annually by year three, with quality maintained or improved.
4. Project prioritisation with transparent hurdles
Adopt an infrastructure ranking framework akin to Infrastructure Australia’s priority list:
- Marinus Link: Proceed only if Commonwealth underwriting covers ≥50% of capital cost, tariffs are capped, and the project passes an updated cost-benefit test using a 7% discount rate to reflect risk. Consider Special Purpose Vehicle (SPV) funding to quarantine budget exposure.
- Macquarie Point Stadium: Suspend until debt service is back under the 8% interest-to-revenue cap, and ≥50% of total cost is met by non-state sources.
- TT-Line/Devonport Wharf: Impose milestone-based funding; publish contingency plans for lease-back or sale if commissioning slips again.
5. Revenue modernisation without choking growth
Tasmania’s own-source revenue is underdeveloped:
- Mineral Royalties: Align rates with WA/QLD averages—potential +$50–80 m/year.
- Gambling Tax Reform: Lift rates on electronic gaming machines; Victoria’s 2023 increase yielded +$100 m/yearwith minimal tourism impact.
- Road-User Charging: Begin transition for EVs and high-mileage fleets to replace falling fuel excise revenue.
- Motor Vehicle Duties: Tie to emissions/congestion.
Political economy note: Any package should be independently costed, phased, and offset for low-income households.
6. Tighten capital discipline
“No net new commitments” rule until an independent pipeline review ranks projects by net economic benefit and delivery readiness. Require reference-class forecasting to counter optimism bias—benchmarking cost and schedule assumptions against completed, similar projects worldwide.
7. Debt management, not just levels
Direct TASCORP to:
- Publish the average term to maturity and refixing schedule in plain English.
- Diversify funding into longer-dated and inflation-linked bonds to reduce rollover risk.
- Maintain a liquidity buffer equal to ≥3 months’ gross borrowing needs.
Timeline and political strategy
First 100 Days
- Legislate dual fiscal anchors and establish the Fiscal Council.
- Publish a “Savings Scorecard” showing agency-level measures already in train.
- Pause discretionary capital adds pending pipeline review.
6–9 Months
- Complete health expenditure review and publish the independent pipeline ranking.
- Table revenue modernisation package with offsets and implementation schedule.
12–18 Months
- Deliver budget meeting primary surplus target.
- Lock in Marinus under risk-ring-fenced terms.
- Publish debt management strategy aligned to the new anchors.
Politics and the “Art of the doable”
None of this is easy. Each reform has vocal losers; agency nurses, stadium boosters, mining lobbyists. But minority government arithmetic offers a paradoxical advantage: neither major party can carry the budget alone, forcing negotiation under the eye of an empowered crossbench.
An open budget compact, jointly agreeing on anchors, oversight, and rules, could be the price for stability. In Canada’s Saskatchewan in the 1990s, such a cross-party pact restored AAA credit in five years while protecting core services. Tasmania’s small size could make a similar compact more agile, if political will exists.
Principle in View
Debt is neither a sin nor a virtue—it is a tool. Used under transparent, enforceable rules for projects with high, measurable returns, it can raise living standards. Left untended, it becomes a slow-acting poison, crowding out the very services and investments it was meant to enhance.
Tasmania’s next government has a narrow window—perhaps two budgets—before debt service crowds out fiscal choice. The question for August 19’s victors will not be whether to act, but whether they can govern with the discipline that turns a debt spiral into a recovery arc.
Sources
1. https://tasmaniantimes.com/2025/06/treasury-tasmanian-state-budget-faces-a-structural-problem
2. https://www.grantthornton.com.au/insights/client-alerts/tasmania-state-budget-2025-26/
3. https://www.abc.net.au/news/2025-02-10/tasmanian-budget-cops-net-debt-blowout/104917616
4. https://www.abc.net.au/news/2024-09-12/tamanian-annual-budget-explained/104328132
5. https://www.rba.gov.au/monetary-policy/int-rate-decisions/2025/
6 https://www.reuters.com/sustainability/sustainable-finance-reporting/australia-cuts-interest-rates-signals-more-come-inflation-slows-2025-08-121
7. https://www.theguardian.com/australia-news/2025/aug/12/rba-interest-rates-decision-relief-for-borrowers-as-reserve-bank-cuts-cash-rate-to-36
8. https://www.cgc.gov.au/reports-for-government/2025-methodology-review/gst-relativities-2025-26
9. https://www.audit.tas.gov.au/publication-category/financial-audit-reports/
10. https://www.oecd.org/en/publications/fiscal-rules-for-subnational-governments_531da6f9-en.html
11. https://www.imf.org/en/Publications/WP/Issues/2024/07/08/Beyond-Debt-Net-Worth-Fiscal-Anchors-551340
12. https://www.aer.gov.au/industry/registers/determinations/tasnetworks-determination-2024-29
13. https://reneweconomy.com.au/marinus-business-case-warns-of-very-large-cost-impact-to-industry-as-federal-green-tick-seals-its-fate/?utm_source=chatgpt.com
14. https://www.abc.net.au/news/2024-09-18/cost-of-hobarts-proposed-macquarie-point-stadium/104362072
15. https://tasmaniantimes.com/2025/03/assessment-report-confirms-stadium-a-budget-blowing-dud/
In this article
What’s changed—and why it matters
Tasmania’s fiscal architecture: Small base, big commitments
How Tasmania got here: Five drivers
What a credible repair plan looks like
3. Rolling expenditure review — Starting with health
4. Project prioritisation with transparent hurdles
5. Revenue modernisation without choking growth
7. Debt management, not just levels
Timeline and political strategy