Auditor-General's Report on the Annual Financial Report of the State of Victoria: 2024–25

About this report

In this report, we share outcomes of our audit on the state's financial report and our independent perspective on the state's financial outcomes and risks to fiscal sustainability.

Audit outcomes (Section 2)

We issued a clear audit opinion on the 2024–25 Annual Financial Report of the State of Victoria (AFR), confirming that the state’s reported financial outcomes are reliable.

We issued clear opinions on 28 of the 30 material entities’ separate financial reports, which together represent the majority of the state's transactions, balances and disclosures. However, we continued to modify our audit opinion on VicTrack's financial report because of how it accounts for its lease arrangement of transport infrastructure assets with the Department of Transport and Planning. This did not impact the AFR because the error was corrected during its preparation.

This year, contentious issues at the Department of Justice and Community Safety, Department of Jobs, Skills, Industry and Regions and Greater Western Water delayed the completion of material entity financial reports and audits compared with last year. At the time of this report, Greater Western Water’s financial report and audit remain outstanding. Despite these delays, our AFR opinion remained unaffected because the issues were not significant.

Financial outcomes for the general government sector and risks to fiscal sustainability (Section 3)

This year, the general government sector (GGS) reported a net operating loss of $2.6 billion. This is an improvement on last year’s $4.2 billion loss but still exceeds the operating loss forecast in the 2024–25 state Budget by $400 million. This result brings total combined losses over the last 6 years to $50.6 billion.

Operating revenue and income increased by $8.3 billion, driven largely by higher tax income of $2.0 billion and additional Australian Government grants of $5.5 billion. Operating expenses also rose by $6.7 billion, with employee expenses increasing by $2.5 billion, higher interest expenses of $1.1 billion and more operating costs of $1.6 billion. 

The higher income tax and federal funding contributed to an operating cash surplus this year of $3.2 billion, in addition to the GGS receiving a $0.7 billion dividend from the Transport Accident Commission. 

The GGS maintained its fiscal cash deficit this year, a trend since 2016–17 that is expected to continue, further weakening the state's financial resilience. These persistent deficits highlight the state's reliance on debt to fund its capital infrastructure program.

Ongoing net operating losses and fiscal cash deficits pose significant risks to the state’s long-term financial sustainability.

Gross debt rose from $168.8 billion last year to $187.9 billion and is projected to reach $236.6 billion by 30 June 2029. Over the last decade, debt growth has consistently outpaced GGS revenue and state economic growth, again a trend expected to continue. Net debt was 23.7 per cent of gross state product at 30 June 2025 and is forecast to reach 24.9 per cent by 30 June 2029.

Since the government’s launch of the COVID Debt Repayment Plan in 2023–24, which aimed to offset the cost of servicing $31.5 billion in pandemic-related debt, the plan has raised $4.3 billion through COVID debt levies and generated $1.8 billion from land sales and investment returns. However, the government has not publicly reported progress on this plan since its introduction.

Emerging risks continue to threaten the state’s ability to meet short-term financial targets, deliver committed savings initiatives and maintain long-term sustainability. These risks exist in the GGS and beyond, requiring close attention and integration into longer-term financial management.

The government has taken initial steps to address the financial challenges faced. However, these focus on addressing immediate fiscal pressures to achieve short-term financial objectives, rather than focusing on strengthening long-term financial resilience. To that end, our recommendations from last year's report remain relevant.

Key issues from our material entities audits (Section 4)

We continue to find weaknesses in IT system controls at material entities, including system access, authentication and monitoring. Many prior-year IT issues remain unresolved. This ongoing pattern reflects weaknesses in entities' control environments and highlights the need for stronger management attention.

Some material entities outsource services to private or public providers that affect financial practices. These entities do not appropriately plan how they will gain assurance over the service providers' control environment or fail to set up proper oversight mechanisms. Without clear oversight, these entities face governance, financial and service delivery risks. 

The Annual Financial Report 

The Department of Treasury and Finance (DTF) prepares the state's AFR, which is the state's consolidated financial report. Also known as the Financial Report (Incorporating Quarterly Financial Report No. 4), the AFR presents the financial results for the State of Victoria for a given reporting period. It consolidates data from over 270 state-controlled entities across 3 sectors that contribute to the consolidated financial results, as outlined in Figure 1.

The AFR presents the financial information for both the general government sector (GGS) and the State of Victoria. 

We audit the AFR and issue an audit opinion to provide assurance that the state's published financial outcomes are reliable. This assurance means Parliament and the Victorian community can confidently use the AFR to understand the state's financial outcomes and, when relevant, make informed decisions.

The AFR also discloses how money has been spent from the public account in accordance with the Financial Management Act 1994.

Entities excluded from the AFR

The AFR only includes state-controlled entities. 

Other public sector entities that we audit are excluded from the AFR because the state does not control them for financial reporting purposes.

These entities prepare separate financial reports and have them audited.

Material entities in the AFR

Each year we audit and provide separate audit opinions on the financial reports of the state controlled entities that are consolidated into the AFR.

In 2024–25, there were 30 material entities that accounted for most of the state's financial transactions and balances. We primarily focus on the financial transactions and balances of these material entities when forming our opinion on the AFR. 

Reporting our insights on the state's finances

This report is the only report to Parliament that we must make under section 57(1) of the Audit Act 1994. The Act provides that we may comment on and make recommendations about the:

• effective and efficient management of public resources
• proper accounts and records.

We use this report to provide our independent perspective on the state's finances.

We also prepare a dashboard as a companion product to this report. It brings together current and historical financial information for the Victorian GGS reported in past state Budgets and AFRs. You can find this dashboard on our website.

Further information

See Appendix B for more information about our audit approach, independence and our costs.

Audit opinion on the AFR

We provided a clear audit opinion on the 2024–25 AFR. Our clear opinion provides reasonable assurance that the financial performance and position of the State of Victoria, and within it the GGS, as reported in the AFR is free from material error.

Key audit matters

Auditors may include a description of key audit matters in the auditor's report, as described under the Australian Auditing Standards. We include such matters in our AFR report and in the audit reports of material entities where we judge it necessary.

Key audit matters are those we identify as most significant to an audit and their inclusion in the audit report provides transparency and insight into the audit process. They do not affect our opinion.

We reported the following key audit matters for the AFR:

• recognition of transport assets
• valuation of non-financial physical transport assets
• recognition and measurement of service concession assets, liabilities and commitments
• valuation of defined benefit superannuation liability
• valuation of provision for insurance claims.

A copy of our audit report is in Appendix C.

Material entity audit outcomes

We had issued clear opinions on 26 of the 30 material entities' financial reports at the time we issued our opinion on the AFR. 

We signed 2 more clear opinions for DJCS and DJSIR after the AFR. The audit of Greater Western Water was not complete at the time of preparing this report.

We issued a modified opinion on VicTrack. 

These delays and the modified opinion on VicTrack did not impact our opinion on the AFR because:

• for VicTrack, DTF made a central adjustment on consolidation of the state's financial report to correct the issue
• for DJCS, DJSIR and Greater Western Water, the individual matters affecting finalisation of our audits were not material to the state's financial report, and we had completed our audit of the balances and transactions that were material to the AFR before we issued our opinion on the AFR.

Appendix D lists the material entities and summarises their financial results and our audit opinions.

Delayed certification of the DJSIR financial report

Our audit of DJSIR was delayed because of an unresolved issue from the previous year. It concerned how the department should account for its arrangement with BioNTech Australia Pty Ltd to design, build and operate a clinical-scale vaccine manufacturing facility.

This was a complex and significant matter because the arrangement involves a large financial commitment, multiple parties and accounting treatment consideration under several Australian Accounting Standards requiring significant judgement.

The department gave us its preliminary accounting position in mid-August 2025, almost one year after VAGO requested an assessment, and its final advice in mid-September 2025. This delay postponed the audit's completion.

Delayed certification of the Greater Western Water financial report

Our audit of Greater Western Water was delayed due to several significant issues:

• The transition to a new billing system in May 2024 created significant challenges, resulting in some customers receiving late bills, others receiving late bills covering multiple quarters and some not receiving bills at all. Data migration issues and system deficiencies had significant audit and accounting implications for the financial report, particularly affecting revenue recognition, contract assets measurement and the estimation of expected credit losses.
• We experienced delays in obtaining information required to complete key audit procedures under Australian Auditing Standards.
• Management's cash flow forecasts indicate that additional financial support will be required in 2025–26 to fund operations, which creates uncertainty about GWW's ability to continue as a going concern. The going concern assumption is fundamental to preparing the financial report. It reflects management's expectation that the entity will continue operating and meet its financial obligations for at least 12 months from the date the financial report is finalised, and that the financial report is prepared on this basis. To mitigate this uncertainty, the Treasurer of Victoria issued a letter of comfort in November 2025, confirming that the Victorian government will provide financial support to GWW through to November 2026. This support was a critical factor in management's assessment of GWW's ability to prepare its financial report on a going concern basis.

These matters significantly delayed the audit and required additional scrutiny to ensure the financial report was accurate, transparent and complied with Australian Accounting Standards. 

Delayed certification of the DJCS financial report

We qualified the 2023–24 audit opinion of DJCS's financial report because of a scope limitation. Last year, we could not obtain sufficient, appropriate audit evidence to conclude on the completeness of fines income from the road safety camera program, specifically for distracted driver and seatbelt offences. This is because DJCS did not assure itself sufficiently that the service organisation it used maintained appropriate controls and records, as required by the Standing Directions 2018 under the Financial Management Act 1994.

For 2024–25, DJCS addressed the issues we identified last year. It obtained assurance over its service provider through an independent ASAE 3402 Assurance Reports on Controls at a Service Organisation assurance report, a copy of which we received on 31 July 2025. The report covered the period from 1 July 2024 to 30 June 2025. While the service auditor noted control deficiencies, compensating controls and alternative procedures were implemented to mitigate significant deficiencies and risks. 

We spent considerable time reviewing the assurance report and assessing whether the controls and alternative procedures were sufficient to remove the prior year’s scope limitation. This additional work extended the timing of our audit process. Based on our assessment, we concluded that a modification to the audit opinion was no longer required.

Our adverse opinion for VicTrack

We have continued to issue an adverse opinion on VicTrack's financial report. This means that its financial report does not accurately reflect its financial performance and position.

VicTrack has continued to account for assets it leases to the Department of Transport and Planning (DTP) as operating leases. VicTrack asserts that it substantially holds all the risks and rewards incidental to ownership of the operational transport assets.

We disagree. VicTrack's incorrect accounting is material and pervasive to its financial report.

Our view is that DTP is responsible for the operation of the transport network as a whole and that in this regard DTP:

• directs the use of transport assets by setting the timetables and operating conditions for all modes of transport with no significant input from VicTrack
• substantially holds the risks and rewards of ownership of the operational transport assets.

This is why we formed the view that it is a finance lease. VicTrack continues to incorrectly recognise these leased assets and associated transactions that should be accounted for by DTP.

In the AFR, DTF made a central adjustment on consolidation to correct this inconsistent accounting treatment. This means the fair value of the underlying assets and associated transactions were correctly reinstated at the State-of-Victoria level.

VicTrack lease arrangement

DTP delivers public transport services in Victoria through contracted service providers. VicTrack, a public non-financial corporation, owns most of Victoria's transport infrastructure assets. 

DTP constructs these assets using funds sourced from DTF through GGS borrowings. Once completed, ownership transfers to VicTrack, which acts as the custodian of the state's transport assets.

VicTrack records these assets and their depreciation expenses in its financial report, with annual depreciation estimated between $600 million and $1 billion per year. However, due to ongoing asset record keeping noted in previous reports, VicTrack cannot confirm the exact value of assets leased to DTP or their associated depreciation. 

DTP leases these assets back from VicTrack for a nominal amount, typically between $1 and $10 per year, and then subleases them to third-party service providers that operate transport services.

Under the Australian Accounting Standards, entities must recognise lease arrangements on their balance sheets, recording a right-to-use asset and a corresponding liability that reflects lease payments over the lease term. For not-for-profit public sector entities, the standards currently allow below-market lease assets (concessionary leases), such as the VicTrack–DTP arrangement, to be measured at cost rather than the fair value, through a relief mechanism. Ordinarily, the leased assets would be measured at fair value.

As a result, DTP, a GGS entity, records these leased assets at their nominal values. Consequently, and in accordance with accounting standards, depreciation, or equivalent charges, are insignificant because they are based on the leased assets' nominal cost, not fair value. DTP's financial report therefore does not reflect the true economic cost of using these assets for public transport services in the GGS. However, DTP does record its share of farebox revenue (that is, income from passenger fares) from subleasing these assets, which totalled $361 million in 2025.

The financial outcomes and targets for the GGS therefore do not reflect any effects of significant transport infrastructure assets used by the GGS.

Figure 2 shows the lease arrangement between DTP and VicTrack.

Figure 2: VicTrack lease arrangement with DTP

Source: VAGO.

Legislated timelines 

DTF and the state-controlled entities must complete financial reporting tasks by the dates set in the Financial Management Act 1994. Entities are required to provide financial reports to us within 8 weeks of the balance date (30 June), which is 25 August.

The Audit Act 1994 requires us to provide the entity with an audit opinion within 4 weeks of receiving its financial report. That means we should provide audit opinions by 22 September.

To meet their legislative timelines, DTF and VAGO rely on entities providing complete and accurate financial information on time. Delays impact the timeliness of our audit opinions as well as the preparation and tabling of the material entities' financial reports and the AFR in Parliament.

Timely financial reports for most material entities

Figure 3 shows that material entity financial reporting slowed this year due to financial report certification delays explained earlier. 

Figure 3: Timeliness of financial report certifications from 2019 to 2025

Note: Figure 3 excludes Greater Western Water for 2025 because its financial report is not certified at the time of publishing this report.
Source: VAGO.

This year, 3 material entities certified their financial reports and a further 25 provided draft financial reports by the due date of 25 August. We were then able to provide:

• 17 of the 30 material entities with an audit opinion by 22 September
• a further 10 material entities with an audit opinion before we gave the Treasurer our audit opinion on the AFR.

Three material entity financial reports remained unsigned and without audit opinions at the time the AFR was finalised.

Annual reports are important accountability documents

Annual reports of public sector entities promote transparency and accountability. These reports provide an overview of an entity's activities, financial performance and use of public resources and includes the audited financial report. They also ensure accountability by detailing how funds were spent and if outcomes were achieved.

As required by the Financial Management Act 1994, state-controlled entities must, by 31 October, either table or transmit their annual reports, or ensure that the relevant Minister notifies Parliament of receipt. The applicable requirement depends on the entity’s expenditure level, as determined by the threshold set out in the Act. 

If they do not meet this date, responsible ministers must:

• report this to Parliament, along with the reasons for the delay
• ensure the annual reports are tabled as soon as possible after they are received.

We have an obligation under the Australian Auditing Standards to consider whether information in annual reports is consistent with the audited financial report. If we identify an inconsistency, it may indicate a material misstatement in either the financial report or financial information of the annual report. This consistency check is done before we release our audit opinion if the annual report is available by the entity.

Delayed tabling of annual reports 

This year, the available parliamentary sitting dates for annual reporting tabling were as follows:

• 14, 15 and 16 October 2025
• 28, 29 and 30 October 2025.

We issued our audit reports on 249 of the 270 state-controlled entity financial reports, on average, 40 days before 31 October 2025. Figure 4 provides a breakdown of our audit opinion timing.

Figure 4: Timing of audit reports

Source: VAGO. 

By 29 October 2025, 9 state-controlled entities had tabled their annual reports in Parliament. By 30 October 2025, 214 state-controlled entities had their annual reports either tabled in Parliament or acknowledged as received by the relevant minister in accordance with the Financial Management Act 1994. 

The tabling of annual reports still lags behind the completion of financial reports and issuing of audit opinions.

Amendments to the Financial Management Act 1994

On 19 August 2025, the Victorian Parliament passed amendments to the Financial Management Act 1994, which received royal assent. These changes aim to improve the timeliness of annual report tabling in Parliament. 

The amendments clarify the timing requirements, outline the responsibilities of ministers in relation to their portfolio agencies' annual report tabling, specify what ministers must report to Parliament regarding annual reports, and formally define the role of parliamentary clerks in the tabling process.

What is fiscal sustainability?

To remain fiscally sustainable, the state must meet current and future expenditure requirements from revenue earned, absorb foreseeable changes and materialising risks and manage the impact from these factors to changing revenue and expenditure requirements.

Fiscal strategy outlines the government's fiscal objectives

The state Budget sets out the Victorian Government’s long-term financial management objectives for the GGS along with short-term objectives and key financial measures and targets for achieving the government's fiscal strategy.

The state’s long-term financial management objectives, as outlined in the 2025–26 state Budget, are:

• sound financial management
• improved services
• building infrastructure
• efficient use of public resources
• a resilient economy.

In the 2020–21 state Budget, the government set out a 4-step fiscal strategy aligned to its key financial measures and sustainability objectives. In the 2024–25 Budget, the government added a fifth step. The 5-step fiscal strategy comprises:

• step 1: creating jobs, reducing unemployment and restoring economic growth
• step 2: returning to an operating cash surplus
• step 3: returning to operating surpluses
• step 4: stabilising net debt levels as a proportion of gross state product (GSP)
• step 5: reducing net debt as a proportion of GSP.

The government acknowledges that reducing spending, especially on inefficient and non-priority programs, as well as increasing operational efficiencies and process improvements across departments and programs are important for meeting its current fiscal strategy.

Short-term objectives have been slightly amended for the 2025–26 financial year

The government sets short-term financial sustainability objectives in response to its fiscal position, which is affected by continued structural deficits, rising debt to fund its large infrastructure program and the COVID-19 pandemic.

Figure 5 shows how these objectives have been modified over the last 5 Budgets.

Figure 5: GGS short-term financial sustainability objectives

Source: VAGO, based on the AFR and state Budgets.

Financial measures and targets continue to lack specificity

To support its financial objectives, the state has set key financial measures and targets. Figure 6 outlines the government's key financial measures and targets for the GGS set out in respective state Budgets along with the actual outcomes reported for the last 2 years.

The measures and targets are qualitative, except for one: 'fully funding the unfunded superannuation liability by 2035'.

Figure 6: GGS key financial measures, targets and results

Note: (a)These are the net cashflows from operating activities as disclosed in the consolidated cashflow statement.
(b)Net debt is gross debt less liquid financial assets. It is the sum of deposits held, advances received, government securities, loans and other borrowings less the sum of cash and deposits, advances paid, investments, loans and placements.
Source: VAGO, based on data from the state Budget, the AFR and a publicly announced policy costing.

The operating cash surplus exceeded the 2024–25 state Budget estimate by $1.4 billion due to higher taxation income, increased Australian Government grants and a dividend payment of $0.7 billion from the TAC. 

Net debt to GSP is 0.7 per cent lower than the estimate in the 2024–25 state Budget. This improvement has primarily resulted from:

• the $1.4 billion net operating cash surplus above budget
• investment returns and growth exceeding the forecast for the Victorian Future Fund (VFF), Victorian Social Housing Growth Fund, and Victorian Homebuyer Scheme. As of 30 June 2025, the combined balances reached $14.8 billion, exceeding the $13.6 billion projected in the 2024–25 state Budget. 

Interest expense to revenue decreased by 0.1 per cent compared with the 2024–25 state Budget estimate. This was due to revenue growing faster than interest relative to the Budget. Revenue was $5.3 billion, or 5.5 per cent above budget, while interest was $0.3 billion, or 4.2 per cent higher than budget.

The government contributed $221 million less than budgeted to the State Superannuation Fund in 2024–25.

Over the last 12 years, financial measures and targets have been gradually revised from specific and quantifiable to less-specific targets, as outlined in Appendix E. Except for the measure to fully fund the superannuation liability by 2035, other measures do not include explicit targets or clearly defined timelines. 

Savings initiatives and the Independent Review of the Victorian Public Service

The government has continued its progress with savings initiatives and efficiency dividends, designed to improve the state's financial position. It has also commissioned the Independent Review of the Victorian Public Service, from which we expect further savings measures. This review plans to:

• identify overlaps, inefficiencies, functions and programs within the Victorian Public Service (VPS) that can be streamlined or eliminated
• provide recommendations to improve processes and make sure all VPS departments and programs work efficiently
• provide recommendations to reduce the VPS workforce back towards its pre pandemic share of employment, including an examination of the appropriate levels of executives.

The review has not considered the state's capital investment program or debt management strategy. The report from this review has been finalised but has not been made public yet.

Achieving savings through these mechanisms is an important step towards managing the state's long-term fiscal sustainability. 

The 2025–26 state Budget includes $3.3 billion in savings targets for the period from 2025–26 to 2028–29. This is in addition to the $9.9 billion in savings targets outlined in state Budgets from 2015–16 to 2024–25.

Figure 7 shows the cumulative savings of $13.1 billion announced in state Budgets from 2016–17 to 2028–29, with $6.3 billion expected to be realised from 2025–26 to 2028–29.

Figure 7: Cumulative saving initiatives announced in the state Budget

Source: VAGO, based on state Budgets.

Despite these efforts, the government has been unable to constrain rising expenditure. The emerging risks outlined in this section further affect the government’s capacity to deliver on its announced savings initiatives for 2025–26 and beyond, as well as any additional measures that may be introduced.

Amendments to the Financial Management Act 1994

In the 2024–25 state Budget, the government announced a plan to introduce financial management reforms, including a review of the Financial Management Act 1994. On 19 August 2025, Parliament passed the amendments to the Financial Management Act 1994, and the legislation subsequently received royal assent.

The government stated that these amendments strengthen the Act to ensure it meet the needs of a growing and increasingly complex public sector. In the context of ongoing economic uncertainty, the reforms aim to improve transparency, accountability and performance in managing and reporting the use of public resources.

As it relates to financial management, the legislation introduces amendments that the government believes will strengthen financial management practices. These include:

• requiring every department and public sector entity to operate within its approved budget
• mandating written notification to DTF if a department or public sector entity expects to exceed its budget
• elevating responsibilities from the Standing Directions 2018 under the Financial Management Act 1994 into legislation for key roles in departments and public sector entities, including the accountable officer, responsible body, and chief finance officer
• assigning explicit duties to these roles to manage financial responsibilities, provide accurate financial information and report material risks.

These reforms represent a positive step towards strengthening financial management across departments and public sector entities. 

We note the amendments do not introduce changes to strengthen the state's focus on long-term financial sustainability planning.

Long-term focus still required

Initial steps have been taken to address financial challenges faced through the initiatives described above. However, these steps remain short term, focused on addressing immediate fiscal pressures rather than building on longer-term financial resilience.

To that end, our recommendations from our report last year remain relevant, given the continued financial trends and the emerging risks to financial sustainability outlined in this report. 

What is the operating result and why is it important?

The operating result shows the difference between what the GGS earns (revenue and income) and what it spends (expenses) during a financial year. It is also known as the net operating balance. 

This result is a key measure of the GGS's financial performance and fiscal sustainability. A positive operating result shows the state can generate revenue and manage expenses effectively, producing a surplus that can support future needs.

The GGS reported a net operating loss this year of $2.6 billion, as shown in Figure 8. This is an improvement on the $4.2 billion loss reported last year, however, more than the operating loss forecast in the 2024–25 state Budget by $0.4 billion.

Figure 8: GGS net operating result

Source: VAGO, based on the AFR and state Budget.

This year's result brings the GGS's total accumulated losses over the last 6 years to $50.6 billion. The government attributes $31.5 billion of these losses to its COVID-19 response from 2019–20 to 2022–23 and the remainder to providing ongoing public services. These operating losses continue to deplete cash reserves, require increased use of debt and weaken the state's financial resilience and capacity to respond to future shocks.

The GGS is forecast to return to a moderate net operating surplus of $611 million in the 2025–26 financial year. Over the 4 years to 2028–29, the government expects the GGS to deliver a cumulative net operating surplus of $6.4 billion – a small portion of the $50.6 billion in losses over the last 6 years. If it is to restore the financial capital eroded by these losses, the government will need to make significantly larger surpluses than the current forecast beyond 2028–29.

How the operating deficit was achieved this year

Figure 9 shows the key contributors to this year's improvement in the operating result compared with last year.

Figure 9: Changes in the GGS net operating result from 2024 to 2025

Note: Numbers have been rounded. 
Source: VAGO, based on the AFR and state Budget.

This improved result was driven by revenue and income growing more than expenses.

Operating revenue and income rose by $8.3 billion, increasing from $93.1 billion in 2024 to $101.4 billion in 2025 (8.9 per cent). This increase was driven by higher:

• tax income of $2.1 billion, with payroll tax rising by $547 million and land transfer duty by $828 million because of stronger economic conditions in labour and property markets
• grants received from the Australian Government of $5.5 billion. This included:
  • $3.9 billion from a larger national GST pool and an increase in Victoria’s share of the pool
  • additional funding for various programs in education, health and housing.

Expenses went up by $6.7 billion, from $97.3 billion in 2024 to $104.0 billion in 2025 (6.9 per cent), mainly driven by increases to:

• employee expenses by $2.5 billion due to more staff and higher wages 
• interest expense of $1.1 billion due to the government taking on new borrowings or refinancing existing borrowings at higher interest rates
• other operating expenses of $1.6 billion because of:
  • $706 million for Energy Bill Relief Concession payments funded by the Australian Government
  • $303 million for frontline services in health and education.

Rising inflation, population growth and increased government activity can also drive year-on-year changes in revenue and expenses.

Funding from the Australian Government, increases in taxation income and income sourced from public corporations have continued to make a substantial contribution to the GGS's operating result.

Income from public corporations supports improved GGS outcomes

Public corporations contribute significantly to the GGS through dividends, statutory fees and charges, the financial accommodation levy, the environmental contribution levy, grants and income-tax-equivalent receipts.

This year, public corporations contributed $1.9 billion to GGS income and revenue (2024: $2.4 billion). Figure 10 presents income and revenue from public corporations over the last 10 years, along with forecasts for 2025–26 to 2028–29 from the state Budget.

Figure 10: Income and revenue sourced from public corporations

Note: PFC stands for public financial corporation. PNFC stands for public non-financial corporation.
Source: VAGO, based on the AFR and state Budget.

Income and revenue from public corporations have varied over time. Between 2015–16 and 2022–23, they averaged approximately $1.1 billion per year. However, in the last 2 years, this average rose to around $2.2 billion mainly due to higher dividend income payments from the TAC. This increase has helped reduce the GGS's operating deficit and supported a return to positive operating cashflows.

What is the operating cash result and why is it important? 

The operating cash surplus is the extra money left over for the government in a financial year after paying for its operations and running expenses, such as employee salaries, supplier expenses, interest costs and utilities.

The GGS achieved an operating cash surplus of $3.2 billion this year, which is $1.4 billion higher than the $1.8 billion forecast in the 2024–25 Budget and $0.6 billion higher than last year's result of $2.6 billion.

Achieving the operating cash surplus this year was possible because of:

• higher taxation receipts of $2.9 billion
• an increase in Australian Government grants of $6.0 billion
• a dividend payment of $0.7 billion from the TAC. The TAC is a public financial corporation that funds Victoria's no-fault transport accident insurance scheme by collecting levies from vehicle registration. It supports Victorians injured in transport accidents by covering medical treatment, rehabilitation and related services.

Figure 11 shows the operating cash result for the GGS since 2015–16 in addition to the projected outcome from the Budget and forecast years from 2025–26 to 2028–29.

Figure 11: Operating cash surplus/deficit

Source: VAGO, based on the AFR and state Budget.

The government expects to generate $26.5 billion in operating cash surpluses over the next 4 years. However, it plans to invest $62.8 billion in capital projects during the same period. The shortfall between projected surpluses and planned capital investments increases the need to borrow additional funds to support its program.

The GGS reported a fiscal cash deficit for a further year

A fiscal cash surplus means the state's cash inflows from operations exceed its recurrent and capital outlays.

A fiscal cash surplus is a sign of good financial health because it means there is available cash for the state to use to invest in public services, pay down debt or build financial resilience for future uncertainties. A fiscal cash deficit means the state must borrow to cover its net investments in non-financial assets used to provide public services. 

Figure 12 shows the fiscal cash deficits of the GGS since 2016–17, in addition to the projected outcome for the Budget and forecast years from 2025–26 to 2028–29.

Figure 12: Fiscal cash deficit

Source: VAGO, based on the AFR and state Budget.

In 2024–25, the GGS made a fiscal cash deficit of $12.8 billion. 

It has not made a fiscal cash surplus in the last 9 years, with this trend expected to continue over the next 4 years. This prolonged period of fiscal deficits highlights why the government has relied so heavily on borrowings to fund its capital investments, as there has been no alternative funding source available.

Persistent fiscal cash deficits pose risks to the state’s long-term financial sustainability. As debt reliance increases, interest expenses rise. In the short term, this reduces available funds for essential government services because more funding is diverted to cover interest payments. Over time, this weakens the state's financial resilience and its ability to respond to future needs. Unsustainable debt levels may also trigger adverse economic conditions. We explain this in more detail in the emerging risk section later in this section.

GGS debt grew with the trend set to continue

State nominal debt is historically high and forecast to grow as the government progresses with its significant planned infrastructure program. GGS debt includes interest-bearing liabilities mainly raised from domestic borrowings through Treasury Corporation of Victoria (TCV). It also includes other less significant interest-bearing liabilities including lease liabilities and service concession arrangement liabilities.

Over the last decade, the growth of debt has consistently outpaced both GGS revenue and state economic growth. As shown in Figure 13, debt increased at an average annual rate of 19.2 per cent between 2015–16 and 2024–25. In comparison, revenue and GSP grew at average annual rates of 6.6 per cent and 5.3 per cent respectively, during the same period.

Figure 13: Revenue, GSP and gross debt growth

Source: VAGO, based on the AFR and state Budget.

Over the next 4 years, debt is forecast to increase at an average annual rate of 6 per cent, while revenue and GSP are expected to grow at rates of 3.6 per cent and 5.3 per cent, respectively. 

Victoria is currently delivering $212.7 billion in new and existing capital projects. Through the 2025–26 state Budget, the government committed $127.8 billion to capital investment from the 2025–26 financial year onward. The majority of this investment is expected to be financed through debt.

Figure 14 shows the growth of Victoria's gross debt since 2016–17 and forecast growth over the forward estimates to 2028–29.

Figure 14: Victoria's gross debt

Source: VAGO, based on the AFR and state Budget.

The GGS's gross debt rose from $37.9 billion at 30 June 2017 to $187.9 billion at 30 June 2025. In particular, rapid growth of 183 per cent has occurred since 2019–20, when debt was $66.5 billion.

GGS gross debt is projected to grow at an average annual rate of 6.0 per cent over the next 4 years, reaching $236.6 billion by 30 June 2029. The state's gross debt follows a similar growth pattern. It was $225.5 billion as at 30 June 2025 and is projected to grow at an average annual rate of 6.6 per cent reaching $290.9 billion by 30 June 2029 because the state is taking on more debt to mainly pay for investments in capital projects.

The increase in debt was partly used to cover the state's operating deficit in response to the COVID-19 pandemic, and partly to finance investment in infrastructure, other assets and operational needs. 

Figure 15 shows the breakdown of GGS existing debt by its purpose and use.

Figure 15: GGS gross debt profile by its purpose and use

Note: Infrastructure programs are also funded through available cash and Australian Government funding.
Source: VAGO, based on the AFR and state Budget.

The government took on $31.5 billion in debt in responding to the pandemic, more than 16.7 per cent of the GGS current outstanding debt. 

Using debt to fund investment in intergenerational infrastructure is common. It enables the government to allocate resources and invest in long-term projects that taxpayers might not otherwise afford today. However, a higher and unsustainable level of public debt can pose a significant risk to future prosperity and economic stability. If not managed in a fiscally sustainable and responsible manner, debt imposes a significant cost to taxpayers now and into the future.

Victoria's debt has been growing faster than other states 

Figure 16 shows GGS total gross debt of all Australian states as a percentage of nominal GSP for each state. This is a common measure used across jurisdictions to understand their relative indebtedness. 

Figure 16: Gross debt as a percentage of nominal GSP of Australian GGSs by state

Source: VAGO, based on each state's Budgets.

Victoria’s gross debt to GSP ratio was comparable to other states prior to the pandemic standing at 8.8 per cent in 2015–16. Since then, it has diverged, growing to 30.0 per cent as of 30 June 2025. 

Despite achieving the targets set out in the current fiscal strategy, gross debt will continue growing, increasing from $187.9 billion on 30 June 2025 to an estimated $236.6 billion by 30 June 2029. 

COVID Debt Repayment Plan 

In May 2023, the government introduced a temporary plan through the 2023–24 state Budget to offset the cost of servicing $31.5 billion in COVID-19-pandemic-related debt. This 10-year plan, running to 2033, includes 3 key funding components:

• temporary COVID debt levy applied to land and payroll taxes
• public service rebalancing through further savings and efficiency initiatives across the government. These include reductions in corporate and back-office functions, labour hire and consultancy expenses
• establishment of the VFF, which includes the $7.9 billion in proceeds received in 2022–23 from outsourcing licensing, registration and custom plate services through the VicRoads modernisation joint venture arrangement.

How does the plan work?

Figure 17 outlines the components of the COVID Debt Repayment Plan and the estimated financial impact.

Figure 17: Components and estimated financial impacts of the COVID Debt Repayment Plan

Source: VAGO, based on DTF and the 2023–24 state Budget.

The government incurred the COVID-19-related debt during a period of historically low interest rates. Instead of repaying the debt, the government's COVID Debt Repayment Plan was structured to use the cash inflows from new levies, savings and efficiency initiatives to reduce future borrowing for its planned capital works program. Further, the VFF was established and now operates as an offset account, using the funds invested and their associated returns to reduce COVID 19 related debt servicing costs.

As shown in Figure 17, the government expects the COVID Debt Repayment Plan to fully offset both the COVID-19-related debt of $31.5 billion and the estimated interest expense of $12.7 billion over the 10-year period. The estimated funding sources include:

• additional payroll and landholding levies 
• savings from cutting back-office roles, labour hire and consultancy spending
• VFF investment returns and contributions from government land sale proceeds to the VFF.

Since the beginning of the plan in 2023–24, the government has collected $2.0 billion from the COVID debt levy on payroll tax and $2.3 billion through the COVID debt levy on landholdings. At 30 June 2025, the VFF held $9.9 billion in investments. Over the last 2 years, it has received $236 million in contributions from government land sale proceeds and has earned $1.6 billion in investment returns. 

The government has not publicly reported its progress on the COVID Debt Repayment Plan since introducing the initiative.

Recommendation

We recommend DTF works with the government to regularly publish updates on its progress against the COVID Debt Repayment Plan.

Risks to fiscal sustainability currently remain elevated

The government aims to maintain its operating cash surplus over the forward estimates, achieve a moderate net operating surplus by 2025–26 and stabilise and then reduce debt as a proportion of GSP by 2027–28. 

There are several emerging risks likely to challenge the state's ability to meet short-term financial targets, savings initiatives and manage its long-term sustainability. These risks require close monitoring, proactive management and integration into longer-term fiscal planning.

These emerging risks are evident across the GGS and within the public financial and non-financial corporation sector, highlighting the need for a holistic response.

Emerging risks in the GGS are:

• growing indebtedness of the state
• rising interest costs of new and refinanced debt
• increasing employee costs
• expense management amid rising service demand 
• financial sustainability pressures with domestic building insurance (DBI)
• limited capacity to meet new revenue and income streams
• unplanned and/or significant cost escalations of major infrastructure projects
• rising costs of government redress schemes
• growing trust fund balances
• potential accounting changes may alter how the VicTrack–DTP lease is recorded in the GGS.

Emerging risks beyond the GGS (discussed in Section 3.4) are:

• WorkCover reforms have taken effect, however, risks to the scheme's financial sustainability remain
• potential challenges to achieving the unfunded superannuation funding target.

These risks are discussed further below.

Managing debt at a sustainable level: a key requirement for fiscal sustainability 

Managing debt at a sustainable level allows the government to borrow at a lower cost, allocate limited financial resources to essential services, respond effectively to future crises and ensure intergenerational equity. 

Several measures of fiscal sustainability indicate that Victoria’s debt burden has increased while the state’s ability to service these debts has decreased.

The state Budget and fiscal strategy contain several measures aimed at achieving fiscal sustainability. The government assesses the sustainability of the debt by applying the following financial measures:

• net debt to GSP
• interest expense to revenue.

We also consider the following to be appropriate measures:

• gross debt to GSP
• gross debt to revenue (indebtedness) – gross debt as a proportion of operating revenue
• interest expense relative to the portfolio of debt – considering new and refinanced (rolled over) debt and the maturity profile.

The impact of rising debt and interest expense on these debt sustainability measures are discussed further below.

Gross debt to GSP is forecast to stabilise

Gross debt to GSP is a key financial measure of the GGS and an indicator of the size of the state’s debt in relation to the size of the economy.

The higher this ratio, the more difficult it is for the state to pay back its debt.

An increasing ratio means that state debt is growing faster than the economy while a decreasing ratio shows that debt still grows, however, at a slower pace than the economy. An increasing and higher ratio puts added pressure on debt service costs and in turn, the net operating result, making debt repayment harder.

Figure 18 shows that gross debt as a percentage of GSP has rapidly grown over the last 9 years and is expected to stabilise. The 2025–26 state Budget forecasts that gross debt will stabilise around 30 per cent as a proportion of GSP by 2027–28 and then begin to decline marginally from 2027–28.

Figure 18: GGS gross debt as a percentage of GSP

Source: VAGO, based on the AFR and state Budget.

Average growth of GGS gross debt from 2016–17 to 2018–19 was 10.2 per cent per year. GGS gross debt grew by an average rate of 27.0 per cent per year from 2019–20 to 2024–25 due to significant investment in infrastructure programs and pandemic-related expenses.

Gross debt to GSP was at 29.5 per cent at 30 June 2025. The state Budget forecasts this to peak at 30.7 per cent by 30 June 2027 before declining to 30.3 per cent by 30 June 2029. The government projects taking on $48.8 billion in gross debt over the 4-year period ending 30 June 2029.

Steps 4 and 5 of the government’s fiscal strategy aim to stabilise and reduce net debt as a proportion of GSP from 2027–28. The government has committed to reduce net debt to GSP from 25.2 in 2026–27 to 25.0 per cent by 2027–28. This measure indicates the intended trajectory of debt relative to the size of the economy, however, the government has not established a long term specific target for net debt to GSP ratio or ceiling on the quantum of debt it plans to take on.

Achieving consistent and higher nominal economic growth is key to achieving steps 4 and 5 of the fiscal strategy. However, it may not address the sustainability risks associated with growing debt.

Gross debt as a proportion of revenue is projected to rise to over 200 per cent by 2028–29 

While governments commonly use net debt as a proportion of GSP as a measure, gross debt to public sector operating revenue is also a useful measure of fiscal sustainability. 

This measure shows government debt relative to revenue, which is the primary source of cash inflows used to pay interest and repay principal. It provides a clear indication of the government’s capacity to meet its debt obligations.

This can be particularly informative:

• if the growth in state revenue uncouples from economic growth
• in a higher interest rate environment, especially where the interest rate is higher than annual GSP growth and the government's revenue growth.

Figure 19 shows that gross debt as a proportion of operating revenue is continuing to increase.

Figure 19: GGS gross debt as a proportion of operating revenue

Source: VAGO, based on the AFR and state Budget.

In this scenario, debt servicing and allocating money to essential services can become problematic because interest repayments take a greater bite from operating revenue.

Interest expense is rising faster than revenue – interest bite

Stabilising the GGS's interest expense as a percentage of revenue in the medium term is one of the government’s financial measures and targets.

As the state’s debt increases and interest rates remain elevated, so does the interest expense incurred to service the debt.

Comparing interest expense to operating revenue provides information on the share of revenue devoted to servicing costs of debt (the interest bite).
Figure 20 shows that the interest bite has and will continue to increase significantly over the next 4 financial years. In 2024–25, 6.7 per cent of the GGS's operating revenue, or $6.8 billion, was needed to service debt costs compared with 3.4 per cent, or $2.3 billion, in 2019–20. This is estimated to increase to 9.0 per cent, or $10.6 billion of total operating expenditure, by 2028–29.

Figure 20: GGS interest expense as a percentage of revenue

Source: VAGO, based on the AFR and state Budget.

Although the government aims to stabilise interest expense to revenue in the medium term, it has not specified the timing or level at which the stabilisation is expected.

When the government spends more money on interest payments, there will be less money available for public services.

The move from low to high interest rates significantly increased the interest bite

The shift from a low to high interest rate environment following COVID-19 has and will continue to increase the cost of borrowing. As a result, interest costs on new and refinanced debt are becoming a larger share total operating expenditure.

TCV raises debt for the state by issuing government bonds to both the domestic and international capital markets. It then on-lends this to DTF or other government entities. TCV lends more than 80 per cent of its funds to the GGS via DTF, which uses the funds borrowed to finance the government's initiatives.

The 2025–26 state Budget estimates GGS gross debt to reach $236.6 billion by 30 June 2029. Over the next 4 years, TCV plans to provide $52.3 billion in new financing and to refinance $45.1 billion of existing GGS debt as it matures over the same period, as seen in Figure 21.

Figure 21: Total financing required by GGS by origin over the next 4 years ($ billions)

Note: New debt refers to the funds required to finance new capital projects and operational needs.
Refinance debt refers to the replacement of an existing debt obligation with another debt obligation under different terms. It is usually performed to extend the original debt over a longer period of time, to change fees or interest rates or to move from a fixed to variable interest rate.
Source: VAGO, based on TCV.

The $45.2 billion of debt to be refinanced over the next 4 years was originally incurred during the pandemic and earlier in low-interest-rate periods. As of 30 June 2025, this debt carried an average interest rate of 2.7 per cent. In today's higher-interest rate environment, TCV expects that any refinanced and new debt taken on by the GGS will attract significantly higher interest rates. 

Figure 22 shows the GGS's actual borrowings as of 30 June 2025, along with forecast borrowings and the corresponding average interest rates on those borrowings over the next 4 years.

Figure 22: GGS borrowings from TCV and related interest rates

Source: VAGO based on TCV and DTF.

By 30 June 2025, GGS had borrowed $153.1 billion from TCV with an average interest rate of 3.4 per cent per annum. 

As GGS refinances maturing debt and borrows new funds from TCV to support its capital program, total GGS debt is forecast to grow to $207 billion by 30 June 2029, with an average interest rate of 4.6 per cent.

Between 2025–26 and 2028–29, interest payments on current GGS debt will decline from approximately $5.3 billion to $4.3 billion as those debts mature. However, as the GGS refinances existing debt and secures new borrowings, it will do so at higher rates. This means interest expenses on new financing are projected to rise from approximately $0.7 billion to over $4.9 billion between 2025–26 and 2028–29, as shown in Figure 23. This increase brings the total expected interest expense to $9.2 billion by 2028–29.

Figure 23: GGS expected interest cost on TCV debt including new and refinanced debt

Source: VAGO, based on TCV.

The higher interest rates are projected to add over $4.0 billion to the GGS interest bill over the next 4 years, on top of the increasing costs from new borrowings. 

This increase presents a significant financial sustainability challenge because it reduces the share of revenue and income available for use on public service delivery.

Rising employee costs

Employees are the state’s largest single operating expense.

In 2024–25, the GGS spent $38.5 billion on employees, which represents 37.0 per cent of its total expenses, $2.0 billion more than $36.5 billion allocated in the 2024–25 state Budget. The state Budget forecast that this will rise to $42.4 billion by 30 June 2029.

Figure 24 shows GGS annual employee expense growth from 2016–17 through to 2024–25, including Budget estimates and forward projections for the period from 2025–26 to 2028–29. 

Figure 24: Growth in GGS employee expenses

Note: Averages are shown as horizontal lines.
Source: VAGO, based on the AFR and state Budget.

GGS employee expenses have increased by 41.5 per cent, rising from $27.2 billion in 2019–20 to $38.5 billion in 2024–25. Growth rates peaked at 10.4 per cent in 2020–21 due to the government's pandemic response, but have gradually declined to 6.9 per cent in 2024–25. 

The recent growth reflects both an increase in FTE staff in frontline services and wage growth, particularly driven by enterprise bargaining agreement (EBA) negotiations.

Achieving the forecast modest growth will be challenging

The government forecasts that the employee expense will grow by 10.2 per cent over the next 4 years, reaching $42.4 billion in 2028–29. This represents a modest average annual increase of 2.6 per cent, compared with the average annual growth of 7.6 per cent over the last 8 years. In 2024–25 alone, employee expenses grew by 6.9 per cent, nearly doubling the budgeted growth of 3.6 per cent.

Managing employee expense growth within forecast levels over the next 4 years presents a considerable fiscal sustainability challenge to the government. Recent EBAs finalised in 2024–25 for Victoria Police and nurses and midwives have resulted in wage increases well above the Victorian Government Wages Policy and the Enterprise Bargaining Framework, which targets a 3 per cent annual increase in wages and conditions. The Victoria Police EBA has introduced a compounded salary and allowance increase exceeding 18 per cent over 4 years, while the Nurses and Midwives (Victorian Public Sector) Single Interest Employer Agreement 2024–28 provided for more than a 28 per cent cumulative wage increase during a 4-year period. 

Employee expenses are likely to face further pressure in the coming years, with several significant EBAs due for negotiation, such as teachers, doctors in training and medical specialists, and allied health professionals. Combined with growing demand for public services driven from population growth, these factors will continue to strain the government's ability to contain employee expense growth.

Cost-saving initiatives are a key focus by government to contain the rate of increase in employee costs

In recent years, the government has included targeted cost saving measures in the Budget, primarily through staff reductions. In the 2025–26 state Budget, the government announced an additional $3.3 billion savings target, which includes reducing employee expenses. The government aims to manage the rising employee expense through these saving initiatives and its wages policy, which sets parameters around public sector enterprise bargaining. However, these efforts have not successfully curbed the growth in employee expenses in recent years.

In February 2025, the government established an independent review, led by Ms Helen Silver, (the Silver Review) to recommend ways to rightsize program expenditure and return the VPS to its pre pandemic share of employment. The review covers VPS departments and their portfolio entities and includes an assessment of appropriate executive staffing levels.

The government received the final report in July 2025, but has not yet published the report or its response to the recommendations.

Figure 25 shows that the number of VPS employees and public sector employees overall increased over the 10-year period to 30 June 2024. At the time of writing this report, the Victorian Public Sector Commission had not released employee data for the year ended 30 June 2025.

Figure 25: Number of VPS employees (FTE)

Source: VAGO, based on the Victorian Public Sector Commission.

Over the 10-year period to 30 June 2024, VPS employees grew by 64.2 per cent, while all public sector employees grew by 45.2 per cent. Between 2018–19 and 2020–21, VPS employees rose by 8,487 FTE, or 18.0 per cent, as the government responded to the COVID-19 pandemic. Since then, growth in VPS FTE employees has stabilised. As a share of total public sector employment, VPS FTE numbers have returned to pre-COVID-19 levels. This is because overall public sector employment has continued to grow, which has reduced the VPS share relative to the total public sector employment. 

Between 2020–21 and 2023–24, the number of VPS FTE employees decreased by an annual average of 0.5 per cent, dropping from 55,735 in 2020–21 to 54,837 in 2023–24. In contrast, total Victorian public sector FTE employees increased by an average of 3.4 per cent per year, growing from 284,937 in 2020–21 to 314,629 in 2023–24. This growth was primarily driven by increases in frontline staff across healthcare, education, police and emergency services. Employee expenses during the same period grew by 6.3 per cent per annum.

The government's recent cost-saving measures, including those outlined in the 2025–26 Budget, rely heavily on staff reductions to meet savings targets and the GGS's financial targets. If these initiatives do not deliver the savings expected, the employee cost will exceed the projections and the targets will not be achieved. 

Operating expenses exceed budget estimates despite cost saving initiatives implemented

Other operating expenses represent the second-largest component of GGS expenses, accounting for nearly 30 per cent of total expenses, or $30.7 billion, in 2024–25.

Since 2021–22, the GGS has exceeded the expense estimates set in the Budget. Figure 26 shows the actual operating expenses from 2016–17 to 2024–25, alongside the budgeted operating expenses from 2016–17 through to 2028–29. Despite implementing several cost-saving initiatives, the GGS has consistently exceeded its budgeted operating expense targets. Over the last 2 years, actual expenses have exceeded Budget estimates by approximately $3 billion each year.

Figure 26: GGS operating cost 

Source: VAGO, based on the AFR and state Budget.

As shown in Figure 27, other operating expenses grew at an average rate of 5.5 per cent from 2016–17 to 2018–19. During the pandemic it peaked at 13.7 per cent per annum.

The government forecasts other operating expenses to grow at a modest rate of 1.2 per cent over the next 4 years to $32.2 billion by 2029.

Figure 27: GGS operating cost growth

Note: Averages are shown as horizontal lines.
Source: VAGO, based on the AFR and state Budget.

To achieve its financial objectives, the government must keep growth of recurrent expenses aligned with forecasts or below. It has been working to slow the growth of operating expenses through various saving initiatives announced in previous state Budgets. Delivering these savings remains difficult due to:

• challenging economic conditions that drive expense growth, including inflation and increased demand for public services driven by population growth
• financial discipline required by departments and agencies that must maintain service delivery despite reduced or reprioritised funding and constraints from earlier savings measures.

Scheme moves into the GGS

On 1 July 2025, the Victorian Government established the Building and Plumbing Commission (BPC) as Victoria’s new regulator for the building and plumbing sectors. The BPC is a GGS entity, created under the Building Legislation Amendment (Buyer Protections) Act 2025. 

As part of this reform, the legal entity remains the Victorian Building Authority (VBA), now trading as the BPC. The BPC brings together the functions of the VBA, Domestic Building Dispute Resolution Victoria, and the Domestic Building Insurance responsibilities, including issuing policies and claims management of DBI products, which were previously administered by the Victorian Managed Insurance Authority (VMIA), a public financial corporation.

In recent years the DBI scheme has faced financial sustainability challenges

At 30 June 2025, the DBI portfolio had $205 million in assets and $695 million in estimated liabilities, resulting in a net shortfall of $490 million. The shortfall grew over several years because of the sharp rise in builder insolvencies given industry challenges, which triggered a surge in insurance claims across the domestic building sector.

Figure 28 shows the number of DBI claims and the growth in claim size from 2015–16 to 2024–25.

Figure 28: Number of DBI claims and average claim size

Source: VAGO, based on VMIA.

DBI claims rose sharply from 680 claims in 2015–16 to a peak of 4,459 in 2022–23 largely due to builder insolvencies. Although the number of claims has gradually decreased over the last 2 years, falling to 2,703 in 2024–25, it remains higher than the historical experience. 

The average size of a DBI claim also rose significantly. In 2015–16, the average was approximately $46,000. By 2024–25, it had increased to $77,500, growing by more than 68 per cent. In 2024–25 alone, the average DBI claims size grew by 14.6 per cent.

The state provided financial support of $590 million to facilitate the transfer

Due to the $490 million shortfall in the DBI portfolio caused by adverse claims experience, the state contributed $590 million in capital to the VMIA, a public financial corporation entity, to support the transfer. VMIA then transferred the $590 million cash contribution, along with other assets and liabilities, to the BPC.

Without this capital injection from the state, the BPC, a GGS entity, would have incurred an estimated loss of $490 million at 1 July 2025.

DBI's financial sustainability is key to achieving the BPC’s objectives 

In 2025–26, the BPC will consolidate several business functions through the legislative change. The government established the BPC to simplify regulation, protect consumers, support industry professionals and maintain public trust in the building and plumbing sector.

Managing the DBI scheme as a GGS entity may increase financial pressure on the government's fiscal targets if adverse claims experience continues, where unplanned funding may be required to support BPC operations.

Sources for raising additional revenue and new cash inflows are diminishing

In 2024–25, the GGS reported $101.4 billion in revenue and income, an increase of $8.3 billion from $93.1 billion of 2023–24. 

As shown in Figure 29, the government has introduced several new taxes in recent years, resulting in increased tax revenue. These taxes have supported the government to manage financial outcomes and the impact of rising costs.

Figure 29: New taxes introduced by the government

Source: VAGO, based on the State Revenue Office.

Figure 30 shows that revenue and income increased by 49.3 per cent from $67.9 billion in 2019–20 to $101.4 billion in 2024–25. Taxation and Australian Government grants made up the majority of this revenue and income, representing 38.4 per cent and 46.7 per cent, respectively.

Figure 30: GGS revenue composition

Source: VAGO, based on the AFR and state Budget.

Taxation income has grown by 68.1 per cent since 2019–20, driven in part by new taxes. The mental health and wellbeing surcharge and COVID-19 debt levies for payroll and land tax contributed $3.1 billion and $3.3 billion in additional tax income in 2023–24 and 2024–25.

Commercialisation opportunities are declining

Commercialising government assets and services has been a significant source of cash inflows to the government and has brought in a substantial amount of revenue in recent years. 

In the last 9 years, several assets and functions have been commercialised or leased to private entities. Key transactions include: 

• leasing the Port of Melbourne land, channels and infrastructure assets for an upfront payment of $9.7 billion in 2016–17
• commercialisation of Victorian Land Registry Services for $2.9 billion in 2018–19
• VicRoads modernisation joint venture arrangement for $7.9 billion in 2022–23.

The receipt of $20.5 billion in funds from these arrangements has supported the government in managing operating and investing cash needs. However, it has also lost access to some future cash inflows previously generated from these assets and services.

Cost escalation of major infrastructure projects is a significant fiscal sustainability challenge

This year, the GGS outlaid $16.2 billion on infrastructure and capital assets – a decrease of $1.2 billion from last year's $17.4 billion. 

For the last 5 years, we have tracked the performance of major projects costing $100 million or more. We are currently reviewing major projects that were complete and active at 30 June 2025 and listed in Budget Paper 4: State Capital Program as part of our limited assurance review Major Projects Performance Reporting 2025. This review report is scheduled for tabling in 2026. 

Through our reviews, we have consistently observed cost escalations in major projects. For example, the total estimated investment (TEI) of the Metro Tunnel Project was $10.9 billion when it first appeared in Budget Paper 4 in 2016. The 2024–25 state Budget reported the TEI as $12.6 billion, however, as of 30 June 2025, the TEI is estimated to reach $13.5 billion. This represents an increase of $0.9 billion since the last year, and an increase of $2.6 billion, or 23.9 per cent, since the project first appeared in Budget Paper 4. 

The cost escalations in major projects can be attributed to several reasons both within and beyond the control of the state, including: 

• staging of funding increases after projects develop more detailed plans
• redesigning or increasing the scope or capacity of a proposed project
• the impact of decisions about adopting procurement models
• unexpected price increases after market engagement
• volatility in the construction industry and supply chains
• contract variations signed with private sector parties.

Costs escalations, regardless of their causes, may require additional funding.

In the 2025–26 state Budget the government committed to investing $212.7 billion in capital projects. This is a net increase of $4.7 billion compared with the same time last year. If cost escalations in current and new major projects persist, it will further significantly strain the state's fiscal sustainability.

Redress scheme provisions

In recent years, the government has established several redress schemes to recognise and address harm experienced by individuals in institutional care or other government settings. These schemes offer financial compensation, provide access to counselling and support services and deliver formal apologies as part of the government's broader commitment to justice and healing. 

To manage its financial obligations associated with the schemes and comply with the Australian Accounting Standards, the government recognises a liability in the financial report when it can reliably measure the payment obligations expected from the scheme. 

At 30 June 2025, the government has recognised liabilities relating to the following schemes:

• Redress for Historical Institutional Abuse
• Fiskville Redress Scheme
• Stolen Generations Reparations Package
• The Restorative Engagement and Redress Scheme for Victoria Police
• Financial Assistance Scheme (victims of crime)
• Historical Forced Adoptions Redress Scheme
• National Redress Scheme for Institutional Child Sexual Abuse.

The scheme costs have risen significantly in recent years

The state's total provision for these redress schemes has risen significantly over the last 5 years, as shown in Figure 31.

Figure 31: Redress provisions

Source: VAGO, based on financial report disclosures of the Department of Families, Fairness and Housing and DJCS.

At 30 June 2021, the government recognised a $30 million liability for the National Redress Scheme for Institutional Child Sexual Abuse, which was the only scheme in existence at that time. By 30 June 2025, the liability has risen to $853 million, driven by the recognition of provisions for 6 additional redress schemes, each varying in nature and financial exposure. 

Management applies significant judgement when estimating these liabilities, making them subject to material revisions in the future. The state also recognises non-quantifiable contingent liabilities because it is unable to reliably estimate liabilities for individuals who may be eligible for a particular scheme but have not yet come forward with a claim. 

There is a risk that the financial impact of these schemes may exceed the current estimates in the liability. This uncertainty could further challenge the state's fiscal position and financial sustainability.

What is a trust and its purpose?

Trust accounts are established by either an Act of Parliament, under legislation for a specific purpose or the Minister for Finance under the Financial Management Act 1994 following a request from a department. 

A trust account is a legally designated fund used to manage and account for certain types of income received and expenditures held in trust for a specific purpose.

A trust account established by statute is restricted for the purpose set out in the statute.

Funds held in trust are recognised in the state's balance sheet as 'cash and cash equivalents' and 'investments, loans and placements' based on how the funds are held and invested.

How a trust operate

Trust accounts are not subject to parliamentary appropriation. Income and expenses of trusts accounts are managed by the respective departments in accordance with the legislation under which each trust account was established. 

At 30 June 2025, the state had $19.2 billion of funds held in trust, with several trust accounts for specific purposes. The major trust accounts include the VFF and the Victorian Social Housing Growth Fund with balances of $9.9 billion and $2.9 billion respectively. 

DTF and other departments administer trust funds on behalf of the state. They invest trust account money in bank deposits and other financial investments and spend funds in accordance with their purpose.

Rising trust account balances

In recent years, the balances in certain trust accounts have grown substantially because the funds have remained unspent for several years. 

Figure 32 shows a growth in balances of a selection of significant trust accounts since 2020–21.

Figure 32: Significant trust account balances

Source: VAGO, based on financial report disclosures of departments.

The trust accounts shown above are hypothecated trust accounts. This means funds in these trust accounts can only be used for the purposes provided under legislation.

The Growth Areas Public Transport Fund collects levies from growth areas infrastructure contribution (GAIC levies). These funds can be used only for delivering state-funded infrastructure for new communities. This fund balance has grown to $637.6 million at 30 June 2025 from $431.1 million at 30 June 2023.

The Sustainability Trust Fund was established under section 449 of the Environmental Protection Act 2017 to receive the Municipal and Industrial Land Fill Levy. The Department of Energy, Environment and Climate Action administers this fund. Under the Act, the payments from this fund can be made only for the purposes of fostering:

• environmentally sustainable uses of resources and best practices in waste management
• community action or innovation in relation to the reduction of greenhouse gas substance emissions or adaptation or adjustment to climate change in Victoria.

The balance in the Sustainability Trust Fund has grown from $66.8 million at 30 June 2022 to $545.7 million at 30 June 2025.

The Community Support Fund receives a percentage of revenue generated from electronic gaming machines in hotels. The money in this fund should be used to reduce the prevalence and severity of gambling-related harm and foster responsible gambling behaviour.

The balance in the Community Support Fund has grown from $55.2 million at 30 June 2021 to $323.8 million at 30 June 2025. 

Risks arising from unspent trust balances

Trust account balances have increased significantly in recent years because the funds collected through the levies and other dedicated revenue and income sources have not been spent.

The accumulation of unspent trust account balances raises some risks for consideration:

• Agencies may not be spending funds promptly for their intended purpose, leaving community expectations unmet.
• Rising balances may signal underlying structural or operational issues that are being masked by the growing funds. These unspent balances have contributed to: 
  • growth in the state’s cash and cash equivalents leading to positively impacting the net operating result – a key financial measure
  • reduce reported net debt by offsetting borrowings – another important financial indicator
  • improved net result from operations because related expenditures have not yet been spent.

Recommendation

Departments responsible for administering these funds assess whether the current spending patterns are effectively achieving the purposes for which these funds were established.

Changes to fair value relief for leased assets

As explained in Section 2, under the Australian Accounting Standards, entities must recognise leases on their balance sheets as a right-of-use asset and a corresponding lease liability. 

Current relief in the standard allows not-for-profit public sector entities to measure concessionary leases, such as the VicTrack–DTP arrangement, at cost rather than fair value. Normally, leased assets under concessionary arrangements are required to be measured at fair value.

The Australian Accounting Standards Board is currently reviewing this relief to consider whether it should be lifted. 

If the relief is removed, DTP may:

• be required to fair value its leased assets with VicTrack, or
• have the option to either apply cost or fair value to its leased assets.

For concessionary leases, fair value reflects the economic benefit of using the asset, not the physical asset’s fair value as if owned. Therefore, the right-of-use asset’s fair value is usually lower than the physical asset’s fair value. The 2 values only match when the lease payments are close to market rates and the lease gives the entity almost all the benefits of owning the asset.

What's the impact to the GGS if fair value is applied?

We have conveyed to DTF and DTP that in our opinion, if the relief is removed and entities can choose between cost or fair value, applying cost is not an appropriate outcome. 

This is because not applying fair value and an appropriate depreciation charge prevents DTP’s and the state's financial reports from showing the true economic cost of using transport infrastructure for public services in the GGS.

If DTP applies fair value to its leased assets:

• right-of-use assets for the VicTrack–DTP arrangement would increase
• depreciation expense would increase
• the GGS net result would decline due to higher depreciation.

We cannot reliably estimate the impact without DTP undertaking a valuation exercise over the lease arrangements.

Public corporations' financial sustainability

Public corporations in Victoria play a crucial role in providing services to Victorians and fulfilling the government's economic, social and public policy objectives. They provide services in sectors considered essential or strategic, such as transportation, utilities and public financial services.

Financial sustainability of public financial corporations is critical for the government's overall fiscal sustainability. It allows these corporations to continue providing essential services without disruption and improve the quality of services by way of investing in innovation and new development.

Non-sustainable financial corporations can add financial strain on the GGS's financial position because taxpayers' money is often used to support the financial health of these corporations.

Further, fees and levies charged by these corporations to the public may increase adding financial burden to citizens.

Transactions with these public financial corporations also have a significant impact on the GGS operating result, balance sheet and operating cash result outcomes in varying ways. The government:

• in recent years, has used taxpayers' money to support the financial sustainability of WorkSafe Victoria. As an example, WorkSafe Victoria received $1.3 billion from the government across 2020–2023 to support its financial sustainability
• sources income from these corporations through dividends, grants, taxation-equivalent payments, levies and capital repatriation that helps with the financial outcomes of the GGS. As an example, the TAC paid a $0.7 billion (2024: $1.1 billion) dividend to DTF this year.

There are 2 emerging risks in the public corporation space that require close attention by the government to avoid further sustainability challenges. They are discussed below.

WorkSafe Victoria contributes 59.3 per cent to the state's insurance liability and remains the primary driver of the growth

WorkSafe Victoria is Victoria's workplace health and safety regulator. It manages the WorkCover insurance scheme and aims to reduce harm in the workplace and improve outcomes for injured workers.

Figure 33 shows that the value of WorkSafe Victoria's outstanding insurance claims has increased by more than 97.1 per cent since 2018–19.

Figure 33: WorkSafe Victoria's outstanding insurance claim liabilities at 30 June

Source: VAGO, based on data from WorkSafe Victoria's financial reports.

Weekly benefits paid to injured workers and common law claims are primary drivers to the significant growth in WorkCover claim costs and outstanding insurance claim liabilities. Weekly benefit payments replace lost wages when workers cannot work due to mental or physical injuries. Common law claims arise when workers pursue compensation through the legal system.

In 2024–25, outstanding insurance liabilities increased by $2.7 billion, up from an increase of $2.5 billion in 2023–24. This increase was primarily driven by a 15 per cent rise in the liability for common law claims and a 13 per cent rise in medical claims.

Financial sustainability challenges of WorkSafe Victoria

Prior to this year, significant increases in claim volumes and longer reliance on benefits have driven up claim costs. This was compounded by a gap between premium revenue and claims cost, causing a premium deficit and weakening the financial sustainability of the WorkCover scheme.

Our previous reports have highlighted these challenges to WorkSafe Victoria’s financial sustainability, which ultimately led to the need for government financial assistance. We recommended that the government implement measures to support WorkSafe’s long-term financial stability.

As shown in Figure 34, WorkSafe Victoria recorded an accumulated net deficit of $7.1 billion between 2018–19 and 2022–23, driven by its adverse claims experience and continued premium deficit.

Figure 34: WorkSafe Victoria net results before income tax

Source: VAGO, based on WorkSafe Victoria's financial reports.

Reforms were required to address financial sustainability

To strengthen WorkSafe Victoria's financial health, the government implemented 2 key initiatives during 2023–24:

• a government-approved average premium increase of 41.7 per cent effective from 1 July 2023
• WorkCover reforms through the Workplace Injury Rehabilitation and Compensation Amendment (WorkCover Scheme Modernisation) Act 2024, effective from 31 March 2024. The government made 3 key changes: it tightened the rules for mental health claims, added a new requirement for long-term weekly payments, and set up Return to Work Victoria to help injured workers recover and get back to work.

These initiatives have improved financial performance and better management of claims growth over the last 2 years. WorkSafe Victoria reported an accumulated net surplus before tax of $1.6 billion across the 2023–24 and 2024–25 financial years. It also reported an improved insurance funding ratio, reaching 113 per cent at 30 June 2025, up from 106 per cent at 30 June 2024.

Following the initial implementation of the reforms on 31 March 2024, WorkSafe reduced its claim liabilities as at 30 June 2024 and claim expenses for the 2023–24 year by $1.2 billion. This reduction primarily resulted from revaluing claims incurred prior to 31 March 2024 that had not yet reached the 130-week threshold under the new eligibility requirements.

WorkSafe Victoria expects these reforms to initially stabilise claims experience in the short term and return to a financially sustainable level in the mid to long term.

The reforms aim to lower the number of mental injury claims that result in weekly payments and decrease the proportion of all claims exceeding the 130-week threshold. Figure 37 shows the growth of physical and mental injury weekly payment claims reported from 2016–17 to 2024–25.

Figure 35: Number of new physical and mental injury weekly payment claims

Source: VAGO, based on WorkSafe Victoria.

In the last 12 months, the number of physical injury weekly payment claims increased by only 0.1 per cent and the number of mental injury weekly payment claims decreased by 16.9 per cent compared with 2023–24. From 2016–17 to 2023–24, the average annual growth rates for these claims were 3.7 per cent for physical injuries and 11.2 per cent for mental injuries.

Risks to achieving reform outcomes remain

Financial sustainability is key to achieving WorkSafe Victoria’s purpose of reducing workplace harm and improving outcomes for injured workers.

However, it will take several years to fully understand the reforms' impact on both injured workers and the scheme's financial position due to the inherent uncertainty and long development period of insurance claims. Legal interpretations of the reforms and behavioural changes by workers and their advisers may also affect how the reforms are applied in practice.

There remains a risk that the reforms may not fully achieve the intended benefits to support WorkSafe Victoria's long-term financial sustainability. Therefore, it is important that the government continues to monitor and evaluate the outcomes of these reforms over time.

In this respect, we note that the Workplace Injury Rehabilitation and Compensation Amendment (WorkCover Scheme Modernisation) Act 2024 requires an expert panel to conduct a review of the reforms and their impact in 2027.

What is the state's superannuation liability?

The state’s public-sector-defined benefit superannuation plans are responsible for the liability for employee superannuation entitlements. These plans are not reported in the AFR because they are not controlled by the state.

The superannuation plans, which are principally operated for GGS employees, are not fully funded. The funding of these superannuation liabilities is the responsibility of the state and therefore a liability is recognised in the AFR for these obligations.

The state's liabilities include a superannuation liability of $18.3 billion at 30 June 2025.

In accordance with the requirements of AASB 119 Employee Benefits, this liability is valued using a discount rate based on Australian Government bond yields. However, the state's funding requirement is determined using the expected return on the superannuation fund's assets. On this basis, the state's actuarial service provider has estimated an unfunded superannuation liability lower than what is reported in the AFR, at $13.0 billion as at 30 June 2025. 

The unfunded superannuation liability for funding purposes is lower than the superannuation liability reported in the AFR because the expected return on assets of the superannuation fund is currently greater than the Australian Government's bond yield.

The government targets to fully fund this unfunded superannuation liability by 2035 by way of annual contributions – a key financial measure of the government.

$18.1 billion is required to fully fund the liability by 2035

Over the last decade, the government has contributed $8.4 billion to fund the deficit. The government deferred annual contributions by $3.0 billion from 2023 to 2027 following the Victorian election in 2022, as outlined in Labour's Financial Statement 2022. The government did not explain why the contribution payments were varied and deferred. However, it keeps its commitment to fully fund the liability by 2035.

The government will need to contribute $18.1 billion (nominal value) between 2026 and 2035, which is more than double its contributions over the last decade, to meet its full funding commitment. These estimates are based on current assumptions used to determine funding requirements.

Figure 36 shows that under its revised contribution plan, the government plans to contribute approximately $0.5 billion per year over the next 2 years to 2027. 

This means that annual contributions will need to increase to approximately $2.1 billion from 2028 to fully fund the liability by 2035.

Figure 36: Actual and projected annual superannuation contributions

Source: VAGO, based on DTF.

This contribution deferral will result in the funding position falling below 40 per cent on the funding basis between 2025–26 and 2027–28 as shown in Figure 37.

Figure 37: Projected funding position of superannuation liability on funding basis

Source: VAGO, based on DTF.

The emerging risks outlined in this report increase the likelihood that the government will face challenges in making ongoing contributions and achieving its funding target.

Further, the current liability estimate is subject to external risks, such as the fund's investment performance and salary and pension increases. For example, a lower-than-expected investment return from the fund’s assets would require more contributions from the government to fully fund the liability by 2035.

Internal controls at material entities are adequate 

We assess the internal controls at each material entity that ensure its financial report is complete, accurate and complies with relevant legislation. We report any significant issues to the relevant entity's management and its audit committee, as required under the Australian Auditing Standards.

This year, we identified and reported 45 new issues:

• 3 were rated high
• 28 were rated moderate
• 14 were rated low.

We define these ratings in Appendix G.

The section below outlines the most significant control challenges we encountered during our audits of our material entities.

Continued investment in transport assets

The state's investment in building, developing and replacing assets in the transport and planning sector continued. In 2024–25 DTP invested $8.7 billion in assets ($11.2 billion in 2023–24), with $3.0 billion being transferred to VicTrack ($2.7 billion in 2023–24). With respect to operational transport projects, DTP enters into the contracts, oversees the capital spending and then transfers the completed assets to VicTrack as the state’s legal custodian of them.

Historical asset accounting issues 

In our past reports, we have explained the significant shortcomings in asset accounting by VicTrack since 2019–20. The issues have included:

• an inability to identify individual assets in VicTrack's asset register
• delays in the recognition of assets, which means depreciation was not charged from when assets were first available for use
• no assessment of the nature of capital spending to make sure it could be recognised as part of an asset
• inadequate review of work-in-progress accounting records, resulting in stale work-in-progress amounts and asset write-offs
• asset disposals and replacements not identified and removed from the VicTrack asset register.

Progress continues to resolve these issues

DTP and VicTrack have devoted significant time and effort to resolve these issues. Since 2022–23, they have implemented an asset collection and attribution framework. As part of our audit work, we confirmed the effective operation of this framework for most assets added since 2019.

Their work over the last 4 financial years has ensured that any newly acquired assets are recorded completely and accurately. However, our testing this year continued to identify issues with asset register information predating 2019. Although the value of these assets has reduced considerably, further work is needed to appropriately support all assets in the asset register. As at 30 June 2025, assets without proper identifying attributes total $1.15 billion, which is a significant reduction from $9.07 billion in 2023–24.

We would normally qualify a financial report for this matter. However, an additional qualification on this issue was not required because we already modified VicTrack’s financial report for not complying with the leasing matter explained in Section 2. We also referenced this matter within that qualification. This did not impact our opinion on the AFR because we concluded that the risk of a material misstatement in the AFR was low. We encourage VicTrack to continue this progress, with the next steps identifying clearly which assets are leased to DTP within the asset register.

Assets' fair value estimation has improved

In the public sector, the cost approach is commonly applied to determine the fair value of specialised assets, such as the transport assets held by VicTrack. This method estimates the cost to replace an asset’s service potential with a modern equivalent asset. This provides entities with a clear view of the current cost to replace the public service potential of such assets.

From a financial perspective, fair value measurement supports transparent and accurate financial reporting, enhances asset lifecycle costing and informs budgeting and long-term financial planning. Regular revaluations also strengthen asset management by improving understanding of asset condition and capacity, helping entities identify underperforming assets, make renewal or upgrade or disposal decisions, and align asset plans with current and future service needs.

This year, VicTrack completed a fair valuation of its non-financial physical assets in accordance with FRD 103 Non-financial physical assets. The revaluation aligned with the first-time application of amendments to AASB 13 Fair Value Measurement, which introduced authoritative guidance for not-for-profit public sector entities. The updated guidance clarified how to apply the cost approach, allowing additional costs, such as demolition, disruption and restoration, to be included in fair value estimates because they affect the cost of replacing an asset with a modern equivalent.

The valuation resulted in a $38.3 billion increase in fair value, bringing VicTrack’s total non-current physical assets to $88 billion. This included:

• $34.9 billion for transport infrastructure assets
• $1.2 billion for land
• $2.2 billion for rolling stock.

The valuation outcomes were positively influenced by the progress VicTrack and DTP have made in improving asset data quality within VicTrack’s fixed asset register and refining project costings to ensure accurate datasets. These improvements enabled more precise valuations. 

Stronger market conditions and inflationary pressures, particularly in construction, also contributed to higher values, as did the inclusion of additional costs under the amended AASB 13 guidance.

Outsourced and shared services arrangements

Government entities often outsource services that affect financial management, financial processes and financial reporting, such as payroll, IT, collection of fees and income and financial report preparation.

These services are outsourced to private or public providers through formal service level agreements (SLAs), which should clearly define key performance indicators, measures and assurance requirements. The aim is to reduce costs, improve service quality and access specialised expertise.

Examples of outsourced and shared service arrangements currently in place include:

• shared corporate service arrangements between the Department of Government Services, DTF and the Department of Premier and Cabinet
• DTP outsourcing human resources and payroll services to the Department of Government Services
• DJCS outsourcing its operation of camera technology, IT systems and processes used to detect, record and verify data for distracted driver and seatbelt traffic offences to a service provider.

Standing direction requirements

Under the Standing Directions 2018 under the Financial Management Act 1994, specifically Standing Direction 3.4 – Internal control system and Instruction 10 – Managing shared services and outsourcing arrangements, entities must:

• assess costs and benefits before outsourcing
• document services, performance indicators and measures in the SLA
• regularly monitor provider performance, including an annual review by the accountable officer, and report to those charged with governance
• obtain and document annual assurance over the provider’s control environment
• ensure arrangements are subject to internal and external audit scrutiny, as appropriate.

Despite outsourcing, the accountable officer of an entity remains responsible for the function.

What we observed

We continued to observe that some material entities do not fully consider how they will obtain assurance over the service provider’s control environment at the outset of outsourcing arrangements, or design appropriate mechanisms to do so.

As a result, SLAs lack clearly defined assurance requirements, leaving entities without the level of assurance required for effective oversight of the shared service providers. In these circumstances, it can take entities several years to establish appropriate assurance over the outsourced services.

Without clear oversight, entities face governance, financial and service delivery risks. Ongoing monitoring is essential to ensure providers meet agreed outcomes, maintain effective internal controls and support transparency, financial integrity and service quality.

The Guidance supporting the Standing Directions 2018 under the Financial Management Act 1994 explains how entities can gain assurance that:

• the provider meets agreed terms and performance measures
• controls are effective and support accurate reporting
• the control environment ensures complete and accurate processing of transactions and data
• the accountable officer and chief finance officer can confidently attest that financial reports are fair, and that risk management and internal controls are sound and operating effectively.

What is appropriate assurance?

Appropriate assurance comes in many forms, the most reliable being an ASAE 3402 Assurance Reports on Controls at a Service Organisation report. An independent auditor provides this type of assurance report.

Customer departments, entities and their independent auditors can place reliance on such independent assurance reports to gain confidence that the controls at the service providers are appropriately designed, implemented and operating effectively. 

Recommendation

We recommend that departments and agencies should: 

• consider the requirements relating to Standing Direction 3.4 – Internal control system and Instruction 10 – Managing shared services and outsourcing arrangements when entering into such arrangements and outline those requirements clearly in the service level agreements
• obtain an appropriate level of assurance annually as required by the Standing Directions 2018 under the Financial Management Act 1994 over the outsourced service providers and shared services and document it.

Key management personnel and related party disclosure requirements

Public sector entities must disclose key management personnel in their financial reports. This typically includes ministers, secretaries, chief executive officers, and senior executives – individuals who have authority and responsibility for planning, directing and controlling the activities of the entity, either directly or indirectly. 

These disclosures are governed by AASB 124 Related Party Disclosures, FRD 21 Disclosures of responsible persons and executive officers and supported by guidance from DTF.

Entities must report the remuneration and benefits received by key management personnel and disclose relevant material related party relationships and transactions. These disclosures highlight any potential impact on the entity’s financial position and performance, including outstanding balances and commitments with related parties. They also promote transparency in the management of public resources and help stakeholders assess whether decisions may have been influenced by personal or related party interests.

To support consistent application, DTF provides extensive guidance for meeting the requirements of the standards.

What we found

During our audit of these disclosures at material entities we identified some common issues.

Some entities applied the key management personnel definition too narrowly and failed to identify individuals who met the criteria, resulting in omissions from the disclosures. 

We also found that some entities did not consistently apply the definition of related parties in line with DTF guidance. These issues led to incomplete or inconsistent disclosures.

Recommendation

We recommend that material entities strengthen transparency by delivering targeted training and practical guidance to staff responsible for preparing key management personnel and related party disclosures.

Why IT controls are important

IT is integral to the operations and success of an organisation.

IT systems support critical business processes, store sensitive data and are essential for effective operations of any organisation. Effective IT controls reduce the risk of unauthorised access and changes to systems and help protect the integrity of data.

They are a prerequisite for the reliability of the systems used by the entities for financial reporting.

IT control deficiencies continue to rise

We continue to identify IT control deficiencies at many material entities. As illustrated in Figure 38, there has been a notable increase in deficiencies identified from 2021–22 to 2024–25, mainly on user access management.

Some of the increase over the last 5 years can be attributed to an expansion in the systems included in our audit testing. Growing reliance on technology coupled with evolving auditing standard requirements have led to the increase in in-scope systems for our audits. For user access management, factors such as staff turnover and complexity in user access roles and responsibilities also contributed to the increase in deficiencies.

Figure 38: New and unresolved IT control deficiencies

Source: VAGO.

Common IT control deficiencies identified at the relevant material entities were: 

Resolution of prior-year IT control deficiencies remains slow 

Thirty-eight prior-year IT control deficiencies remained unresolved across many material entities. This pattern reflects ongoing weaknesses in their control environments and highlights the need for stronger management attention.

Figure 39 shows a total of 77 new and unresolved prior-year IT control deficiencies.

Figure 39: New and prior-year IT control deficiencies in 2024–25

Source: VAGO.

Root causes of prolonged and rising IT control deficiencies

IT control deficiencies continue to occur and remain open for a prolonged period because of:

• competing priorities, funding constraints and staff turnover
• limitations of systems
• legacy applications making it difficult to put in place controls addressing new risks from program changes, access issues and cyber threats
• limited awareness by management of the risks and potential effects these deficiencies could have on operations
• untimely detection or remediation and limited oversight.

We have made several recommendations to relevant material entities to address these deficiencies through our reporting to management and those charged with governance.