States facing credit downgrades due to ‘lax fiscal discipline’

One of the world’s biggest ratings agencies has put the states and territories on notice their credit ratings could be downgraded, which could push up borrowing costs, as it accuses them of “lax fiscal discipline” that could leave them exposed to any future economic shock.

S&P Global on Tuesday said even as the states and territories enjoyed an increase in revenue, they had gone on a $212 billion spending spree over recent years that may be “politically appealing” but was putting their budget bottom lines at risk.

Cost blowouts on infrastructure, such as the Parramatta light rail in Sydney, have driven state budgets into the red.

A downgrade to the ratings of states such as Victoria, NSW and Queensland, which account for most of the forecast $850 billion in state-level gross debt by 2028, would make the situation worse by pushing up the interest bill on their borrowings.

S&P Global primary credit analyst Anthony Walker said if the states failed to curb regular costs and project blowouts, they would face credit rating downgrades.

“The issue for Australian governments is spending, not revenue. Their approach to fiscal discipline appears increasingly loose. We now question whether many states have exceptionally strong financial management on a global scale,” Walker said.

Australia’s states all have high credit ratings – which affect how much interest they pay on debt – compared to most provincial administrations across the world.

But since the start of the COVID-19 pandemic, S&P has downgraded the ratings for NSW and the ACT (from AAA to AA+) and Victoria (from AAA to AA) while upgrading Western Australia to its highest rating level (AAA).

More recently, the ACT, NSW and Tasmania have been put on negative watch, which suggests S&P could further downgrade their ratings.

Walker said the problem was states being unable or unwilling to control their spending.

The agency noted that state revenues had climbed by $146 billion more than had been expected compared with their budget positions of 2019-20, enough to fund all of Victoria’s major rail projects such as the Suburban Rail Loop or seven new Sydney metro rail lines.

But combined spending had lifted by $212 billion in the period 2020 to 2023.

Almost all states have come under fire for increased spending on their bureaucracies, including pay rises for public servants.

But S&P said this was not the main problem facing state finances, arguing the biggest drivers had been increased expenditure on infrastructure, due in part to booming population growth and the national energy transition.

Before the pandemic, states expected to spend $64 billion on infrastructure in 2020 before gradually easing in further years. Instead, spending was now expected to reach $100 billion in 2025 and the following year.

“While states have high credit ratings and have collected record tax revenues since the pandemic, they have failed to rein in pandemic-size spending, choosing instead to prioritise voter-friendly expenditures,” Walker said.

Victorian Treasurer Jaclyn Symes said in its most recent appraisal of her state’s budget, S&P had confirmed its stable credit rating outlook.

She said debt was starting to fall as a share of the state economy.

“Throughout the pandemic we invested more than $21 billion in business and economic support to keep businesses afloat, keep people in jobs and emerge from the pandemic in the best shape possible,” she said.

“While the Victorian economy is strong and there are more Victorians working than ever before – we know that the cost of living is hitting families hard. That’s why we’ve funded the $400 school savings bonus, taken bold action on housing and announced a plan to cap fuel price rises.”

But Symes’ NSW counterpart, Daniel Mookhey, declined to comment on S&P’s report.

All states came under fire for “poor budgeting” and oversight practices which had enabled huge spikes in infrastructure costs and overall spending.

Victoria’s spending had climbed 20 per cent over its original forecasts between 2020 and 2023 while in NSW, it had lifted by 14 per cent.

“Both states were more affected by the pandemic than other states due to their self-imposed lockdowns. While these decisions may have saved lives, they came at a cost, which is still being felt,” Walker said.

The agency noted that the Queensland budget was in trouble under the Miles government with “generous measures” such as $1000 energy rebates and 50¢ public transport fees. The recent budget update by the Crisafulli government revealed deficits of $9 billion for 2026 and 2027.

In Tasmania, the agency said the state had now entered its “largest spending period in its history”.

Independent economist Saul Eslake noted Tasmania’s explosion in debt could not be justified by population growth which had slowed sharply. Over the past year, Tasmania’s population growth eased to just 0.3 per cent, or an extra 1600 people.

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