Victoria faces credit downgrade if rising costs, spending blowouts, global rating agency says

A leading credit agency has revealed Victoria risks a credit downgrade if rising operating costs and spending blowouts are not addressed raising fears about the state’s revenue.

A leading credit agency has again warned that Victoria faces a credit downgrade if it fails to curb rising operating costs and cost blowouts.

A downgrade would lead to increased borrowing costs and further drive up Victoria’s ballooning debt, which is on track to hit $188bn by 2028.

In a report published on Tuesday, S&P Global Ratings warned all Australian state ratings were at risk of damaging downgrades.

It blamed lax financial discipline, operating revenues nearly $150bn higher than pre-Covid expectations, and $200bn in spending blowouts.

A leading credit agency has again warned that Victoria faces a credit downgrade if it fails to curb rising operating costs and cost blowouts. Picture: Nadir Kinani

It currently rates Victoria worst among the states, with a AA rating, raising concerns about the state’s revenue and new spending.

It also highlighted Victoria outpacing the rest of the country in both operating expenditure and debt growth.

“States continue their spendthrift ways,” the report said.

“States insist they are making ‘difficult decisions’ or ‘hard choices. At the same time, spending continues to rise rapidly, and new projects are regularly announced.

“This suggests the focus is more on determining the amount of spending and borrowing, rather than identifying savings.

“Some states still blame the pandemic; while others point fingers at the ‘cost-of-living’ crisis, or others like the central bank.

“Victoria continues to use its growing revenues from new taxes like its Covid debt levy to fund new spending.

“The relaxed approach to fiscal consolidation is causing us to increasingly question our views that many states have exceptionally strong financial management on a global scale.

“While politically appealing, higher spending is increasing credit risk across the country, reducing headroom to address shocks.”

A downgrade would lead to increased borrowing costs and further drive up Victoria’s ballooning debt which is on track to hit $188bn by 2028. Picture: Mark Knight cartoon

The report follows explicit warnings by S&P that Victoria was at risk of a record low credit rating if it pushed ahead with the $34.5bn Suburban Rail Loop without funding from the federal government.

The Allan government has locked in just $11.8bn of funding for the project, leaving a funding black hole of up to $20bn.

Even if it were to secure the funding, there are serious doubts about the project being delivered within budget.

Despite rising labour and material costs, S&P’s latest report raised concerns about states’ appetite to reassess projects.

“New business cases could weaken the case to deliver some projects,” it said.

“Some states have relied on out-of-date costings to justify the perceived net benefits.

“Cost blowouts that highlight poor budgeting and governance practices could affect our view of financial management.

“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.”

There are also growing concerns about potential hidden borrowings that could be masking the true extent of the state’s debt burden. Picture: Supplied

Senior government and industry officials have become increasingly nervous about a potential credit downgrade in light of last month’s half yearly budget update which showed the state’s deficit had blown out by $1.4bn for the financial year.

The deficit, originally forecast to be $2.2bn for 2024-25, has now grown to $3.6bn.

Department of Treasury and Finance sources said bureaucrats were actively working to fend off any potential downgrade in the weeks before former treasurer Tim Pallas abruptly resigned.

Current projections forecast net debt to grow to $187.8bn by 2027-28, but that figure is expected to blow out by billions more in May’s state budget.

There are also growing concerns about potential hidden borrowings that could be masking the true extent of the state’s debt burden.

Shadow treasurer James Newbury accused Jacinta Allan of ignoring warnings about the state’s finances.

“Sadly, we know that these new warnings will be ignored and rating downgrades are imminent, which will only increase the one million dollar cost of interest on debt our state pays every hour.,” he said.

“The only way to stop the financial horror is to change the government”.

Originally published as Victoria faces credit downgrade if rising costs, spending blowouts, global rating agency says