Victoria’s budget outlook described as ‘very weak’ compared to other states

Ratings analysts warn the state could be slapped with its worst credit score in history, with little room for additional spending in the budget.

Victoria faces being slapped with its worst credit score in history as top ratings agencies warn of the potential for downgrade pressure in next week’s budget.

The state’s AA rating is the nation’s lowest, with analysts warning there will be little room for additional spending in the budget.

Victoria’s debt is on track to hit $165bn by 2025-26, and that figure expected to increase in the budget, the Andrews government is under pressure to rein in spending to reduce the debt burden.

Ratings analysts say a spike in the debt, sustained fiscal deficits, or indication of government weakness would all lead to Victoria’s rating being downgraded to a historic low.

The state’s AA rating is the nation’s lowest. Picture: Andrew Henshaw

“There is limited room within the AA rating for additional spending in next week’s budget,” S&P Global Ratings analyst Anthony Walker said.

“Sustained fiscal discipline will be key for any positive rating revision in the future,” he said.

“Victoria’s budget will need to improve substantially to reverse it debt trajectory before we consider raising the rating.”

Both S&P and Moody’s downgraded Victoria’s credit score in late 2020, to its lowest level since 1999.

Mr Walkers said Victoria’s budget outlook was “very weak” compared to other states.

S&P Global Ratings analyst Anthony Walker says there is limited room within the AA rating for additional spending in next week’s budget. Picture: AAP

“We forecast Victoria’s debt to reach 210 per cent of operating revenues in 2025,” he said.

“This is the highest among Australian states. By 2025, debt will be triple the level Victoria had at the commencement of the pandemic.”

Mr Walker said despite the weak fiscal outlook, Victoria’s low rating was “very strong” in a global context, ensuring strong access to global capital markets.

But ongoing cash deficits were forecast because of the state’s large infrastructure program.

Moody’s lead analyst John Manning said renewed economic shocks in coming years would have negative implications for Victoria’s rating.

“If it became increasingly likely that the state could incur even larger and more persistent increases in debt than currently expected, that could introduce downgrade pressure on the rating,” he said.

Renewed economic shocks in coming years are tipped to have negative implications for Victoria’s rating.

“In that context, particularly, we think that would denote a marked erosion of government strength.

“Indications of government weaknesses, should they be more pervasive than what we currently assess, could also be a downward pressure on the rating.”

Any credit downgrade would increase interest cost on Victoria’s rising debt level, which is currently costing $10m a day to service.

Victorian net debt, as a share of the economy, grew from 5.5 per cent in 2018-19 to 19.3 per cent in 2021-22.

Current government forecasts predict it will reach 24.6 per cent in 2025–26.

Premier Daniel Andrews has blamed the state’s debt on the need to borrow to fund the health and jobs response to Covid.

“We had to go and borrow to get through the most difficult of times,” he said.

“For the best of reasons, lives and jobs, at the worst of times, we went and borrowed very substantial amounts of money.

Daniel Andrews says ‘we had to go and borrow to get through the most difficult of times’. Picture: Andrew Henshaw

“That was absolutely essential and now it is essential that we lay down a plan to pay that money back.”

Shadow treasurer Brad Rowswell said a looming “horror budget” was one of the government’s own making.

“At a time when households are battling to make ends meet – instead of additional support, Victoria’s are bracing for a budget of cuts, delays and higher taxes for years to come,” he said.

“The Andrews Government must take responsibility for its years of mismanagement and end the culture of waste and incompetence that is forcing hardworking Victorians to pay more but get less.”