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 they could have their credit ratings downgraded unless they get their spending under control.

S&P Global said “lax fiscal discipline” across the states, despite a lift in their expected revenues, meant the high ratings for almost all jurisdictions were at risk.

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

“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,” it said in a report released on Tuesday.

“Ratings revisions loom if states fail to curb rising operating costs and cost blowouts.”

Australia’s states all have high credit ratings – which affect how much interest they have to pay on their 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.

The agency 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 65 per cent of that extra revenue was captured by Queensland and Western Australia due to high commodity prices.

Over the same period, state spending climbed by $212 billion over forecasts.

“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,” S&P said.

Almost all states have come under fire for increased spending on their public services.

But S&P said this was not the main problem facing state finances, noting employee costs accounted for 14 per cent of total increased spending.

It argued one of the biggest drivers has been increased expenditure on infrastructure, due in part to booming population growth and the national energy transition.

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

“The change in attitude to infrastructure spending came during the pandemic when states sought to support economies, and gained access to cheap money. It made sense to spend on productive enhancing infrastructure when interest rates were low, and prevent a worse economic slump,” the agency said.

“[But] the cost of some projects, however, blew out for various reasons. These include the rising cost of labor and materials, supply chain issues, unforeseen geotechnical obstacles, and poor budgeting by states that committed to projects before they were fully costed or accurately scoped.

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

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 new 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”.

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,” the agency said.

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