Rating agency’s warning on perils of runaway state debt

As the post-COVID economic recovery gathers pace, state governments, always eager to spend, are putting the Reserve Bank of Australia’s advice into practice. In August, RBA governor Philip Lowe advised that “by borrowing today to support the economy we are avoiding an even bigger loss of output and jobs that would damage our economy and society for years to come, which would put ongoing strain on the budget”. Delivering the NSW budget a fortnight ago, Treasurer Dominic Perrottet said record low interest rates were “ a golden opportunity’’ to get the economy moving. Doing nothing, he said, would inflict long-term damage on future generations.

That said, the quality as well as the quantity of government stimulus spending are both important. And credit ratings agencies have sounded a timely warning about the “dire’’ state of Victoria’s public finances. The nation’s second-largest state, Adam Creighton reports, could be stripped of its AAA rating within weeks. S&P Global Ratings is concerned about the Andrews government posting what is “likely the largest ever” deficit of any AAA-rated government in the world. Any downgrade would be the first for an Australian government for seven years. It would leave the commonwealth, NSW and the ACT as the only AAA-rated governments in the country.

Anthony Walker, S&P’s top sovereign analyst for Australia, notes Victoria is increasing borrowing substantially more than NSW, relative to its balance sheet. Victoria’s 2021 deficit, he told Creighton, could be equivalent to more than 50 per cent of its revenue, “likely the largest-ever deficit seen for a AAA-rated (state) government”. The state’s financial picture is related to the coronavirus pandemic. The second lockdown, Moody’s analyst John Manning says, cost Victoria an extra $21bn in borrowings. But government policies and priorities are also a major influence. State and provincial governments in Canada and Germany, which suffered more from the coronavirus pandemic than Victoria, are forecasting deficits of between 10 and 20 per cent, S&P Global points out.

Victoria’s budget forecast a surge in net debt from $44bn in June 2020 to $155bn by 2024, compared to a forecast increase to $104bn by 2024 for NSW. Queensland, which lost its AAA credit rating in 2009, delivers its budget on Tuesday. After years of profligate spending, it is encouraging that Queensland Treasurer Cameron Dick promised on Sunday that his first budget’s “debt numbers … will be lower than NSW and Victoria”. New borrowing would be significant but reasonable, he said. A return to the disciplined approach of the Goss/De Lacy years of the early 1990s would restore Queensland’s path to prosperity.

Apart from the three years of the Newman LNP government (2012-15), growth in public sector wages has been a major contributing factor in Queensland’s ballooning debt. The same problem has reared its head in Victoria, never more than in last week’s budget, when the state’s public sector wages bill was forecast to rise by 21 per cent over the forward estimates, through recruitment and pay rises. In the current financial year, employee expenses are set to balloon by an astonishing 9.5 per cent, at a time when community wages growth is likely to be about 1 per cent. Victoria’s investment in long-term, productive infrastructure, however, is sound, especially the CBD-Melbourne Airport link that is being backed by the Morrison government.

Once lost, AAA credit ratings take years of disciplined cost cutting, revenue raising or asset sales and leases to restore as debt is paid down. Such options, especially tax rises, are politically unpopular. The problem will eventually become more expensive for taxpayers when interest rates rise, forcing states with poorer credit ratings to pay more for finance.

State and territory finances will also come under pressure in coming years with an expected decline of about $25bn in GST revenues over the three years to 2022-23 compared with what had been expected before the pandemic, Patrick Commins reports on Monday. The health crisis has “basically blown a big hole in state finances”, ANZ economist and budget specialist Cherelle Murphy told The Australian. The loss of revenue would further complicate the recovery from COVID as well as the fiscal repair after this year’s big-spending budgets.

In the current economic climate, a recent report about Queensland from Deloitte Access Economics offered advice that is applicable to all states. Increasing debt, it said, needed to be “used for good”, with decisions on spending and recovery geared to a competitive economic agenda on the right scale.