Soaring state borrowings to undermine living standards

On the eve of the Reserve Bank of Australia board’s interest rates decision on Tuesday, accounting firm EY’s analysis of the debilitating impact of excessive government debt and borrowing, especially at state level, highlights factors central to the nation’s economic future. EY’s report includes the startling revelation that federal and state interest costs on borrowings have risen to $44bn a year. To put that impost into context, the federal government currently spends $45bn a year on defence and $44bn on the NDIS. Rising debt and elevated interest rates are diverting federal and state taxpayers’ resources away from other priorities. Like a runaway train, the trend must be stopped in its tracks to limit the damage. As the RBA reminded Australians in its August Statement on Monetary Policy, “recent public spending announcements by federal, state and territory governments’’ were contributing to inflation.

Spending by the states, driven by ballooning public service workforces, populist handouts and major infrastructure programs, some of dubious value, such as Melbourne’s suburban “rail loop that goes nowhere’’, is a major part of the problem. For the second successive year, Jack Quail reports, state governments will exceed commonwealth borrowing by a long way, collectively needing to issue more than $100bn over the 2024-25 financial year. And the bottom line has deteriorated. A year ago, EY calculated that the states would borrow a combined $91.2bn in 2023-24. It is now clear that the end of the Covid crisis gave way to a new era of permanently higher public consumption and investment. Structural spending pressures in areas such as health, aged care, disability support and ­defence have intensified, as governments also continue to roll out a series of huge infrastructure commitments. Almost 60 per cent of new state debt this financial year will be issued by Victoria and Queensland.

That is disproportionate to the size of their economies, which amount to just over 40 per cent of the nation’s GDP combined.

Rating agency S&P has already noted that Victoria, which has the lowest credit rating of any Australian state, could suffer a further erosion of its rating given its historically high infrastructure investment program and weak fiscal outlook. In Queensland, where the state election is five weeks away, neither Premier Steven Miles nor Opposition Leader David Crisafulli, whose Liberal National Party is well ahead in Newspoll, have raised the problem of debt. Voters are entitled to know their plans to tackle it or why they are seemingly indifferent to it. This is neither responsible nor viable economically. Intergenerational equity should be a key motivator to encourage fiscal discipline, as the EY report notes, to help avoid “the financial burden of today’s policy being pushed on to younger generations’’. Heavy debt also limits the capacity of governments to respond to another pandemic or major financial crisis.

Excessive and increasing debt levels, EY’s report notes, cause a vicious cycle of growing debt, reducing economic growth potential. Over time, rising debt forces governments either to divert spending away from other public services, increase taxes, sell assets or further increase debt as a result of higher borrowing. That cycle must be broken and replaced by returns generated in the corporate and small business sectors, boosted by policies that lift productivity and encourage investment. It is a bad sign that two-thirds of the 900,000 jobs created under the Albanese government have been funded by taxpayers in “non-market sectors’’ such as the care economy and the public sector. At a time of sluggish GDP growth of a measly 0.2 per cent in the June quarter, and 1.5 per cent last financial year, the nation needs a new growth agenda. Ever increasing state borrowings, however, is not the pathway to improved living standards, especially as it adds to inflationary pressures.