ACT loses top credit rating as debt jumps

Surging debt to pay for record infrastructure spending and slower than anticipated budget repair coming out of the pandemic has cost the ACT its coveted AAA credit rating.

ACT chief minister Andrew Barr says his government is spending the money on the infrastructure required for a rapidly growing population. Picture: Sean Davey

Surging debt to pay for record infrastructure spending and slower-than-anticipated budget repair coming out of the pandemic has cost the ACT its coveted AAA credit rating.

S&P Global Ratings on Friday downgraded the Territory to AA+, the first time in 20 years the national capital has not held the top credit score.

S&P analyst Anthony Walker said cost-of-living packages and the additional expense of the public takeover of Calvary Hospital in the Canberra’s north would push the Territory’s budget back into deficit in this financial year, before a gradual improvement.

As ACT Chief Minister Andrew Barr defended his government’s fiscal management, the S&P report revealed the real blowout, however, had been in infrastructure spending, which jumped by 40 per cent in 2022-23 to a record $1.2bn – or about $200m more than S&P had expected.

Resources-rich Western Australia is now the only jurisdiction rated AAA by S&P, after NSW and Victoria were downgraded in to AA+ and AA, respectively, in December 2020 as pandemic spending and lockdowns ravaged those states’ finances.

“There has been increasing pressure on governments to support households who are doing it tough, as well as a ramp-up in infrastructure spending across all states,” Mr Walker said.

Mr Barr in a statement said the downgrade reflected the legacy of the $660m in total Covid-related spending, as well as an accelerated infrastructure spending plan that would provide for a rapidly expanding population.

More recently, cost-of-living support and additional health and housing spending had added to the taxpayer bill, he said.

“The expansion of the Canberra Hospital, a new northside hospital, new community health centres, building more housing, new schools and TAFE facilities and public transport investment are all projects that will support population growth, and higher skill levels and incomes over the coming decades,” he said.

The ACT’s debt burden would peak at 160 per cent of operating revenues by mid next year, or nearly $13bn – “significantly” higher than the pre-Covid 93 per cent as share of revenues.

The debt burden is similar to the two biggest east coast states, but almost triple the average of AAA-rated similar level jurisdictions globally.

While total debt would continue to climb to nearly $14bn by 2026, it would ease to 154 per cent as a share of revenues, S&P said.

Mr Walker said to regain the top rating, S&P would need to see a “substantial” improvement in the Territory’s operating margins, and much smaller deficits, if not surpluses, leading to a lower debt burden.

He said this prospect was further challenged by the next ACT general election, due to be held in a little over a year. “Many governments in Australia have struggled to maintain fiscal discipline in the lead-up to elections, and one-off spending measures can become more permanent in this type of environment,” he said.

S&P estimated ACT taxpayers would pay $310m in servicing the debt in 2022-23, or 4.2 per cent of the Territory’s total operating revenues, and this would climb to more than $500m, or 5.6 per cent of operating revenues, by 2026.

While a political blow to the ruling Labor-Greens government, Mr Walker said the impact of the downgrade in terms of higher borrowing costs would be limited. “The AA+ credit rating is still extremely high,” he said.