Big-spending state government placing credit ratings at risk, S&P warns

An erosion of financial discipline by big-spending state governments is hamstringing planned budget improvements and is raising the risk of credit rating downgrades.

Victorian Premier Jacinta Allan. Picture: NewsWire/ David Crosling.

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An erosion of financial discipline by big-spending state governments is hamstringing planned budget improvements and risks credit rating downgrades, S&P Global Ratings has warned.

A new report by the ratings agency on Tuesday found that state and territory governments were spending at levels still exceeding those of the coronavirus pandemic, as expenditure continues to rise rapidly.

“The pandemic is over, but ­pandemic-size budgets aren’t,” S&P analyst Anthony Walker said, warning that the consolidated cash deficit – calculated by combining the underlying budget balances of the states and territories – was forecast to hit $64.8bn this financial year.

“The relaxed approach to fiscal consolidation is causing us to increasingly question our views that many states have exceptionally strong financial management on a global scale,” he said.

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

Lax fiscal settings prompted S&P to downgrade the credit ratings of NSW, Queensland and the ACT in late 2024.

Building wage pressure risks undermining the budget position of the states further in the near term, the report warned, after several public service unions struck inflation-beating pay deals, potentially emboldening others to seek similar agreements.

The public service wages bill in NSW, Queensland, Tasmania and ACT is projected to rise by as much as 15 per cent this financial year, as signs of further wages pressure emerge.

In Queensland, the recently elected Crisafulli government is trying to fend off threats of rolling industrial action from the state’s police officers, teachers and nurses in negotiations over a new enterprise agreement, while the NSW government is grappling with a mass resignation of the state’s psychiatrists over a 25 per cent pay claim.

Similarly, surging infrastructure spending amid booming population growth also threatened states’ fiscal position, Mr Walker said, with forecast expenditure expected to peak at $100bn in both 2024-25 and 2025-26.

“There is little appetite among states to reassess projects yet to be started because costs have spiked and interest rates are high,” he said. “Some states have relied on out-of-date costings to justify the perceived net benefits.”

Further, a widening of state budget deficits – as governments borrow more to cover everyday costs including social welfare, utilities and interest repayments – also risked prolonging budget repair, the report said.

In the 2020-21 pandemic-era budgets, which outlined how governments planned to move on from Covid-era lockdowns and restrictions, states forecast the combined deficit to be $42.5bn by 2024-25.

That figure, however, is now not expected to be achieved until 2028-29, S&P estimated, pushing gross debt above $850bn by that time.

As a result of increased expenditure and expected delays to budget recovery, Mr Walker said state and territory governments risked a second round of rating downgrades after those related to the pandemic.

“The average state rating could fall closer to ‘AA’ than ‘AA+’,” Mr Walker said. “Even if this occurs, state ratings will still be very high on a global scale.”