Victoria at risk of record low credit rating if it proceeds with Suburban Rail Loop

Jacinta Allan has been issued a warning over her beloved $34bn Suburban Rail Loop, told by a global ratings agency to ditch the project or send the state nosediving into mammoth debt.

Victoria is at risk of a record low credit rating if it pushes ahead with the Suburban Rail Loop, a move which would damage the state’s finances and hit taxpayers with an even greater debt bill.

The shock warning of the $34.5bn project has been made by global ratings giant Standard & Poors who told the Sunday Herald Sun Victoria’s credit rating could be slashed if the Allan government pressed on with the SRL without funding from the federal government.

They have also said they didn’t believe the Allan government would be able to deliver the 26km rail project within budget given the government’s history of cost blow outs on major projects.

Standard & Poors believe there’s a ‘real risk’ of the SRL costing more than the latest government forecasts. Picture: Supplied

The warning comes as insiders tell the Sunday Herald Sun Tim Pallas’ budget is already in tatters just 13 weeks after he handed it down- with spending assumptions already blown.

Inside the Allan cabinet, there are divisions over whether the SRL should be shelved because of its cost.

Only days ago Treasurer Pallas publicly warned his colleagues “we have to be focused in terms of managing the situation because if debt were to go up appreciably, then it wouldn’t be long before a review of our rating would occur”.

Several ministers including deputy premier Ben Carroll have questioned if the state can afford the SRL given Victoria’s debt is already set to balloon to $187.8bn by 2027-28.

Others, including Premier Jacinta Allan, say it’s a project the state cannot afford not to invest in given Victoria’s projected population growth.

Victorian Treasurer Tim Pallas warned his colleagues to “focus on managing the situation” to avoid a credit rating review. Picture: David Crosling

S&P analyst Anthony Walker told the Sunday Herald Sun the government was running a risk if the project proceeded without federal support.

“If Victoria pushes ahead with the Suburban Rail Loop without additional federal government funding, the state’s fiscal outlook may weaken, further eroding its credit standing,” he said.

“We believe there’s a real risk the SRL may cost more than the latest government forecasts, given the size and complexities of the undertaking and the state’s recent history of major projects going well over budget,” he said.

S&P downgraded Victoria an unprecedented two notches to AA, from AAA, in December 2020.

If S&P lowered the credit rating from AA to A Victoria would face increased borrowing costs of between 0.1 per cent and 0.5 per cent.

The state government is seeking $11.5bn in federal funding but has so far only secured $2.2bn with any future funding in limbo as Infrastructure Australia waits for more detail on the project from the Allan government.

Fears of rising debt come as senior government sources say that just weeks after Treasurer Tim Pallas handed down his budget, its spending assumptions are in ruins.

Since May the government has announced an extra $1.5bn in health spending after a public outcry.

Jacinta Allan has been warned to dump the Suburban Rail Loop or cop a credit rate slash. Picture: David Crosling

It has also signed up to a $1bn wages deal for nurses which gave them pay rises of up to 28 per cent.

A senior minister said the Treasurer was understood to be worried about more budget blowouts that are set to be revealed in December’s mid-year budget. “There’s quite a lot of other expenditure that’s piled up since the budget,” he said.

John Manning, vice president and senior credit officer at Moody’s Ratings also warned Victoria was facing significant pressure of further downgrades.

“The ratings would experience downgrade pressure if it became increasingly likely that Victoria will incur an even larger and more persistent increase in debt than we currently expect,” he said.

“This would denote a more marked erosion of governance strength.

Mr Pallas met with top ratings agencies in the US last month to discuss Victoria’s credit rating.

He has claimed discussions were “very positive” and the agencies were “quite complimentary of the economy”.

Originally published as Victoria at risk of record low credit rating if it proceeds with Suburban Rail Loop