Australia’s states and the ACT have almost doubled their borrowings in the past three years, placing them on track to hit the half-trillion dollar debt mark by mid-year, according to rating agency S&P Global.
The borrowing binge comes as the Morrison government projects almost $1tn in net debt by the 2024-25 fiscal year, with commonwealth outlays on the economy and health during the Covid pandemic amounting to more than 14% of gross domestic product.
By contrast, the biggest increase in such spending among the states was in NSW, at about 4.5% of economic activity.
“We expect the debt burdens of most Australian states to rise as they grapple with the aftershocks of the pandemic and ramp up infrastructure investment,” S&P said.
S&P Global has an interesting report out today, showing how Australian states' and the ACT's debt will hit the half trillion-dollar mark by mid-2022. pic.twitter.com/6GkcctH0e3
— Peter Hannam (@p_hannam) March 9, 2022
“The escalation in debt across eastern Australian states is proportionally larger than that of most comparable overseas peers, such as German states and Canadian provinces,” the report said.
S&P cut its debt rating for NSW debt by one notch in December 2020 and two notches for Victoria. Downgrades typically result in higher borrowing costs as borrowers have to pay a higher interest rate to sell the debt.
The ratings agency has a “negative” outlook for South Australia and ACT’s debt, implying a one-in-three chance they will face a downgrade, said Martin Foo, S&P’s primary credit analyst.
S&P Global also had this interesting graph too on which governments had been the biggest spenders during the past couple of pandemic years...seems like there's a pattern: pic.twitter.com/cVWixeh1ZV
— Peter Hannam (@p_hannam) March 9, 2022
Foo said the looming $500bn debt landmark did not imply debt would spiral out of control, adding the projections were “already built into our base case”. S&P was “comfortable broadly with the credit ratings where they are”.
Victoria’s debt load was higher than NSW as a proportion of the population, gross state product, and as a proportion of revenues, he said.
State debt, though, had risen 90% since the 2019-20 fiscal year, representing an “extraordinary change in political sentiment”, the report said.
And it's worth remembering that our 'fastest GDP growth rate" in decades has been largely debt-fuelled, particularly as the federal level. According the mid-year forecasts from last November, the $1 trillion net debt 'landmark' is not that far down the track. pic.twitter.com/PzkaFTg9fE
— Peter Hannam (@p_hannam) March 9, 2022
S&P described the shift as an “only Nixon could go to China” moment, with centre right governments leading the spending growth.
“Intervention by the Reserve Bank of Australia (RBA) provided political cover for states to go large,” it said.
Foo said “conservative governments who might have once been very concerned about debt and deficits are probably less concerned or have eased some of that concern over the past three years”.
The NSW treasurer, Matt Kean, said his state had spent $45bn in health and economic programs to get through the pandemic.
Much of that had gone to protect “the fabric of the economy”, such as ensuring workers remained connected to their companies, allowing them to rebound as Covid restrictions eased.
“We will always put people before the budget,” Kean said. “That’s why we invested to keep our community safe through the pandemic.”
Still, the government would have to make way for businesses to drive growth in the future. “The private sector will be able to take over and fill the gap,” he said.
The large-scale floods that have hit eastern Australia will probably bring another call on the state’s coffers.
The government’s flood disaster recovery small business grants – that offer support up to $50,000, as announced on Wednesday – would cost as much as $200m, Kean said.
The Guardian has also approached the Victorian government for comment.
S&P excluded debt issued by the Northern Territory as they do not provide a rating for it.
