Government spending is coming under the spotlight as the economy tightens.
The states have been warned their credit ratings could be sliced due to their inability to control spending.
S&P Global this morning said “lax fiscal discipline” across the states, despite a lift in their expected revenues, meant the high ratings for almost all jurisdictions were at risk.
“The issue for Australian governments is spending, not revenue. Their approach to fiscal discipline appears increasingly loose. We now question whether many states have exceptionally strong financial management on a global scale,” it said in a report released on Tuesday.
“Ratings revisions loom if states fail to curb rising operating costs and cost blowouts.”
Australia’s states all have high credit ratings – which affect how much interest they have to pay on their debt – compared to most provincial administrations across the world.
But since the start of the COVID pandemic, S&P has downgraded the ratings for NSW and the ACT (from AAA to AA+) and Victoria (from AAA to AA) while upgrading Western Australia to its highest rating level (AAA).
The agency noted that state revenues had climbed by $146 billion more than had been expected compared to their budget positions of 2019-20, enough to fund all of Victoria’s major rail projects such as the suburban rail loop or
seven new Sydney metro rail lines.
But 65 per cent of that extra revenue was captured by Queensland and Western Australia due to
high commodity prices.
Over the same period, state spending climbed by $212 billion over forecasts.
“While states have high credit ratings and have collected record tax revenues since the pandemic, they have failed to rein in pandemic-size spending, choosing instead to prioritise voter-friendly expenditures,” it said.
Almost all states have come under fire for increased spending on their public services.
But S&P said this was not the main problem facing state finances, noting employee costs accounted for 14 per cent of total increased spending.
It argued one of the biggest drivers has been increased expenditure on infrastructure, due in part to booming population growth and the national energy transition.
Before the pandemic, states had expected to spend $64 billion on infrastructure in 2020 before gradually easing in further years. Instead, spending is now expected to reach $100 billion in 2025 and the following year.