Victoria’s long term credit ratings remain on a stable footing despite a forecast blowout in public sector debt over the next four years following the release of Andrews Government’s 2023 budget.
State treasurer Tim Pallas yesterday revealed that the government’s net debt was projected to reach A$167 billion in 2026, which would equate to more than 200 per cent of revenue.
The Andrews Government is proceeding with a swathe of spending measures on health, education and infrastructure that ratings agencies S&P and Moody’s expect could exert pressure on the state’s finances as inflation and interest rate pressures build in the economy.
Victoria has long term issuer ratings of “AA” from S&P and “Aa1” from Moody’s, which means it has the highest credit risk profile among Australian state and territory governments.
While the ratings agencies are encouraged by the “resilient” recovery of the state’s economy in the last six months, both are concerned that the growth in net debt could challenge the government’s financial performance over the next four years.
“Victoria’s economic recovery has exceeded our initial expectations, a credit positive,” said John Manning, vice president of Moody’s Investors Service.
“Business confidence and consumer sentiment strongly rebounded after the state’s extended lockdowns and will slow the growth rate in the state’s debt burden and support its return to a gross operating surplus by the end of 2026.
“However, sustained debt-funded capital spending – expected to average AUD21.3 billion annually over the next four years – will drive Victoria’s debt burden significantly and persistently higher than our expectations by the end of 2026, constraining the state’s capacity to pursue fiscal repair.”
Manning said rising inflationary pressures and interest rates, together with more volatile global economic growth were likely to increase cost pressures for the state and make the budgeted expenditure levels challenging to achieve.
S&P, which lowered Victoria’s long term ratings by two notches in December 2020 said the 2023 budget reflected a “mixed scorecard” for the state’s ability to undertake fiscal repair.
“The state's debt levels are likely to soar past 200 per cent of operating revenues by fiscal 2024 due to historically high infrastructure spending, exacerbated by rising inflationary pressures and some project-related cost overruns,” S&P said in a statement.
“While no new major infrastructure projects were announced in today's budget, an already packed pipeline means debt levels continue to rise, reflecting large and persistent after-capital account deficits.
“We consequently believe Victoria's fiscal repair will be gradual.”
Pallas said the government was committed to stabilizing debt and would establish a new “Future Fund” to retire help retire debt in future years.
He said proceeds from future land sales would be used to grow the Fund’s balances in the next four years.
S&P last affirmed Victoria’s AA rating with a stable outlook on 16 March.