S&p: Budgets for Pandemics Must Not Become Election Budgets | Stimulus Check


States and territories, particularly those with upcoming elections, have been warned that if epidemic stimulus spending continues for longer than necessary, their excellent credit ratings may be jeopardized.

According to S&P Global Ratings, widespread stimulus expenditure and a record pipeline of significant infrastructure projects will boost state and territory debt above $500 billion later this year.

Between 2019 and 2025, Victoria’s debt is expected to treble to more than $200 billion, while NSW’s gross debt is a little under $200 billion.

The main reason for reducing Australia’s two most populous states’ credit ratings in 2020, according to S&P, was the size of their borrowing obligations.

In a letter to clients on Wednesday, S&P credit rating analyst Martin Foo wrote, “Federal and state governments pushed out a series of large support packages to help keep firms and households afloat.” “The combined budgetary response has been one of the world’s largest in terms of GDP.”

S&P would keep a close eye on whether COVID-19 crisis budgets were extended and rebranded as election budgets, he cautioned.

“We’ll keep a close eye on whether states use temporary stimulus to bake in recurrent spending.” This may have a detrimental impact on ratings.”

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S&p: Budgets for Pandemics Must Not Become Election Budgets | Stimulus Check

The government’s coffers were being bolstered by increasing stamp duty collections, but S&P warned that there was a possibility of a market correction with interest rates projected to begin climbing within the next 12 months.

Mr. Foo noted that any large drop in transaction volumes or prices would harm stamp duty collections, which are one of the states’ key revenue streams.

Infrastructure investment at an all-time high

States that avoided protracted COVID-19 lockdowns suffered less financial blows, but record infrastructure investment across the commonwealth means the debt burden will continue to rise, except Western Australia.

According to the Grattan Institute, the value of road and rail projects under construction across the country surpassed $120 billion for the first time in March 2020. The states’ total capital budget for the next four years has risen to $303 billion, according to recent budget reports.

On an inflation-adjusted basis, that’s nearly 1.6 times more than the Marshall Plan for rebuilding Europe after WWII, according to Mr. Foo.

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“New borrowing will still be needed to finance historically big infrastructure initiatives as tax receipts and pandemic-related emergency spending normalizes,” he said.

This year’s borrowing needs, according to S&P, are expected to be around $70 billion.

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“Australian states appear to be replaying their post-financial crisis playbook by launching large ‘city-shaping’ and state-shaping’ infrastructure plans,” Mr. Foo said.

Major supply-side restrictions, on the other hand, were making it difficult to deliver the anticipated infrastructure pipeline.

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“States often under-deliver in comparison to budget, which should result in debt growth that is shallower but more extended,” he said.

“The forthcoming pipeline will put business and government capacities to the test.”

According to an analysis by The Australian Financial Review, states underspent their combined $47 billion budgeted spending on non-financial assets by around $6 billion in 2019-20.

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According to the most recent official data from each jurisdiction, the spending gap climbed to $10 billion in the fiscal year ended June 30, and actual spending on non-financial assets was $45 billion vs a budgeted $55 billion.

Applying last year’s percentage of underspending to state-by-state budgets for the fiscal year 2022, another $10 billion could be lost this year. This would raise the total underspend on non-financial assets since 2019-20 to more than $25 billion, mostly due to pandemic-related concerns.

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