Grim outlook for states

Moody’s warns of debt-funded capital spending

SOFT household spending leading to falling GST revenue – as well as debt being raised for major works – has led ratings agency Moody’s to offer a negative outlook for state governments in the coming year.

But Prime Minister Scott Morrison has warned against making rash decisions after the government brought forward $3.8 billion for infrastructure.

That figure is supplemented by spending by the states, and incorporates some new money and projects being started two and three years earlier than previously budgeted.

The anticipated big infrastructure spending spree as states meet election promises has fed into the Moody’s 2020 outlook for Australian regional governments, issued yesterday.

That outlook is negative, based on revenue pressures and rising debt burdens, the report by Moody’s vice-president John Manning states.

It notes while the housing market is recovering, this is happening quite slowly.

In the meantime, soft economic conditions are squeezing state revenues, particularly the GST pool.

“While we have tepid wage growth and household confidence and business confidence really quite dampened, the states are having to step up to the plate with significant capital spending programs and a lot of those are being debtfunded,” Mr Manning said.

“That’s OK and manageable within the current parameters but as debt rises at a rate more rapid to revenue growth, that’s something that needs to be managed over the longer term.”

Mr Morrison (pictured) said Australia would not risk its budget surplus to provide more economic stimulus.

“The surplus is not money left down the back of the couch with no economic purpose, it pays down debt,” he told the ABC’s AM.

The Coalition Government came under intense pressure to bring forward spending on infrastructure, with big business, the central bank, economists and the Opposition calling for faster cash. But Mr Morrison said the decision wasn’t based on a “phone call over the weekend”. “We just took the sober, calm, methodical approach and got the projects ready,” he said.

While there are suggestions more needs to be done to stimulate the economy, the Prime Minister says sacrificing the surplus is off the table.

“It’s critically important for Australia’s future financial resilience,” he said.

“You just don’t go and erode all of your financial resources at a time like this.”