States facing debt blowout due to COVID, Moody's warns - The Age

By Shane Wright   July 22, 2020  View all commentsto shortlist

State government debt levels will soar by almost $50 billion this year due to the coronavirus pandemic, one of the world's leading credit agencies has warned, making it more difficult to spend their way out of recession.

Moody's on Wednesday said every state and territory bar Western Australia faced a lift in borrowing requirements, warning they were likely to have elevated borrowings for the next three years.

State government spending on infrastructure may be challenged due to a large run-up in debt levels.Credit:Justin McManus

Ahead of the coronavirus outbreak, the state and territories had been expected to borrow almost $45 billion from investors. Moody's now believes that due to the pandemic, they will need between $67 billion and $87 billion this financial year.

NSW had been expected to borrow $17 billion in its 2019-20 budget. It ended up borrowing $23 billion, with Moody's tipping it will need between $25 billion and $30 billion this financial year. That will leave NSW with total government debt of $77 billion, up from $58 billion. to shortlist

Victoria's borrowing demand last financial year jumped from a forecast $5.5 billion to $20.9 billion. Moody's is tipping it will borrow between $20 billion and $24 billion in 2020-21. Its debt level will climb from $36 billion to a forecast $50 billion.

Across all states and territories, total debt is forecast to reach $306 billion after hitting $258.5 billion last year.

Moody's analysts said the debt surge was affordable as the states had traditionally kept on top of their budgets. But the recession and recovery would hinder the return to better state finances and curtail spending in key areas such as infrastructure.

"We expect debt burdens to remain above pre-pandemic levels for at least the next three years before economic conditions and institutional capacity combine to gradually reduce them," they said.

"The impact of the coronavirus on state finances will challenge the capacity of states to continue their existing record infrastructure spending pipelines while accelerating post-coronavirus economic stimulus spending and over time reduce their debt burdens to regain the capacity to absorb shocks."

All states and territories have delayed their traditional May budgets, pushing them back to at least October, which is when the federal government will release its 2020-21 budget.

Treasurer Josh Frydenberg says the Australian economy will recover from 'unprecedented shock' as the Jobkeeper and Jobseeker programs are extended.

An economic statement to be released on Thursday by Treasurer Josh Frydenberg will give the states some insight into the damage the coronavirus recession has done to key revenue streams including the GST.

The statement will also outline the federal government's expected debt level, with some analysts tipping this to reach $1 trillion. The current federal debt limit is $850 billion.

Moody's cautioned the states would face battles to get back on top of their debt levels.

"Australian states' debt affordability is currently strong given the duration of funding secured at record low rates," they said. "However, states' capacity to reduce the debt stock from operating surpluses will be constrained for several years depending on the scale of the economic disruption.

"This raises additional challenge for states as they continue to implement further stimulus measures over the next few years at the same time as pursuing fiscal repair."

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