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04 Dec

Federal government’s budget finances a threat to Victoria’s top AAA credit rating

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Victrorian Treasurer Tim Pallas wants to persuade ratings agencies that ”we have revenue security of our own”. Photo: Josh RobenstoneThe parlous state of the federal budget could cost Victoria its coveted AAA credit rating.

Top ratings agency Standard & Poors has warned there is a one-in-three chance the state’s rating could be downgraded – potentially raising the interest bill on public borrowing needed to pay for big road and rail projects.

In a report to investors issued last week, S&P said Victoria’s economic and financial health remained “very strong”, with “exceptional liquidity” and moderate debt.

But the glowing assessment could be irrelevant if the Commonwealth fails to rein in its spending and bring debt down.

The report says Victoria’s budget remains critically reliant on the Commonwealth, with 40 per cent of the state’s revenue flowing from Canberra, mostly from GST.

This, it says, would make it impossible for any state to be more creditworthy than the Commonwealth if things turned ugly.

“We don’t consider that any state or territory in Australia, including Victoria, can maintain stronger credit characteristics than the sovereign in a stress scenario,” the report says.

Maintaining the AAA rating remains an article of faith for the Andrews government. The rating was last lost in 1992, in a crippling blow to the Kirner government during the last recession. It was regained six years later in 1998 during the Kennett years, and has remained ever since.

As a result of the downgrade threat, the state government will argue that the GST should be regarded as a state rather than a federal tax – mirroring a controversial argument made by former federal treasurer Peter Costello when the GST was introduced in 2001.

The assessment follows a warning last week from federal Treasury secretary John Fraser that the nation cannot continue to pay for its ongoing spending by lifting debt.

“That would leave us increasingly exposed to international shocks, erode into … intergenerational equity and increase borrowing costs that could reduce our long-run growth potential,” he said.

Federal Treasurer Scott Morrison also last week issued a dire warning that Australia could face a trillion-dollar debt burden over the next decade, plunging the economy into recession and triggering the loss of the rating.

Victorian Treasurer Tim Pallas said Victoria would attempt to convince the ratings agencies that “we have revenue security of our own”. He said Victoria was the standout economy in the nation, with a strong budget position, strong employment growth, strong consumer confidence and strong construction activity.

He also reiterated a plan to lift debt back to 6 per cent of the state economy to free up an extra $16 billion to spend on infrastructure.

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