'Very weak': Labor warned over Victoria's credit status

Victoria could lose is prized AAA credit rating within 12 months, one of the global ratings agencies has warned, after the response to the COVID-19 pandemic left the state in “very weak fiscal position”.

Ratings agency S&P says its outlook for Victoria has been on "negative", since early April when it issued a similar warning to the Commonwealth about its post-COVID-19 budget position.

S&P issued a more detailed warning on Monday that the state's looming large budget deficits and big debts as it struggled to recover from the coronavirus crisis could put its strong credit position at risk.

The firm acknowledged the state’s “strong financial management” had ensured the Labor government had access to large sums of money as it tried to spend its way out of trouble but said it would be watching with interest as the government tried to rein in its public-sector spending.

But the agency’s analysts were worried by the hits expected to the state’s main revenue streams — payroll tax and stamp duty — and by the sums of money the government was spending in its attempts to keep the economy afloat.

Treasurer Tim Pallas said he was glad the state had retained its AAA status from S&P.

Credit ratings are important to governments because they determine the rates at which treasuries can borrow money on the international bond markets, with a strong rating allowing cheaper debt.

With the Victorian government prepared to borrow up to $24 billion for its COVID-19 response, on top of large debt-raising to fund its ambitious infrastructure build, a loss of the AAA rating would be a financial as well a political blow.

S&P expects Victoria’s budget deficit to soar past $6 billion at the end of the 2021 financial year amid a recession before the economy and the state’s bottom line recover in 2022.

“We expect the state's budgetary performance and debt burden will weaken during the next few years, before improving in fiscal year 2022,” the analysts wrote.

“The main hit to the state's finances is primarily revenues, though we expect the state's expenditure to increase as the economic fallout continues.”

The ratings firm was generally positive about the financial management of the Labor government but noted that pressure was growing on the budget and cast doubt on the government’s ability to keep one of the fastest-growing areas of expenditure – public sector wages — under control.

“The government allowed operating expenses — namely employee expenses — to grow relatively fast compared with its peers,” S&P wrote in its analysis.

“We believe these expenditures are inflexible and difficult for governments to reduce.”

S&P said it expected Victoria to recover economically as the COVID-19 restrictions were lifted and that the state’s long-term strength as a wealthy and stable economy would endure.

Mr Pallas noted on Monday that S&P had Victoria on the same status as the Commonwealth.

"We’re pleased Victoria’s economy has retained its AAA credit rating, which is in line with the rating received by the Commonwealth government," Mr Pallas said.

"While no jurisdiction will be immune to the economic challenges coronavirus is creating, our strong financial management means we are well placed to rebuild and recover from this global pandemic."