Treasury sounds warning over NSW credit rating ahead of big spending budget

Treasury officials have warned the New South Wales government its triple A credit rating could be at risk as it prepares to hand down its final budget before the state election next year.

The Guardian understands that in the lead-up to the next budget on 21 June, Treasury told the government that a series of big spending announcements coupled with pressure on the state’s finances could lead to a downgrade in its prized triple A credit rating.

December’s half-yearly budget review recorded the state’s deficit blowing out to $19.5bn, more than double the forecast from the previous budget.

With an election looming, the government is embarking on a big-spending budget with little emphasis so far on budget repair.

While the most recent credit opinion, published by rating agency Moodys, forecasts a stable outlook for the NSW economy, the Guardian understands a raft of new spending measures – including a widely expected commitment to new funding for childcare – led Treasury to caution that it could lead to a downgrade.

In response to questions, a spokesperson for NSW’s treasurer, Matt Kean, did not deny that Treasury had raised concerns.

“The AAA rating is an important long-term objective for the government and the budget will have fiscal improvement measures to improve its long-term financial sustainability,” the spokesperson said.

“However, the NSW government is committed to continuing to invest in the state’s productive capacity because, over the long term, the best way to ensure that the state’s finances are strong is to ensure that the state’s economy is strong.”

In December 2020, rating agency S&P Global lowered NSW’s credit rating to AA+, citing concerns about a “rising debt burden”. In recent days the agency has signalled that it expects the government to return a modest surplus in the upcoming budget, but would be unlikely to return its triple A credit rating until the second half of the decade due to its overall debt burden.

Moodys gave the state’s economy a stable rating in April, but warned it could be downgraded if it “became increasingly likely that the economic and fiscal impact of the [Covid] shocks was larger, and/or NSW’s policy response was less effective”.

With the 2023 election set to be fought on the rising cost of living, the government is in the final stages of preparing a budget aimed squarely at voter’s hip pockets. It has already announced $500m in funds for rebates on road tolls and last week said it would spend another $128m on energy rebates for low-income households.

That follows a commitment to spend $4.5bn on boosting the health workforce by more than 10,000 over four years. The state will also lift its public sector wage cap by 0.5% and offer health workers a one-off payment of $3,000.

In addition to that is an expected childcare package, estimated to cost about $800m, which is likely to include subsidies for parents and funding for new centres in areas of the state without sufficient placements.

The NSW shadow treasurer, Daniel Mookhey, said the government had made about $1.5bn in new spending commitments each day in the space of a week but had “not yet announced how they will pay for it”.

“The premier is a clever politician. His ploy is to win the next election with big spending promises,” he said.

“Markets were already worried about NSW’s staggering $117bn debt portfolio … the government is running the risk that NSW will pay more in annual interest than we [pay] to fund the Police Force. Especially as interest rates are skyrocketing.”

But Kean’s spokesperson said the government’s spending was warranted, particularly coming out of the Covid-19 pandemic and in the wake of recent flood events.

“The NSW government has made unprecedented investments in the state’s economy during the pandemic, is supporting communities impacted by recent floods and is delivering a once-in-a-generation upgrade to the state’s infrastructure,” Kean said.

“These investments have ensured that the NSW economy supports more jobs today than it did before the pandemic and is laying the foundation for NSW to become the country’s first trillion dollar economy by 2030.”

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