Global debt ratings agency S&P Global (formerly known as Standard & Poor’s) has started nosing around the NSW government’s wages book in the wake of the state election, as the incoming Labor regime prepares to lift a longstanding wages cap.
The ratings agency spelled out in neon that there’s no change to its present assessment — first line “This report does not constitute a rating action” — but there are plenty of indicators that fiscal eyebrows are ready to be raised quickly if need be.
This is pretty normal for a change of government after 12 years. The basic message is pretty simple: election rhetoric is one thing, debt quality is another, and if and when things move, so may credit ratings.
It’s a salient point given interest rates are rising and pretty well every government is in debt, post-COVID stimulus. Which is why the state payroll is important to debt graders, who essentially price risk and quality, better known as the capacity to repay.
For all the urinal extraction and bluster from NSW, Victorian and Queensland (only got one) chambers, investors actually love state governments in Australia because of their comparative stability and capacity to repay. But it’s conditional love.
Australian state governments are great borrowers, too — they sincerely love spending on projects and infrastructure. But they love cash flow even more, like stamp duty/annual land tax (bad in NSW, good in ACT, according to Labor), rates, toll roads, yada yada. Don’t mention speed cameras.
Debt markets might seem pretty esoteric compared to basic kitchen table economics used in political election campaigning, but they do matter. Especially to treasurers.
Martin Foo, S&P Global’s state-debt point person, put it this way about NSW:
“We see slight downside risk to the rating from potentially higher overall spending on public sector wages. This spending represents the state’s single-largest outlay,” Foo said.
“The incoming government proposes to abolish an existing ‘wage cap’, though it would maintain existing targets of 3%-3.5% wages growth in fiscal 2024 (ending June 30) and 2.5% in subsequent years. Wages growth above these targets would be permitted with offsetting and budget-neutral ‘productivity savings’,” which may be difficult to quantify.
“If wages were instead to rise in line with inflation and without countervailing savings, there could be a further delay in the return to operating surplus. This, in turn, could call into question the quality of the state’s financial management.”
Put more bluntly, S&P, and by proxy other debt-rating agencies, want to know more. Again, this is pretty normal for a change of government.
“We still expect the state’s debt burden to continue to rise. A major driver of NSW’s after-capital-account deficits is its hefty infrastructure investment program, budgeted to exceed A$108 billion over four years (on a cash basis, at the nonfinancial public sector level). On this, there is little to differentiate the major political parties,” Foo assessed.
“The new government has ruled out further ‘asset recycling’ or privatisations, which might have helped narrow our measure of the after-capital-account deficit but are electorally unpopular.”
He notes that “hung parliaments are not uncommon in Australian state politics”.
“Our rating on NSW (AA+/Stable/A-1+) reflects the state’s wealthy and diversified economy, excellent financial management and exceptional liquidity. On our measures, NSW is likely to return to cash operating surpluses in fiscal 2023, after reporting operating deficits over the preceding three years.
“The state government rolled out tens of billions of dollars in public health and business support measures in response to COVID-19 lockdowns in 2020 and 2021. More recently, revenue upsides have been channelled into new spending in areas like healthcare and cost-of-living support, slightly delaying the fiscal recovery.”
The paradox here, even if S&P hasn’t called it out, is that an ostensibly fiscally conservative government went hell for leather on stimulatory spending. But asset sales are off the books for the time being.
Debt and deficit may no longer be dirty political words. But the price has gone up. How NSW de-risks debt from here is the issue.
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NSW introduces 3% public sector pay rise and boosts paramedics
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