The states and territories are being warned their credit ratings could be downgraded if they deliver unaffordable handouts to deal with the spiralling cost of living, as new figures reveal they reaped record revenues while engaging in a debt binge over the past two years.
S&P Global analysts on Tuesday said while the federal government’s AAA credit rating – which underpins the interest rates on federal debt – was safe unless the war against Iran continues for years, the ratings of the states and territories were not so secure.
Treasurer Jim Chalmers will use his May 12 budget to unveil a suite of measures, including spending cuts, an overhaul of key elements of the tax system, and a package of reforms aimed at boosting the speed at which the economy can grow.
While some analysts believe the war in Iran is likely to lift total federal revenue, Chalmers has warned the combination of higher inflation and slower growth could actually hurt the budget bottom line. In his mid-year forecast, Chalmers predicted a deficit of $34.3 billion for the 2026-27 financial year.
Senior S&P analyst Anthony Walker said Australia had a low net debt position, which meant it had the space to deal with the fallout from the war.
Australia, one of just 11 nations with the AAA rating, was unlikely to suffer a credit downgrade.
“The [federal government] is coming from a very strong net debt position,” he said.
“The pressure would build if this is not a short-term issue … dragging on two to three years. We’re not going to downgrade for a six-month shock.”
While the federal government’s AAA rating is solid, the states and territories outside of Western Australia are in a different position.
Walker said some states, such as Victoria, which has extended free public transport for another month, were offering “temporary” cost-of-living relief.
But he had doubts over how temporary this relief may prove.
“This might be the case, but this is the fifth year in a row that we’ve heard these comments. This appears permanent,” he said.
Queensland and NSW have AA+ credit ratings with a negative outlook, and were the most at risk from a downgrade if they go on a spending spree.
Figures from the Australian Bureau of Statistics show the states and territories have enjoyed a stronger lift in revenue than the federal government over the past two years.
Between 2022-23 and 2024-25, Queensland’s tax take grew by 20.7 per cent or $5.4 billion to $30.8 billion. It was driven by the state’s property and jobs market, with strong growth in conveyancing and payroll taxes.
NSW’s tax revenue grew by 19.5 per cent over the same period while it lifted by at least 18 per cent in Victoria, South Australia and Western Australia.
The federal government’s tax take, however, grew by a much more modest 9.3 per cent as its revamped stage 3 personal income tax cuts began in mid-2024.
Gambling taxes are growing fastest in South Australia, up 105 per cent since 2020, while NSW collects the most in gambling revenue at $3.8 billion.
Victoria remains the highest taxing state or territory per capita, collecting a record $6605 for every resident. This was a 3.7 per cent lift on 2023-24.
The second-highest taxed state or territory is NSW, at $6383 per person, while the fastest growing tax take is in Queensland, where it grew by 8.3 per cent to $5481 last year.
Chalmers is expected to confirm federal government gross debt will top $1 trillion early in the coming financial year in next month’s budget.
The bureau figures confirm that states have been running up debt faster than the Commonwealth.
Gross government debt climbed by 7.6 per cent or $64 billion between 2022-23 and 2024-25 to $906 billion. Over the same period, state and territory gross debt jumped by 37 per cent or $194 billion to a record $722 billion.
NSW public sector debt stands at $263.6 billion with Victoria at $195.5 billion. The fastest growth in debt has been in Tasmania, where it has doubled to more than $6 billion.
Chief economist with the right-leaning Institute of Public Affairs, Adam Creighton, said the figures confirmed the debt binge being fuelled by all levels of government.
“Federal government debt, often reported to be close to $1 trillion, is obviously obscenely excessive and represents a failure of successive governments in Canberra to get spending under control,” he said.
“But this is only one part of an even more grim picture, with hundreds of billions of dollars in state public debt hidden in plain sight.”
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Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.