'Stable' outlook despite climate spending

A leading ratings agency says the outlook for state governments' coffers is stable as moderate domestic growth counters a slower global economy.

Moody's Investors Service said Australia's states will benefit from "continued but slower growth" in key export markets.

But net-zero emissions targets and physical climate risks such as floods will increase capital spending, Moody's warned.

The development of renewable energy zones, climate change adaption and mitigation strategies will require large capital spending to build long-term resilience amid already elevated debt burdens, Moody's said.

Cyber risk is also a growing concern, requiring capital spending to build resilience, according to the 2023 credit outlook issued on Tuesday.

Moody's spokesman John Manning said Australia's largest export sectors remain vulnerable to China's growth outlook and its COVID-19 pandemic response.

"The credit outlook for Australian states is stable, reflecting steady regional economic activity, solid household wealth and high employment, despite slower global growth, tighter monetary policy and inflation pressures," he said.

But stabilisation of interest rates and inflation is key to government operating surpluses.

Food and energy costs will remain high, and rising interest rates and cost of living pressures are expected to partly constrain household finances.

Further monetary policy tightening will underpin consumption-driven activity, which is a key driver of state revenue in 2023.

Still, global economic and geopolitical factors are expected to continue to support high energy and commodity prices in 2023.

Moody's expects Australia's economy to grow 1.9 per cent in 2023 and 2.3 per cent in 2024 supported by high employment levels and household wealth.

Credit ratings affect governments' borrowing costs, with weaker ratings making debt more risky for lenders and expensive for taxpayers.