WA Treasurer Mike Nahan says the State Government is determined to get back the State’s triple-A credit rating despite Moody’s joining Standard & Poor’s and downgrading it.
The international credit ratings agency lowered its rating on WA Treasury bonds from Aaa (negative outlook) to Aa1 (stable outlook) today.
Dr Nahan described the decision as disappointing but said the Government was determined to regain the State’s triple A rating.
He said he didn’t expect any significant increase in the cost of borrowing as the lower rating had already been factored in to the Government’s forward estimates when S&P announced its downgrade.
The Government had responded to the State’s financial challenges through the $8.6 billion Fiscal Action Plan announced in the 2013-14 State Budget.
The Treasurer said further measures would be considered in the forthcoming mid-year review and in developing the 2015-16 Budget.
Dr Nahan noted the State’s rapidly declining GST revenue and unprecedented demand for government services and infrastructure from strong population growth.
“This highlights what the Liberal National Government has been saying for the past five years, that the GST system is broken, the State is increasingly relying on volatile iron ore revenue because the Commonwealth is redistributing GST revenue to other States,” Dr Nahan said.
“This is clearly unsustainable and I call upon my colleagues in Canberra to work with me in addressing this situation immediately.”
The distribution of the GST for WA has fallen from a return of 93 cents per $1 collected in WA in 2007-08 to just 37 cents in 2014-15.
Dr Nahan said that net debt had risen in recent years because borrowings were required to help fund the State’s significant infrastructure requirements.
“These levels of net debt remain affordable and WA’s debt levels compared favourably with other Australian jurisdictions,” he said.
“The State Government has embarked on an infrastructure investment program that is fundamental in meeting the needs of the State’s growing economy and population.
“Without this investment there would be a very real risk that the State’s existing assets would be unable to cope with the strong demand for public infrastructure.”
Moody’s said its downgrade decision was taken for a series of reasons, almost all related to its current debt levels and reliance on highly volatile mining royalties.
It also identified the Government’s poor response to its debt levels.
“The ratings downgrade reflects the State’s ongoing deficit position, the deterioration in its debt metrics, and a growing risk that this trend may not be reversed soon,” it said.
“The challenges related to narrowing the budget gaps include greater volatility in the state’s revenue base, reflecting its increasing reliance on royalty income, expenditure pressures related to the rapid expansion in the state’s economy and population, and a weak policy response to the deteriorating financial and debt position.”
Moody’s said the trends identified had led to “persistent” deficits on total government spending.
Deficits had averaged 5 per cent of revenues between 2008-09 and 2012-13. This year the deficit is tipped to climb to 6.2 per cent of revenue.
The company said while the Government had a plan to cut debt levels, it would require many things to go right.
“The State will be hard pressed to meet its very low spending growth targets, unless the government’s fiscal resolve strengthens and new measures are identified,” he said.
“Projections rely on reducing the average rate of spending to 3.5% compared to 7.1 per cent over the past four years, which incorporates much slower growth in employee costs and a steady reduction in the growth rates of healthcare and other social services.”
Moody’s said the rating could be upgraded if the Government’s resolve to tackle debt strengthened. But the rating could also fall further.
“The lack of a strengthening in government resolve to slow the pace of expenditures without offsetting improved revenue trends - resulting in wider deficits and continued debt accumulation - could lead to downward pressure on the ratings,” it said.
“A more effective budgetary redress plan that allows the State to return to a surplus position and an associated easing in the debt burden could lead to a rating upgrade.”