The ACT’s credit rating has been downgraded from AA+ to AA by international ratings agency S&P Global Ratings.
The group cited the territory’s proportionally high debt relative to other Australian jurisdictions, and the likelihood the budget will remain in deficit until 2027.
S&P singled out the ACT’s rising health costs and major infrastructure projects as factors contributing to its financial position.
The agency said it expected the territory’s budget to return to a “slim operating surplus” in 2027, which would mark five operating deficits since 2022.
“An increase in capital spending, including for new projects added to the pipeline in the latest budget, is likely to push ACT’s deficits after capital accounts above 10 per cent of total revenue over the next two years,” S&P said.
“These weaker outcomes will also drive ACT’s total tax-supported debt toward 200 per cent of operating revenue, well above our prior expectations.”
According to the ratings agency, that higher capital spending will weigh on overall deficits, driving the territory’s debt above that of all rated Australian states except Victoria.
Economist Saul Eslake says while in theory the ACT would be paying higher interest rates on debt, in reality the markets will have already figured that out. (ABC News: Daniel Irvine)
Independent economist Saul Eslake said the move wasn’t entirely surprising given S&P had foreshadowed a possible downgrade.
“It’s sort of like coming home from school with your report saying you have got a B minus,” Mr Eslake said.
“Maybe your parents had guessed that you weren’t going to be an A student this year, and that’s confirmed what you had already suspected.”
He said the rating change would, in theory, mean the ACT would be paying higher interest rates on debt — but he said in reality, the markets would have already figured that out.
“In all likelihood, they have probably been paying a little bit more in recent months than they would have been a year or so ago,” Mr Eslake said.
“It sounds as though the treasurer is prepared to wear having to pay slightly higher interest rates on the territory’s debt in order to be able to press on with the infrastructure spending which his government has decided is more important.”
Economist Saul Eslake says ACT Labor chose the embarrassment of a downgraded rating over the embarrassment of cancelling or delaying promised projects. (ABC News: Jade Toomey)
Mr Eslake said the government had chosen the “embarrassment” associated with the credit rating downgrade, compared to the “political embarrassment” if they had to cancel or delay projects that had been promised to voters.
“There are no easy options here, and the government has chosen one rather than the other,” he said.
While the ACT is now equal worst with Victoria on the national credit ladder, Mr Eslake said he wouldn’t be surprised if Victoria’s credit rating was further downgraded.
He said he also expected Tasmania, the Northern Territory and Queensland would also be at risk of having their credit ratings downgraded.
“The ACT almost certainly won’t be alone in experiencing this kind of mild embarrassment,” Mr Eslake said.
Treasurer Chris Steel says the ACT’s level of net debt reflects the government’s investment in generational infrastructure to support population growth. (ABC News: Matt Roberts)
ACT Treasurer Chris Steel said he had engaged with S&P as it prepared the rating, walking the agency through the territory budget.
“In particular, making them aware of the actions and tough decisions the ACT government has made through the most recent budget to put the budget on a more sustainable footing whilst also managing a very significant increase in activity in our healthcare system,” he said.
“S&P has made their decision and also provided that commentary about the state of the ACT government’s finances, including about the future, and we’ll consider that as we continue to budget for the territory.”
Mr Steel said the level of net debt reflected the investment the government had made in “generational infrastructure” to support expected population growth.
“S&P has acknowledged that the level of infrastructure investment is tapering over the forward estimates, and we will need to continue to look at the investment we’re making in the infrastructure pipeline to make sure that it is deliverable, achievable, and sustainable,” Mr Steel said.
“[However,] S&P has acknowledged that we will be returning to cash operating surpluses, which is one of the key metrics that they look at as part of their ratings assessment.
“And they’ve also acknowledged that we have strong financial management in the ACT, and a strong economy in the ACT.”
ACT Liberal MLA Ed Cocks says the credit rating downgrade is a direct consequence of Labor’s choices. (ABC News: Adam Shirley)
ACT Liberal MLA Ed Cocks said in a statement that the downgraded rating would leave Canberrans worse off.
“This is where years of budget blowouts and no fiscal discipline get you,” Mr Cocks said.
He said the lowered rating would push up borrowing costs and put more pressure on frontline services.
“Families have been hit with a new health levy and more than 25 new or increased fees, charges and taxes. Yet the budget keeps getting worse,” Mr Cocks said.
“Labor continues to rely on borrowings and emergency tools like the treasurer’s advance because it can’t pay for its promises. The result is higher debt, higher interest and short changed services.
“This is not bad luck. It is the direct and predictable consequence of Labor’s choices.”
