By guest contributor Ken Atchison, Principal, Atchison Consultants
The recent declaration of a state of disaster by the Victorian Government has extended the coronavirus crisis. A health crisis generated an economic crisis. The second shutdown then generated a financial crisis for Victoria.
Victoria has a “AAA” credit rating from Standard & Poor’s and a “Aaa” rating from Moody’s. A coveted AAA/Aaa rating has ensured that interest rates payable on Victorian Government debt are the most favourable available in Australia after the Commonwealth Government. S&P revised its rating outlook to Credit Watch Negative in April 2020 implying a downward revision is possible.
A brutal fall in state economic activity, officially known as gross state product (GSP), is likely. The Victorian Chamber of Industry and Commerce has stated that thousands of businesses will close or transfer to other states. A 3.5% contraction in both 2020 and 2021 is expected as businesses fail or move and an additional 250,000 Victorians join the ranks of the unemployed, effectively doubling Victoria’s jobless rate to 13%.
State government revenue, comprising taxation and Commonwealth grants, is expected to fall by $7.0 billion, or 10%, in 2020/2021. Expenditures will increase by an estimated 5% through additional medical, hospital and coronavirus-related costs. Emergency funds of $24 billion have been set aside for the 2019/2020 and 2020/2021 years. Then there are the consequence of business failures, higher numbers of unemployed along with demands for higher public service salaries. Budget deficits of $12 billion or higher are projected for the next two years.
Net debt was $29.3 billion in Victoria at 1 July 2019. In the 2019/2020 budget, net debt was expected to increase to $69 billion over the next three years. It is now projected to increase to $100 billion over this period. The Victoria Government had stated it would maintain debt at 12% of GSP. Based on these projections of increased debt and falling GSP, debt will approach 19% of GSP in 2022/2023.
Interest as a percentage of revenue was planned in the 2019/2020 budget to be maintained at around average levels. The average over the period from 2009 to 2019 had been around 3.2%. Prior to this crisis, this ratio was expected to rise to 3.7%. With net debt at $100 billion and a lower credit rating, the ratio will approach 6%.