Tasmania’s Credit Rating Downgraded by S&P

Key Takeaways

• Tasmania’s credit rating has been downgraded to AA by S&P, putting it on par with Victoria and the ACT as the lowest-rated jurisdictions in the country.
• The downgrade is attributed to "very weak" budget metrics and "strong growth in operating expenditure" in recent years.
• The proposed Macquarie Point stadium is a concern, with potential cost overruns beyond the current $1.1 billion estimate.
• Tasmania’s debt burden is forecast to rise to 131% of operating revenue by 2028, up from 60% in 2023.
• The state government has been criticized for delaying significant corrective action until the next full state budget in May.

Introduction to the Downgrade
The credit rating of Tasmania has been downgraded to AA by S&P, a move that puts the state on par with Victoria and the ACT as the lowest-rated jurisdictions in the country. This downgrade comes just days after Moody’s also cut Tasmania’s rating, shifting it from AA2 to AA3. The decision by S&P is not entirely unexpected, as independent economist Saul Eslake noted that it should come as no surprise. Eslake pointed out that this is the first time S&P has downgraded Tasmania since it was first rated in 1993, and the state’s credit rating has been upgraded twice since then, first to AA in 2001 and again to AA+ in 2004.

Reasons Behind the Downgrade
S&P cited "very weak" budget metrics and "strong growth in operating expenditure in recent years" as key reasons for its decision to downgrade Tasmania’s credit rating. The agency also expressed concerns about the proposed Macquarie Point stadium, warning that the state could be left to cover cost overruns beyond the current $1.1 billion estimate. This is a significant concern, as the stadium’s construction is expected to put a strain on the state’s finances. Additionally, Tasmania’s debt burden is forecast to rise to 131% of operating revenue by 2028, up from 60% in 2023, which is a worrying trend that needs to be addressed.

Implications of the Downgrade
The downgrade of Tasmania’s credit rating has significant implications for the state’s economy and finances. S&P warned that it may consider another downgrade if the state continues to run operating deficits or if debt rises faster than expected. This could lead to higher borrowing costs for the state, making it more expensive to finance its debt. Eslake noted that the decision largely confirmed what financial markets had already priced in, but it is nonetheless politically embarrassing for the state government. The government has been criticized for delaying any significant corrective action until May, when the next full state budget is due, despite Treasury warnings for years that spending needed to be reined in.

Government Response and Criticism
The state government has been criticized for its response to the downgrade, with Eslake arguing that it has delayed taking significant corrective action for too long. The government has been warned for years that its spending needs to be reined in, but it has failed to take decisive action. The delay in addressing the state’s financial issues has led to a situation where the state’s debt burden is forecast to rise significantly in the coming years. The government needs to take immediate action to address the state’s financial issues, including reducing spending and increasing revenue. This could involve making tough decisions, such as cutting back on non-essential expenditure and increasing taxes or fees.

Conclusion and Future Outlook
In conclusion, the downgrade of Tasmania’s credit rating to AA by S&P is a significant concern for the state’s economy and finances. The reasons behind the downgrade, including "very weak" budget metrics and "strong growth in operating expenditure", need to be addressed urgently. The state government needs to take immediate action to reduce its debt burden and improve its financial position. This will require making tough decisions and taking a long-term approach to managing the state’s finances. If the government fails to take decisive action, the state’s credit rating could be downgraded further, leading to higher borrowing costs and a range of negative consequences for the state’s economy.