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Bulletin: Proof Of Victoria's Fiscal Consolidation Will Be In the Pudding

This report does not constitute a rating action.

MELBOURNE (S&P Global Ratings) May 7, 2024--A tax boost and fiscal discipline will determine whether Victoria delivers on its long-awaited surplus promise. The state could deliver its first cash operating surplus in six years. A A$3.6 billion boost in goods and services tax (GST) grants and strong growth in property and payroll tax should contribute to an operating surplus, albeit thin, by our measures, in fiscal 2025 (year ending June 30). The government has also promised to cut its capital expenditure (capex) pipeline.

Promised fiscal consolidation could provide Victoria greater headroom at the 'AA' rating if delivered. The budget introduced a new fiscal target aimed at reducing net debt, at the general government level, as a proportion of gross state product. We are yet to see this happen, and the state itself forecasts it to occur in fiscal 2028 at the earliest.

Despite a mooted return to cash operating surplus and a potential reduction in the state's capex pipeline in the outer years of the budget, Victoria's fiscal recovery has been much longer than that of many subnational governments around the world. Today's budget confirms the government's accounts are in large structural fiscal cash deficit when accounting for capex.

Victoria's plan to gradually reduce capex still means after capital account deficits are likely to average close to 20% of total revenues over the next three years. After capital account deficits peaked at 35% in fiscal 2020 when the pandemic struck. The deficit was just 4% in fiscal 2019.

We expect Victoria's gross debt as a proportion of revenues to soar past 200% of operating revenues. This is the highest among the Australian states and stems from successive operating deficits and its large capex since the pandemic hit in late fiscal 2020. Debt to operating revenues has almost tripled since this time. Victoria's serviceability costs are also rising.

On the flipside, we believe Victoria maintains strong access to global capital markets. This will allow the government to fund its budget and avoid any acute stress scenario, despite rising interest expenses and market volatility. The state is partially shielded from rising interest rates in the immediate future because it mainly funds itself through fixed-rate, long-term borrowings.

The 'AA' rating on Victoria derives support from its wealthy and diverse economy in a global context. Further we expect, Victoria will achieve its savings targets outlined over the past two budgets, keep major projects broadly in line with costings, and ensure liquidity coverage remains comprehensive.

Pressure on the rating could build if financial management wanes. This could occur if the operating position doesn't return to a surplus or debt rises toward 240%, or interest expenses to 10%, of operating revenues.

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Primary Contact:Anthony Walker, Melbourne 61-3-9631-2019;
Secondary Contact:Rebecca Hrvatin, Melbourne 61-3-9631-2123;

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