Huge debts built up by propping up millions of unemployed during the coronavirus pandemic has cost two Australian states their top credit ratings.
Ratings agency S&P Global took away NSW and Victoria’s coveted AAA credit ratings, meaning it is now more expensive for them to borrow money.
Surging government debt and the coronavirus lockdowns prompted the ratings firm to downgrade NSW one notch from AAA to AA+, and to punish Victoria with a double downgrade to AA.
It is the first time since 2003 that Australia’s two largest states have missed out on the AAA rating.
There are now doubts the Federal Government will be able to hang onto the nation’s gold-standard rating in the face of massive coronavirus stimulus spending.
Ratings agency S&P Global downgraded Australia’s two biggest states, NSW and Victoria, removing their AAA credit ratings. This slightly increases their borrowing costs
Reserve Bank of Australia Governor Philip Lowe (pictured November 3) told Australia’s governments not to worry about credit ratings – just borrow and create jobs to lift the economy
The yield on Victoria’s 10-year government bonds rose by 0.06 percentage points after the downgrade to 1.32 per cent.
Victorian Treasurer Tim Pallas estimated last week that losing the AAA credit rating would cost the state about $10 million a year in extra costs, the Financial Review reported.
In NSW, 10-year bond yields rose 0.03 percentage points to 1.15 per cent.
S&P wrote that higher debt and a large infrastructure program contributed to the NSW downgrade with the ratings agency expecting the state’s debt burden to increase over the next three years.
Fortunately, as interest rates are so low, and demand for bonds so high, the slight increase in borrowing costs is not the body blow it would be in years passed.
Reserve Bank of Australia governor Philip Lowe has urged Australian governments not to worry about debt but to fight unemployment instead – and pledged to keep interest rates low for years to help.
Australia’s GDP rebounded to grow by 3.3 per cent in the September quarter, propelling the nation up and out of recession as this Australian Bureau of Statistics chart shows
Australia’s housing construction sector was reignited by a $25,000 government handout to people building a new house. Pictured: construction workers in Melbourne
‘The Board views addressing the high rate of unemployment as an important national priority,’ he said last Tuesday.
‘Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time.
‘For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range… Given the outlook, the Board is not expecting to increase the cash rate for at least 3 years.’
Some experts predict Australia’s economy will skyrocket in as it recovers from the coronavirus downturn as it has done so well keeping the virus out.
The nation has already emerged from the coronavirus recession with the economy expanding by 3.3 per cent in the September quarter – the strongest quarterly growth in 44 years.
Economist Leith Van Onselen, who worked for Treasury, Goldman Sachs and now writes for website Macrobusiness, said Australia’s economic rebound would continue.
‘Everything concerning the Australian economy has turned out better than expected,’ he told Daily Mail Australia on Monday.
‘The economy now faces the prospect of a strong rebound and V-shaped recovery in 2021.’
Mr Van Onselen said the primary cause of Australia’s recession was the economic lockdowns which have now ended.
‘The economy will naturally recover as the artificial barriers preventing economic activity have been removed,’ he said.
Pictured left: Victorian Treasurer Tim Pallas, and right, NSW Treasurer Dominic Perrottet. Ratings agency S&P downgraded both states, demoting them from their AAA credit rating
Australia’s rebound, fuelled by pent-up household consumption, would be underpinned by Victoria’s delayed freedom.
‘As Victoria has now opened up, its economy will experience strong catch-up growth over the December and March quarters, thus fortifying Australia’s rebound,’ he said.
Even though government stimulus measures such as JobKeeper and JobSeeker are scheduled to wind down, this would not be enough to offset the rebound in household spending or the rebounding private sector economy, he said.
Mr Van Onselen said monetary stimulus was strong with the RBA suppressing interest rates, access to credit becoming easier and the ‘neutering’ of Australia’s financial regulators.
When the coronavirus vaccine is delivered, immigration and international tourism could return faster than expected, further lightening Australia’s rebound.
The September quarter GDP figures rose on a spike in housing construction fuelled by government grants.
Consumer spending surged in the September quarter, jumping 7.9 per cent as lockdowns eased across Australia.
Australia’s economy has become heavily reliant on the housing industry, so the construction boost together with an unexpectedly low unemployment rate of less than 8 per cent has boosted consumer confidence.
Pictured: inside the deserted foyer of the Reserve Bank of Australia during coronavirus lockdown in Sydney, on May 18. The RBA has promised to suppress interest rates for years
Under the Federal Government’s HomeBuilder scheme designed to protect construction jobs from the pandemic shutdown, eligible Australians can get $25,000 grants for renovations or new home builds.
Figures reported by The Australian on Friday showed Australians rushed the taxpayer-funded subsidy, exceeding the initial estimate of 27,000 by January 1.
It is instead now expected to hit 40,000 by the end of the year, or 50 per cent more than forecast.
Digital Finance Analytics principal economist Martin North said government support for the housing sector and banks had been unprecedented.
However the chance to diversify the economy away from housing construction towards real infrastructure investment had been missed, he said.
‘The high debt incurred by the government and its misdirected spending will be a burden on the recovery,’ he said.
The deflationary impact of the coronavirus has allowed the Federal Government to pursue the same high-debt, low-rate strategy from the last decade.
‘I expect rates to stay low for a decade, as we try to navigate our way out – and I am not sure that encouraging people to take more debt on at this time is a responsible stance for Governments to take,’ he said.