The Parliamentary Budget Office has warned that federal government decisions to shift hospital and school spending obligations onto state governments will put more pressure on state budgets in the next few years.
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It also warns state governments have not yet fully incorporated these added pressures into their budget forecasts.

The PBO’s warning, delivered just two weeks from the Abbott government’s second budget, comes as Goldman Sachs told clients on Wednesday that Australia could risk of a ratings downgrade for the first time since 1989.

The PBO’s report says the fiscal position of state and federal governments in Australia has “deteriorated significantly” over the past decade, with the fiscal balance dropping from a surplus of 0.9 per cent of GDP in 2002-03 to a deficit of 2.4 per cent of GDP in 2012-13.

It says the growing national deficit was driven mainly by the deterioration in the Commonwealth’s fiscal position.

The deterioration of Australia’s fiscal balance has seen the country’s net debt increase from 2.1 per cent of GDP in 2002-03 to 12.4 per cent of GDP in 2012-13, it says.

It warns net debt is projected to peak at 19.9 per cent of GDP in 2016-17, before dropping to 19.5 per cent the following year, it says.

But the PBO report also warns that current projections for spending and taxation levels, at all levels of government, which show an improvement in government fiscal positions over the next four years, could be easily compromised by the deteriorating terms of trade.

In the case of the Commonwealth, the projected improvement in the budget position relies on a strong recovery in economic growth and significantly reduced spending growth, the report warns.

A recent update from the Reserve Bank pointed to a softening of the economic outlook, it says.

Recent dramatic falls in mineral commodity prices, particularly iron ore, are expected to put further downward pressure on Commonwealth revenues, it says.

“[And] the projected reduction in Commonwealth spending growth is reliant on the Parliament passing significant savings measures that, to date, remain unlegislated​, and the states assuming a greater proportion of funding for hospitals and, to a lesser extent, schools.”

It warns the “upward pressure” on state spending – resulting from the reduction in growth in Commonwealth funding for hospitals and schools – is yet to be “fully incorporated into state budget forecasts.”

Goldman Sachs on Wednesday warned that Australia risked losing its AAA credit rating from agency Standard & Poor’s, due to the country’s “poor fiscal performance.”

But it said the possible credit downgrade would be a consequence of sharply lower commodity prices, weak growth and a political impasse, not of Australia’s overall public debt burden which “remains favourable” relative to other comparable countries.

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