While Commonwealth government net debt has increased rapidly to $153 billion over the last six years, little attention has been paid to the dramatic increase in state government debt to $43 billion, finds a new report.
The states had a negative net debt position in 2007, yet $70 billion in debt was added in the next six years. Although the overall upward debt trend is concerning, some states are in a worse position than others, finds States of Debt from The Centre for Independent Studies.
With new state governments to step into power in South Australia and Tasmania, South Australia and Tasmania are in the weakest financial position of the states, followed by Queensland and Western Australia, finds CIS Senior Fellow Robert Carling.
If current trends continue, NSW and Victoria risk joining the ranks of Queensland, Western Australia, South Australia and Tasmania, which have lost their triple-A credit ratings.
'The states' financial position has deteriorated due to soaring infrastructure spending, accompanied by a decline in net operating surpluses,' says Mr Carling.
The impact of the global financial crisis was felt from 2007 to 2010, when tax revenue and investment income sagged, and infrastructure investment rose strongly, while from 2010 to 2013, operating surpluses dried up and cash deficits rose even further.
'Unless action is taken now, state governments will face rising deficits and debt in the long-term, just like the federal government, and will be unable to deliver the services the public wants,' says Mr Carling.
'To curtail the growth in state debt, states will need to greatly reduce capital expenditure or achieve large increases in operating surpluses, or both. Reducing capital expenditure, however, would be inconsistent with demands for infrastructure investment.'
'States need to contain costs such as staff numbers and pay rates, and avoid costly new program commitments. The Newman government in Queensland has been criticised for cutting operating expenses, but it is on the right track - other states should follow its lead.'
'Financial strength is not just desirable for its own sake; if the states were to return to running operating surpluses, it would mean more funds available for improved infrastructure,' says Mr Carling.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.He is available for comment.