Moody’s Cuts Tasmania’s Credit Rating to Australia’s Worst

One of the two major credit rating agencies has dropped Tasmania's credit rating from Aa2 to Aa3. This makes it the worst-rated of any Australian state. The rating drop will translate into an impact on the interest rate the state pays on its borrowings. Rising debt and problems with the budget prompted this. Treasurer Eric Abetz says his next budget will show more details on how the government plans to fix the state's money position.

Sharp Rise in Debt Behind Rating Drop

Major ratings agency Moody's has dropped Tasmania's credit rating from Aa2 to Aa3, making it the lowest of all Australian states. A decision this week was made based on a sharp rise in the state's debt burden and growing interest costs which, it says, will be hard to contain over the next two years. The report also said flexibility has been limited because of structural constraints on its own source revenue, as opposed to federal government grants, and expenses.

As a result, these pressures will more and more limit the state's ability to respond to future shocks, reflecting weaker governance strength than we have looked at in the past, it said. Credit ratings are used by lenders as a sign of the ability to pay debt. But they are not the only thing in working out the cost of lending. A decision from the other major credit agency Standard and Poor's is expected in the coming weeks. It currently lists Tasmania as AA plus Negative.

Treasurer Says He Is Not Alarmed

Treasurer​‍​‌‍​‍‌​‍​‌‍​‍‌ Eric Abetz expressed that the fall did not cause him any concern. Also, he appreciated the change of outlook by Moody's from negative to stable. "We have the borrowings done, so it will not be raising the interest rate that we are paying today," he ​‍​‌‍​‍‌​‍​‌‍​‍‌said. It may impact potential future borrowings, but these factors are usually taken into account well and truly by the market before any ratings agency makes its assessment. He said an Aa3 rating was in line with other OECD countries such as France, Japan and Taiwan.

This month's interim budget showed Tasmania's net debt climbing from around $5 billion to around $10.4 billion by 2029. $365 million is budgeted for borrowing for this financial year. But it is thought that it will have risen to $689.9 million in 2028 to 29. Abetz has said that his first full budget would contain more extensive budget control measures. He is looking at right right-sizing of the public service.

COVID and Elections Blamed for Growing Debt

He has previously said COVID, early state elections and money paid to victims of child sexual abuse as things that helped the state's growing debt. We can look back and try to put the blame. I'd simply draw a line in the sand and say this is where we are, how do we improve that, he said today. On the 21st of May next year, when a budget is delivered from our perspective, getting the fiscal strategy right is vitally important. This is to make sure that we can continue to deliver the services that the people of Tasmania need.

Economist Saul Eslake said this was a vote of no confidence in the government's fiscal performance and strategies. It confirms the Tasmanian government is likely to be paying higher interest rates on the new debt, he told ABC Hobart Mornings. In addition, it will be paying higher interest rates on the debt it has to reissue when bonds it issued in previous years mature and come up for rolling over.

Markets Already Charging Higher Interest

He agreed that, because of the worsening financial position, lenders would already have been charging higher interest rates. He said interest rates are not going to increase simply because Moody's has said Tasmania is Aa3 now, rather than Aa2. The financial markets can work these things out for themselves. They've been able to look at the succession of budget papers over recent years. Eslake did an independent review of Tasmania's finances in 2023.

In that review, he found they were on track to be the worst in the country in the coming years. He said a mix of revenue boosting and spending-cutting measures was needed. His view was that economic growth alone would not be enough to fix it. Abetz has been clear that his preferred method of budget repair is cutting government spending. But he has not ruled out revenue changes.

One thing I've seen in public life over the years is that increasing taxation doesn't increase the pie. What it does tend to do is to stifle the economy and therefore instinctively I don't like the idea of new taxes, he said. But as I have been known to say from time to time, never say never. Own source revenue covered just 31.1 per cent of government spending in 2024 to 25. GST payments from the federal government are the state's main source of income.

Read more state finance and government news at Inspirepreneur magazine to stay updated about budget decisions that are affecting Tasmania's economic future.