Moody’s dumps states onto downgrade watch

Via Moody’s

Moody’s Investors Service says in a new report that softer domestic economic conditions and a slow housing market recovery will squeeze state revenue in 2020, but will not disrupt 28 consecutive years of economic growth in Australia (Aaa stable).

Debt-funded public spending will continue to underpin economic growth across the Australian states, but the record capital expenditure programs they have in place to achieve this will lead to debt rising more rapidly than revenue.

Soft economic conditions will reduce the size of the GST pool in 2020, one of the largest sources of revenue for Australian states, while stalled wage growth, subdued household consumption and a slow recovery in the housing market will further constrain revenue. The shrinking GST pool affects in particular the smaller and less diversified economies of Tasmania, Northern Territory and South Australia, which are heavily reliant on Commonwealth transfers as a percentage of budgetary revenue.

Meanwhile, the ongoing US-China trade tensions and geopolitical tensions continue to weigh on business confidence and export growth to China, Australia’s largest export market.

Finally, Australian states also face challenges in the form of population growth and ageing demographics, which will pressure education and health care costs, while extreme heat events – leading to drought, bushfires and tight water supply – add further risk.

Below is a chart that summarizes Moody’s ratings and outlook on the different Australian states and territory.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. The next financial downturn will be the end of the Australia states.

    They have lost almost all their taxing powers. They have sold their assets. They have alienated their revenue streams. They have continued to incur massive debt. They have contingent liabilities under various “partnerships”..

    Unlike the federal government – but like Greece – they have no capacity to print their own money to meet their debts.

    Like Greece they will ultimately be at the mercy of the one government in Australia which can create its own money.

    Federalism in Australia will end not through constitutional means but because the state politicians voluntarily surrender their remaining sovereignty in return for a federal bailout.

    The resultant centralised regime – the largest in the world outside one-party states – will be an unaccountable and corrupt monster that will destroy the lives of all Australians.

    • SM you are probably right to a point, given the State pollies are exceptionally poor bunch of no hopers. That said it is not the only outcome that could (extremely low probability) be utilised. Not all states need to be screwed, WA is a net exporter so in pure theory has more options. The parasite states like SA, Vic & NSW less so given they are importers of Capital.

      WA & QLD could:-
      1) Utilise a separate currency and require all state taxes be paid in new currency i.e. the WA-Drachma.
      2) Utilise all labour resources without wastage to improve productivity ~ 20 % underemployment (waste), utilise job guarantee to soak up some surplus labour to control inflation.
      3) Deficit spend unless WA, which will have a strong CAS in WA-Drachma. given (S-I) = (G-T) + CAS so maybe WA would run a surplus only if inflation was getting hot.
      4) Apply taxes such as land tax etc to raise revenue as needed, drop stamp duties.
      5) Increase state based Royalties (WA, QLD mostly).
      6) Hold up exports for a short period $AUD would tank sending shivers up Canberra, make it clear what states really are important.
      7) Build a wall to keep the parasite states from sending millions to the Northern super States.

      Actually QLD and WA have some real options if the respective state politicians had testes larger than the nano particle versions they currently swing. That said nothing will happen because OZ pollies do not represent the people only the 0.01% elite. But nice to dream of what could happen if pollies represented the people, you know Tony Benn style.

      Yeah Naa’h, you are correct, we the people of OZ are stuffed!

      • I don’t think the States are going anywhere folks. That would require a radical constitutional change that ain’t going to happen.

        • 51. Legislative powers of the Parliament

          The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:
          .
          .
          .
          (xxxvii) matters referred to the Parliament of the Commonwealth by the Parliament or Parliaments of any State or States, but so that the law shall extend only to States by whose Parliaments the matter is referred, or which afterwards adopt the law;

          (xxxviii) the exercise within the Commonwealth, at the request or with the concurrence of the Parliaments of all the States directly concerned, of any power which can at the establishment of this Constitution be exercised only by the Parliament of the United Kingdom or by the Federal Council of Australasia;

          There is no limit on the matters which desperate state politicians may refer in return for a bailout.

          No referendums required.

          The following matters have already been referred:

          https://www.aph.gov.au/About_Parliament/Senate/Powers_practice_n_procedures/~/~/link.aspx?_id=312B0D9213324EDC9DC38870AA75BC8C&_z=z#note-15

          • Different issue — this does not equate to an ‘end of the States’ but rather lets the Cwth government make laws when the States request them to. For the States to literally end would require massive constitutional change.

          • 109. Inconsistency of laws

            When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.

            A “state” which no power to legislate and no independent revenue is a state in name only.

            As for the Senate, it has been in firing line for years:

            http://www.austlii.edu.au/au/journals/FedLRev/1980/11.pdf

            It is only a matter of time before the (Commonwealth-appointed) High Court judges decide that the answer to Winterton’s question is “Yes”.

          • The inconsistency of laws provision only potentially applies to issues as to which both the Commonwealth and States have powers to make laws. There are lots of issues on which the Commonwealth have no such power, and so the infamous 109 is not applicable.

            You’re clutching at straws.

          • OK, so in your scenario the States are going to give up *all* their powers (voluntarily) to the Feds. Then if they change their mind the Feds can say “hey we have paragraph 109 of the Constitution to rely on, so we can now overpower you completely as you’ve voluntarily given us all your powers” and in substance (though not form) wiping out the States.

            Cool story bro. And I’m the one in denial….

          • “OK, so in your scenario the States are going to give up *all* their powers (voluntarily) to the Feds”.

            Nope!!

            What I’m suggesting is that venal state politicians are going to give up their state’s powers to the Feds in return for a bailout (and whatever other inducements are required).

            In much the same way that Greek politicians ignored the results of the 2015 referendum and did as they ordered by Germany.

            In much the same way that Newfoundland’s politicians voluntarily voted themselves out of existence in December 1933 (again in response to economic crisis).

            Elective government is “government by politician”. And it has the effect of adversely selecting narcissistic, machiavellian individuals who do whatever is to their own advantage, especially in a crisis.

            That is why economic crises often induce constitutional changes that would have seemed inconceivable at an earlier time.

    • I vote QLD should secede immediately and keep all the revenue for ourselves — goodness knows we could do with paying down some the debts but Palasczuk is a one-trick pony: borrow and spend like there’s no tomorrow, because I won’t be in power when it all goes t1ts up and someone else will take the blame.

      Oh wait … that’s ALL pollies. Vote Ron Paul!

      • i would like to go back in time and have WA secede first and keep mining boom profits for itself. ill admit the state govo still would run the state into the ground but at least would of got a little more of the share.

    • Rubbish – Victoria would secede. I honestly think they are not far away from it and forming a Union with SA, Tasmania, NSW (maybe), and New Zealand and create and economic zone.

      It would allow them to introduce progressive policies, move forward technically and education wise and leave behind the 20th century reliance on agrarianism.

      The idea we would move further towards what is clearly an extreme right wing centric broken democratic model a fear mongering inanity.

      Your fears guide your mind – its very common but ultimately delusional.

      • It has been observed throughout history that those who imagine themselves to have a Monopoly on Wisdom and Virtue need little convincing they should have a Monopoly on Power as well.

        • Amen. Nothing like a bunch of people inured of their superiority (and therefore their ‘right’) to tell others what to do. Not sure it always ends up heading toward the extreme Right – but to the extreme in general, I would accept.

          Fascism / socialism, what’s difference? Stalin has a 100 million deaths to his name. Did Hitler do any better? Damn lightweight by comparison.