Moody’s: Bushfires to hit government budgets

Moody’s says in a new report that Australia’s (Aaa stable) general and state governments can absorb the near-term credit impact from the ongoing bushfires, although they are “likely to result in rising and recurring costs that will test the government’s capacity to mitigate these costs”:

The near-term credit implications for the sovereign and the states are limited given a likely contained economic impact and the availability of ample fiscal buffers.

Over time, increasingly frequent and severe natural disasters related to climate change are likely to result in rising and recurring costs for Australia’s general and local governments, which will test their capacity – currently strong – to mitigate these costs…

Although fires have burnt across the country, the bushfires have been concentrated in NSW, covering an area more than six times larger than that affected by the 2018 Californian fires, for an economy that is seven times smaller than that of California.

Predictions by the Australian Bureau of Meteorology indicate that the fires are likely to continue and could even intensify over the coming months…

The Commonwealth government bears some of the direct containment and repair costs – such as for the deployment of military resources for firefighting – as well as the ultimate costs through transfers to the states. The government also incurs some expenditure on relief for affected areas, with AU$2 billion already announced to support affected farmers and businesses. Moreover, Commonwealth tax revenue from affected areas will be hit by temporarily weaker economic activity.

Taking into account both the direct costs and indirect loss of revenue, we estimate that the cost of the bushfires will reduce Australia’s
general government’s fiscal balance overall by around 0.1% of GDP per year in the next two fiscal years…

The more material costs will be related to recurring financial support as climate change leads to more frequent and severe natural disasters…

Limited economic impact as bushfires primarily hit sparsely populated areas

The bushfires are mainly concentrated in rural areas, predominantly in national parkland. As a result, the economic cost has been limited. With evidence pointing to a relatively mild impact so far, we have revised our forecast for 2020 GDP growth to 2.1% from 2.3% in 2020…

In 2020, reconstruction will boost economic activity, partially offsetting the initial losses from the areas which are being rebuilt. Over the longer term, if bushfires of this severity were to become more frequent, we would expect tourism and investment, especially in rural areas, to be affected.

Leith van Onselen

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