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The ratings bell tolls for South Australia’s finances

The bell rang yesterday on South Australia’s public sector financial performance.

It was heard loud and clear in Adelaide’s private sector boardrooms, while the state’s acting-Treasurer appeared deaf to its warning, and the opposition leader managed to turn the focus to a different agenda altogether.

Just after noon yesterday, Moody’s Investor Services delivered a scathing assessment of the state government’s financial position, reflecting “deterioration in the state’s financial performance over the past several years”. The assessment took a broad swipe at the past three budgets of former treasurer Kevin Foley and the first budget of his successor Jack Snelling, suggesting Moody’s assessors no longer believed the promises of past years that expenditure savings targets would be met.

Moody’s observations included that current expenditures have remained elevated and capital expenditures have reached record highs. It expects the state’s deficits to persist, leading to a significant increase in debt levels over the medium term. These trends also reflect a loosening in the state’s fiscal policy stance.

The decline in Commonwealth one-time economic stimulus grants and still-elevated levels of current spending are widening the state’s budget gap. Improvements in the interim period would require low spending growth rates of 1.8% on average, a challenge to achieve given the much higher 7% average annual growth rate in expenditure over the previous four years.

To meet its targets, SA will have to exert resolute controls to counter pressures emanating from health care and wage expectations, which will likely require stronger fiscal resolve. And in a signal that Moody’s had considered the revenue impact from the cancellation of the Olympic Dam expansion project, it warned the revenue projections might need to be re-visited.

In addition, it may need to intensify its focus on expenditure reductions should its relatively robust revenue assumptions prove unfruitful,” the agency said.

Ratings agencies are traditionally late arrivals at the gate of economic reality. They are slow to upgrade or downgrade, preferring to accept assurances that worrying short-term trends can be addressed. This is why agencies took a couple of years to upgrade the state’s rating to triple-A in the post-State Bank collapse era.

Then premier John Olsen had sold a batch of state assets to reduce debt and it wasn’t until two years after he left the job that the ratings agencies upgraded South Australia, citing the asset sales and debt reduction. In a piece of political genius, the then-Labor government of premier Mike Rann and treasurer Kevin Foley promoted the re-rating as a vote of confidence in their 2003 state budget.

For the past four years the agencies have given qualified support to the Rann and Foley finances by accepting that promised savings measures would be delivered. However, what Moody’s said yesterday was that the targets weren’t met and there’s no sign that they will be.

The much-vaunted shared services reforms and sustainable budget commission reviews have not delivered as promised.

Ironically, while John Olsen’s policies delivered a bonus to Kevin Foley, Foley has delivered a ticking time bomb to Snelling. With Snelling out of the country, it was up to acting-Treasurer Tom Koutsantonis to respond. He said the government had decided to put a greater value on maintaining jobs and continuing its record infrastructure program.

The government has gone into debt to spend money on building roads, schools, hospitals, bridges, important pieces of infrastructure for our economy,” he told reporters. ”We can’t withdraw now; if we withdraw now the situation will only get worse.”

The folly of that statement is that the infrastructure programs he talks about are prominently funded by federal government grants and programs.

Moody’s is talking about recurrent expenditure and its rise and rise beyond stalled revenue growth. It also warned that it’s time to deliver on promised budget restraint, lest there be another downgrade.

Meanwhile, the  Isobel Redmond was talking about her night out at a Hindley Street strip club and other hotspots … giving Koutsantonis a genuine reason to smile.

In the boardrooms of Adelaide they were nonplussed. It’s time to listen to the ringing of the bell.

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