Public service: Generous government sector wage rises are creating a debt crisis at a state level

Soaring public sector wages are sparking a debt crisis at a State level with average credit ratings at a 25-year low - and the situation is only expected to worsen as premiers spend big to get re-elected.

Despite the pandemic ending more than four years ago and low unemployment across Australia, borrowing levels are ballooning, with S&P Global Ratings expecting public sector trade unions to be even more brazen in coming years ahead of upcoming State elections.

“Tight election races in some states have also seen ministers, of all political complexions, promise new spending initiatives while waving aside Budget repair,” it said.

“The challenge for States is political, not financial.

“State leaders have learned that spending is popular, and attempts at savings are often disparaged as austerity.”

While the Federal Government has a top-tier AAA credit rating, the States and territories have an average rating of AA+, the worst since 2000 with a collective debt of $660 billion.

Last year, Tasmania and the Australian Capital Territory had their credit ratings downgraded to AA stable from AA+ negative.

Queensland’s outlook was revised to AA+ negative from AA+ stable, with the Sunshine State expected to reap less revenue because “coal royalties are normalising”.

Like New South Wales, Queensland was expected to “carry negative outlooks into 2026”.

While NSW and Victoria are paring back infrastructure spending, smaller States are “ramping up spending enthusiastically”.

Ratings downgrades often coincide with higher government bond yields which means higher annual interest payments on debt.

Budget deficits among Australia’s States and territories now make up 16 per cent of revenues, matching where it was in 2021 during extended COVID lockdowns in Sydney and Melbourne.

Western Australia, the only State with a AAA credit rating following a rating upgrade in 2022, was expected to benefit from higher than expecting iron ore prices.

“Resource-rich Western Australia stands apart. Our base case assumes that iron ore prices will remain higher than assumed in Western Australia’s budget, translating into stronger royalty revenues and supporting that State’s outperformance,” S&P said.

“Debt burdens will keep rising,” it said.

“Fiscal discipline is waning. States have tended to quickly spend any windfall revenue gains.

“The COVID-19 emergency in Australia ended years ago, but some State governments are spending like they’re still in lockdown.

“We see ongoing risk that they will further delay post-pandemic fiscal repair.”

The 28 per cent pay increase over four years, awarded to Victorian nurses more than a year ago, “could embolden unions in other states to push for similar deals”.

State and territory governments across Australia collectively employ 2 million workers, making salaries the biggest expense, with S&P noting public sector staff expenses have tended to rise by 7 to 8 per cent a year, well beyond the 2 to 3 per cent level forecast in annual Budgets.

They also account for 77 per cent of all public sector employment, last year collectively spending $190 billion on wages compared with $40 billion for the Federal Government.

Public sector wages grew by 3.8 per cent in the year ended September 30, compared with an annual pace of 3.2 per cent in the private sector. Government-funded jobs have seen bigger pay rises than private enterprise since the start of 2025.

“Recompensing public servants for past low wages growth could strain budgets,” S&P said.

Political spending

With unemployment below 5 per cent across Australia, S&P suggested big spending was driven more by a desire to get re-elected than by any need to stimulate economic activity.

“The media has amplified each crisis-of-the-week in health, youth crime, cost of living, and housing, for which the suggested remedies are often more government intervention.”

Responsible economic management is now regarded as less of a priority among voters, taking away the impetus to cut back on spending.

“Higher spending has also collided with broad antipathy to structural reform that could boost economic growth. Polls suggest that debt and deficits have tumbled down the list of issues that voters care about,” it said.