Moody's: Australian regional and local governments sector outlook negative as revenue growth slows

Moody's Investors Service says that the outlook for the Australian states and territories sector is negative as revenue growth slows, and as these regional and local governments (RLGs) face rising expenditures.

The negative outlook is primarily driven by weakening domestic economic growth as China's slowdown reduces earnings from commodity exports and investment, while a slower pace of revenue growth could impede efforts to narrow deficits, thereby delaying a return to balanced budgets.

Moody's further believes that fiscal austerity is becoming harder to maintain after several years of robust cost controls.

Moody's conclusions were contained in its latest report on the Australian states, "Regional and Local Governments -Australia: 2016 Outlook -- Slower Revenue Growth Drives Negative Outlook".

The states' deficits will widen if revenue growth falls short of their projected 3.3% average for 2016-2019 and Moody's notes that they built up large deficits between 2005 and 2014 as expenditure growth of 6.7% outpaced revenue growth of 6.2%.

In addition, goods and services tax-backed (GST) Commonwealth grants could fall short of a projected average rise of 5.9% as consumption is increasingly focused on activities not subject to GST.

Moody's also notes that property-related conveyancing duties are volatile and payroll tax revenues could be dampened by weaker trends in the labor force.

On the other hand, Moody's says the states' deficits are narrowing, but risks remain, given that the pace of healthcare spending is difficult to reduce, while there will be a lower indexing of Commonwealth grants.

The states' debt burdens are also forecast to stabilize, and although the average duration of their debt is relatively short, large holdings of liquid financial assets provide a buffer.

Moody's says that the outlook could return to stable if fiscal discipline leads to budget surpluses and an improved level of competitiveness underpins growth in the manufacturing, education and tourism sectors, in turn supporting revenues.