Queensland's economy is teetering on the edge of a credit rating downgrade, despite a windfall from coal royalties, according to Moody's Ratings. The state's growing debt and slowing economic growth have raised concerns about its fiscal sustainability.
Moody's issues warning on Queensland's fiscal health
Moody's, the credit rating agency, has placed Queensland's AA2 credit rating on negative outlook, signaling a potential downgrade within the next 12 to 18 months. The agency cited the state's rising net debt, which is projected to reach $85 billion by 2026-27, and a slowdown in economic growth as key factors.
According to Moody's, Queensland's net debt-to-revenue ratio is expected to climb to 145% by 2026-27, well above the median for Australian states. This increase is driven by infrastructure spending and the lingering effects of the pandemic.
Coal royalty windfall not enough to offset debt
Despite a surge in coal royalty revenues, which reached a record $5.2 billion in 2023-24, the state's fiscal position remains precarious. The royalties, boosted by high coal prices, have provided a temporary buffer, but Moody's warns that the windfall is not sufficient to offset structural budget pressures.
Queensland Treasurer Cameron Dick acknowledged the state's fiscal challenges but defended the government's spending priorities. "Our investments in health, education, and infrastructure are essential for the state's long-term prosperity," Dick said. "We are committed to maintaining fiscal discipline while delivering for Queenslanders."
Economic growth slows amid global headwinds
Queensland's economy grew by 2.1% in 2023-24, down from 3.4% the previous year, reflecting broader economic headwinds. The state's reliance on coal exports makes it vulnerable to fluctuations in global demand and prices.
Moody's also highlighted the risk of lower coal prices, which could further strain the budget. "A sustained decline in coal prices would significantly reduce revenue and widen the budget deficit," the agency warned.
Impact on borrowing costs and public services
A downgrade could increase Queensland's borrowing costs, making it more expensive to fund infrastructure projects and public services. The state has already allocated $60 billion for infrastructure over the next four years, including major transport and energy projects.
Economists have expressed concern that higher debt servicing costs could crowd out spending on essential services. "If the rating is downgraded, the state may have to cut spending or raise taxes to maintain fiscal credibility," said Shane Oliver, chief economist at AMP Capital.
Government defends its fiscal strategy
The Queensland government has defended its fiscal strategy, arguing that the debt is manageable and necessary for economic growth. "Our borrowings are for productive infrastructure that will generate returns for decades to come," Dick said.
The government has also introduced measures to improve budget management, including a new fiscal target to reduce net debt as a share of revenue by 2030. However, Moody's remains skeptical, noting that the target lacks concrete details.
Outlook remains uncertain
The outlook for Queensland's rating will depend on its ability to contain debt and boost economic growth. Moody's will review the state's finances in the coming months, with a decision expected by mid-2025.
If the downgrade occurs, Queensland would join other Australian states with lower credit ratings, such as New South Wales and Victoria, which have also faced fiscal pressures. The state's AA2 rating is currently the second-highest among Australian states, behind only the federal government.
