The share of national net debt held by the states is tipped to grow from 10 per cent in 2018-19 to a third by 2022-23. State net debt is tipped to grow while federal net debt is expected to fall.
States are expecting their combined net debt to climb from $45.7 billion, or 2.4 per cent of GDP, to $156.4 billion or 6.9 per cent of GDP.
That lift in debt will be largely driven by Victoria, NSW and Queensland where each state is increasing infrastructure spending, from roads to new schools.
The PBO said despite states running surpluses they would not be large enough to cover their planned extra infrastructure expenses.
“The small operating surpluses expected in most states are insufficient to fund the strong level of investment the states plan to undertake over the forward estimates,” it found.
“States will need to sell assets or borrow to fund their planned investment, with a consequent impact on their net debt positions.
“To the extent that this additional borrowing is being used to fund investment in productive assets, and given the low level of long-term interest rates, this increase in debt should not adversely affect the fiscal sustainability of state and territory governments over the medium term.”
The office warned that despite the improved outlook for all budgets there were risks. These included weaker-than-expected economic conditions or wages growth.
The PBO used its report to reveal it is going to investigate the threat posed to state budgets by changes in GST collections.
The GST is expected to raised $69.3 billion this financial year with that money to be shared among the states and territories. But there are signs GST collections are falling short of expectations, in part due to soft household spending.
There are also long-standing concerns that spending has increased the most on goods and services excluded from the tax, such as health, education and financial services.
The office estimates the share of household spending that attracts the GST has fallen from 61.5 per cent when the tax was introduced in 2000-01 to 55.5 per cent. If that continues then there may be a risk to a key funding source of the states and territories.
“While GST revenue as a share of GDP is projected to be relatively stable over the forward estimates, higher consumption of some GST-free services such as health and education may place downward pressure on GST revenue over time,” it noted.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.