States Face Surging $900B Debt Amid Budget Strains

State governments are expected to push gross debt beyond $900 billion by 2029 as they try to fund large infrastructure programs and support for households facing rising living costs. However, this approach may strain credit ratings and delay much-needed reductions in interest rates. With current debt levels now more than three times what they were before the pandemic, economists warn that states are on an increasingly unsustainable financial path.

Governments across Australia are dealing with the financial consequences of years of ambitious spending. Budget forecasts for 2025 to 2026 show that several states, particularly New South Wales, Queensland and the ACT, are operating in deficit and becoming more dependent on borrowing. Since 2019, state debt has risen 150% to reach $661 billion with no indication of a slowdown.

Forecasts suggest gross debt will rise another 37% in the next four years, reaching $907 billion by 2028 to 2029. This would raise the share of state government debt to 27.3% of Australia’s nominal GDP, up from 23.7% today. Without changes to current spending patterns, combined state and federal debt may exceed $2 trillion by the end of the decade. Economists point to post-pandemic stimulus and infrastructure-related costs as major contributors, particularly in Tasmania and Victoria.

Tasmania is set to post the highest average deficits of any jurisdiction at 5.4% of its gross state product over four years, with debt expected to double to $22.4 billion. Queensland faces a 73% increase in debt, bringing its total to $198 billion. Victoria may see a 29% rise to $272 billion and New South Wales is also heading in a similar direction, with debt expected to grow 24% to over $204 billion. Despite these financial pressures, governments are still providing public transport discounts, energy bill relief and other household subsidies to meet public expectations.

Infrastructure costs are a major factor in this rising debt. In New South Wales, capital spending has tripled since 2010 and now exceeds $22 billion each year, with major projects including WestConnex and the Metro rail network. In Victoria, the Suburban Rail Loop is projected to cost more than $125 billion, well beyond original estimates. These cost overruns are raising concerns that state budgets may not cope, especially if wage growth and inflation continue to outpace spending limits.

The growing debt burden carries significant risks. Credit rating agencies have already started issuing warnings. Victoria experienced a two-level downgrade while Tasmania, NSW and the ACT are on negative watch, which signals possible further downgrades. More credit ratings cuts would raise borrowing costs, making it harder to fund ongoing projects and manage debt repayments. This could create a cycle that further weakens state finances.

Source: Australian Government Department of Finance, Treasury Australia, Australian Bureau of Statistics