JOSH GORDON June 07, 2012
A boost for the state doesn't let Baillieu off the hook.
IT WAS another wintery day in Melbourne, but Kim Wells - Victoria's elusive Treasurer - must have felt like whooping for joy.
The state economy has been teetering on a knife-edge for months and finally a piece of positive economic news emerged from the gloom yesterday. State final demand - a key measure of economic health - rebounded by 1.8 per cent during the first three months of 2012.
As Wells was quick to point out in Parliament, it was the strongest result since June 2010 and the second strongest result for the quarter for the state behind Western Australia.
So perhaps there is life in the state economy yet. You could almost hear the collective sigh of relief from the Baillieu government, which has for months been manfully arguing its economic strategy is on track despite a steady stream of grim data and increasingly vocal criticisms from business.
It might not mean much to the public, but the government's austere - some would say bland - approach to economic management has much do with maintaining Victoria's coveted AAA rating.
Only last week South Australia was stripped of its AAA badge by ratings agency Standard & Poor's. It downgraded the state a notch to AA+ following the release of the state's budget, which predicted deficits worth $1.7 billion over the next three years and a sharp rise in borrowing to finance infrastructure.
South Australian Treasurer Jack Snelling dismissed the move (rival ratings agency Moody's maintained its AAA rating but warned of concerns over the deterioration in the budget position), declaring ''we still have good economic management''.
But Ted Baillieu and Kim Wells are determined to avoid a similar fate. Aside from triggering higher borrowing costs, a downgrade would represent a loss of economic credibility the government can ill-afford. According to government analysis, states that have lost their AAA credit rating - including South Australia and Queensland - face borrowing costs that are about 0.4 per cent higher than Victoria's.
Victoria's interest bill is already considerable. Treasury is predicting it will almost double from $1.2 billion this financial year to $2.3 billion in 2015-16 as debt rises. If Victoria had to borrow at the rates faced by South Australia and Queensland, the interest bill would likely be more than $200 million higher than in 2015-16.
This is not a trifling sum. As Baillieu puts it, the AAA rating ''is an ace for this state'' that makes the job of delivering infrastructure a little easier. ''We need to recognise it is a competitive advantage.''
True though this is, the argument about the need to protect the AAA rating - which is both dry and hypothetical - hardly represents an inspiring plan to present to the public. (In the minds of many, ratings agencies lost credibility for their failure to predict, and indeed their contribution to, the global financial crisis that began in 2008).
Not only this, building a political strategy around what private ratings agencies may or may not do is inherently dangerous.
According to one investment firm, RBC Capital Markets, Victoria's finances are moving towards a position that could trigger a downgrade. This is taking things too far: both Standard & Poor's and Moody's insist no decisions have been made. But Moody's senior credit officer Debra Roane told The Age the rating had been reaffirmed after the May budget ''although it's not an improving profile we are looking at''.
Whether Victoria keeps its rating will depend both on whether it breaches a series of technical trigger points relating to debt and revenues, and also on value judgments about the credibility of its strategy to rein in spending.
Meanwhile, Baillieu's backbench and business leaders are getting tetchy about the apparent lack of a plan that is saleable to the voting public in a time of rising unemployment and economic pressures.
One MP described this inability to communicate an economic strategy as ''low level chatter and rumblings''.
''The government is firstly still struggling to come to a view as to what its key message is and, secondly, it is struggling to communicate it,'' the MP said. ''If you don't get that right you are going to fail at micro-managing of smaller issues such as TAFE [cuts]. To me that is a concern.''
Yesterday's stronger-than-expected growth figures notwithstanding, Baillieu's success at handing the state economy will be central to his political success. Once again, it is the economy, stupid - and the jury is still out.
Josh Gordon is state political editor.
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