Victorian Treasurer Michael O'Brien has vowed to keep the budget under control. Photo: Jason South
The Napthine government has been presented with a painful political choice for the 2014 state election: avoid ramping up spending and debt or risk losing Victoria's top credit rating.
Leading ratings agencies have indicated the state government has little scope to loosen its purse strings leading up to the November poll if it hopes to maintain the coveted AAA rating.
It comes down to the strength of the operating position and the government's willingness to keep the budget in surplus.
It follows a shock decision by Standard & Poor's last week to downgrade Western Australia's AAA rating because of rising debt and a failure to rein in spending.
Denis Napthine's government faces a painful political choice. Photo: Dave Langley
The downgrade – seen as a political body blow for the Barnett government of the resource-rich state – has left Victoria as the last remaining government with the prized rating.
Treasurer Michael O'Brien has vowed to keep the budget under control, with a promise to fund most new infrastructure from future surpluses rather than debt.
''The reason why you want an AAA credit rating is the same reason you want to have a good relationship with your bank manager: It means you can borrow at lower rates when you need to borrow and it also means when times get tough you can borrow,'' Mr O'Brien told a housing industry breakfast last week.
But maintaining the coveted rating will be a challenge.
Standard & Poor's credit analyst Anna Hughes said Victoria's budget position was now ''close to where we would see there being [downward] pressure on the ratings''.
''There is limited capacity to undertake additional capital expenditure at the AAA without an increase in revenues or a further cut in operating expenditure,'' Ms Hughes said.
''It comes down to the strength of the operating position and the government's willingness to keep the budget in surplus so they do have some extra revenues to spend on infrastructure.''
The warning was mirrored by Moody's senior credit officer Debra Roane, who said that although the outlook for Victoria's rating was ''stable'', government efforts to constrain spending and debt would be watched closely.
''At this point we are really focused very much on the government's policy response and their resolve to continue to be fiscally prudent,'' Ms Roane said. ''They would need to continue to constrain expenditure growth.''
Treasury analysis shows the loss of the rating would be likely to add about 0.39 percentage points to Victoria's interest rate.
There is nervousness within Coalition ranks that a disproportionate amount of political energy is being expended on the $6 billion to $8 billion east-west road project, potentially at the expense of public transport, health and education.