Moody's comments on the State of South Australia's fiscal 2018 budget

Moody's Investors Service says that the state of South Australia's fiscal 2018 budget projects wider average fiscal deficits than expected when compared to the fiscal 2017 forecasts. These are driven by larger expenses, including the reform of child protection systems and implementing the state's Energy Plan, but are moderately tempered by the planned sale of the land titles office.

The state projects that the fiscal deficit — on a net lending/borrowing basis — will average 4.4% during fiscal 2017-20, above the 3.6% forecast in the fiscal 2017 budget.

Moody's notes however, that the result is affected by the completion of the nRAH in fiscal 2017, with the project costs inflating the state's deficit for fiscal 2017. Adjusting out the impact of nRAH, we estimate that the state would record a modest surplus of 0.9% of revenues in fiscal 2017, or a small average fiscal deficit of 0.6% between fiscal 2017-20.

Additionally, the fiscal 2018 budget incorporates the state's anticipated receipts from the planned sale of the land titles office. Moody's believes that South Australia's average deficit forecasts would be higher if the proceeds of the sale are excluded. From fiscal 2018-21, the state estimates that its fiscal gap will narrow to a smaller 0.8% of revenues.

Revenue growth is projected by the state to rise by 3.0% annually during fiscal 2017-20, compared to the previous 2.9% forecast. The state expects to receive higher dividends largely due to receipts from the Motor Accident Commission, and has proposed a number of new revenue measures to support growth— including a state-based major bank levy and a surcharge on foreign purchases of residential property.

However, these measures will be offset by softer growth in payroll tax collections, following the closure of the Holden motor vehicle factory in 2017 and lower payroll tax rates for small businesses.

The state anticipates that spending will grow by 3.2% over the same period compared to 2.7% in the fiscal 2017 budget, due to higher expenditure levels in fiscal 2018. These expenditures are the result of non-recurring payments related to commencement of service payments for the nRAH, child protection system reforms, and implementation of the state's energy plans.

The state forecasts that capital spending will increase from fiscal 2017-20, reflecting investments in health and education infrastructure, as well as roads and transport; and totaling AUD12.6 billion at a consolidation level. In fiscal 2017, capital spending on roads will be supported by AUD688 million in receipts from the Motor Accident Commission into the state's Highways Fund.

Moody's normal monitoring process will include an in-depth analysis of the budget and its medium-term impact on the state's financial and debt profile.

Moody's assigns backed long-term senior unsecured debt ratings of Aa1 to the South Australian Government Financing Authority (SAFA), the entity that issues debt on behalf of the State of South Australia and state-owned corporations. SAFA's debt is guaranteed by the State of South Australia and the rating is based on the credit quality of the state. The rating outlook is stable.