Executive summary: While Commonwealth government debt has been the focus of attention recently, this report takes a broader view by bringing state debt into the picture.

Much has been made of the fact that Commonwealth government debt is projected (under current expenditure and tax policies) to grow from $300 billion at June 2013 to more than $400 billion in 2016–17— and keep growing.

Over the same four years, net debt (after deducting certain financial assets) is expected to grow from $153 billion to $280 billion and then to $325 billion in 2018–19, at which point it will peak as a percentage of GDP.

State debt has also risen dramatically since 2007, when net debt was negative. In the six years to 2013, states added $70 billion to their general government net debt to reach a positive level of $43 billion. Aggregate state debt is manageable at that level, but the upward trend is of concern—and more so in some states than others.

By 2016–17, combined Commonwealth and state general government (GG) net debt will exceed $350 billion—almost 20% of GDP, or more meaningfully, more than 50% of general government revenue. The general government debt figures do not tell the full story. For the broader non-financial public sector (which includes non-financial public corporations), state net debt was much higher at $127 billion in 2013. Combined with the Commonwealth, total non-financial public sector net debt was $283 billion, already 50% of the sector’s revenue. Public corporations’ debt is guaranteed by their government owners, but these corporations are better able to carry debt as their investments are supposed to be commercially viable.

The above figures exclude non-debt financial liabilities such as unfunded superannuation and long-service leave liabilities. These loom large in state finances. When added to net debt, non-debt financial liabilities bring the 2013 total of net financial liabilities to $190 billion for state general government and $319 billion for the state non-financial public sector. In most states, general government net financial liabilities in 2013 exceeded 100% of revenue, having increased steeply since 2007.

The states’ financial position has deteriorated because their net operating surpluses have shrunk while capital (‘infrastructure’) spending soared, resulting in large cash deficits. All states have experienced this deterioration: Queensland, Western Australia, South Australia and Tasmania have lost the coveted triple-A credit rating, and NSW and Victoria are at risk of being downgraded should current trends continue.

All states have curbed the growth of operating expenditure, but they will need to persevere in the face of sluggish revenue if they are to rebuild operating surpluses and avoid sharp cuts in capital expenditure.