NSW and Queensland are singled out as at risk of a credit rating downgrade as infrastructure projects and entitlement claims mount, while tax increases become politically much harder

Ratings agency S&P Global says some Australian state governments are spending like they're still in pandemic lockdown. In line with their predictions last year, they see an ongoing risk that there will be further delay post-pandemic fiscal repair.

This is especially true in NSW and Queensland and they warn thee two carry carry negative outlooks into 2026, threatening their high AA+ ratings.

State operating balances are mending slowly and are likely to remain weak due to historically large infrastructure programs. Sector-wide debt and interest burdens will continue to rise. Overall state government debt stands now at $660 billion, or 24% of GDP.

They made the warnings in a report published today (Thursday) , titled "Subnational Government Outlook 2026: Smaller Australian States Catch The Borrowing Bug."

"The states' combined cash deficit ballooned in 2025 to about 16% of revenues, matching the previous nadir in 2021. We project the stock of state government debt will roughly triple between 2019 and 2027," said S&P Global Ratings credit analyst Martin Foo.

The report is part of a global series on subnational governments. It surveys the fiscal and credit outlook for the seven rated Australian states and territories, and their A$660 billion of outstanding collective debt.

Common obstacles facing Australian states include combative public-sector wage negotiations, widespread community demands for more entitlement spending, and a broad aversion to tax increases or economic reform. In 2025, we downgraded two smaller states, Australian Capital Territory and Tasmania (both now 'AA').

Perhaps counterintuitively, higher debt means greater secondary market liquidity and name recognition. As a result, Australian semis are becoming a more global asset class and attracting demand from new types of offshore investors.

"In 2025, two states, Queensland and Victoria, issued benchmark-sized foreign-currency bonds for the first time in more than two decades, helping to diversify their financing sources. We anticipate more such issuance in 2026," Martin Foo said.