S&P Global Ratings has issued a blunt warning to Australian leaders, appearing to signal that a "cost-of-living spending spree" could trigger a wave of credit rating downgrades.
As the Middle East conflict drives petrol prices higher at the local bowser, the ratings agency cautioned that further subsidies and handouts—popularised during the pandemic—risk exacerbating inflation and making the Reserve Bank's job harder.
S&P analyst Anthony Walker noted that states have largely failed to rebuild their fiscal buffers, leaving them vulnerable to the dual threat of stagflation and mounting debt.
The pressure is particularly acute in New South Wales and Queensland, both of which currently hold AA+ ratings with negative outlooks.
S&P suggested that any "unexpected weakening" in their budget positions could result in immediate downgrades.
While the federal government has already halved the fuel excise at a cost of $2.55 billion, Treasurer Jim Chalmers insisted Australia remains well-placed due to modest debt levels.
However, economists like EY’s Cherelle Murphy warned that a lack of coordination between federal and state policy risks keeping inflation higher for longer.
With Victoria and Tasmania already offering transport "freebies" ahead of elections, analysts fear that political pressure to cushion the oil shock will outweigh fiscal discipline.
If states continue to pump demand into the economy, the RBA may be forced to push interest rates beyond the current 4.1% to reach its 2%–3% target band, further straining household budgets.