Tues 9 June - I remember well the last days of the school year when report cards were looming. I spent many hours working through a measured defence of results, which I anticipated would be peppered with comments such as "could do better".

Despite the practice, on report card day, the hard final grade tended to cut through to my parents. My many defensive arguments were lost in its wake.

Report card day is looming in NSW. Budget day is June 16, when the people of NSW will be handed the report card on the State Government. It will show what Treasury thinks the deficit will be, but another important question will be: will the state retain its AAA credit rating? Is it important that we do?

To the second question: yes, it is. For a variety of reasons, many outlined in the Government's own mini-budget, keeping the AAA rating is imperative.

As the mini-budget says, "The largest cost of a credit rating downgrade would be its effects on business confidence … negatively impacting economic activity and employment." This loss of confidence would come on top of the Sensis business confidence survey, which has shown that NSW businesses have the lowest confidence of any in the country.

And they've taken that honour for the past 20 quarters. They are reeling under regulation and the highest tax burden in the country. To put any more pressure on economic activity or employment in the next 12 months cannot be entertained.

This is the point on which Nathan Rees started his premiership. He declared his Government's top priority was to keep the AAA rating. His Government said it again this month when it issued the State Plan Annual Report: "The AAA credit rating is the single most important signal that the NSW Government finances are being well managed."

In its 2004 analysis, the rating agency Standard & Poor's said for NSW to lose the top spot there would have to be, among other matters, "several years of inaction in addressing fiscal problems". Over the past decade, the agency has rightly been concerned by Government expenses growing faster than its revenue, something hidden in the good times.

The questions the agencies will ask on budget day are: has the Government controlled its expenses; can it fund its capital spending program; does its liabilities exceed those of comparable governments?

Current forecasts put NSW very close to the point at which an agency would lower its rating. One significant number in the budget papers will be the size of the Government's superannuation liabilities for which it has not set aside enough money. They have blown out, not just because of the falling markets, but because for years the Government has taken short cuts and refused to plan for the future.

Losing the AAA rating would make Treasury's life even more difficult, at a time when it is already facing significant pressures on funding infrastructure. The Federal Government's guarantee would reduce this risk in the short term, but state governments cannot frame their fiscal policies around such a temporary measure.

As we saw in the federal budget, the Prime Minister, Kevin Rudd, and the Treasurer, Wayne Swan, don't have much faith in the financial management of their NSW Labor colleagues. It would be foolish to solely rely on their support. A ratings downgrade would also widen the gap between Victoria and NSW as a place for investors to sink their money. Victoria has successfully carved a financial path that is unlikely to require the Federal Government's support. NSW has not.

Those who have a AAA rating can borrow money at the lowest possible cost. A poorer rating means higher interest and more money required to service existing debt diverted away from frontline services. It would probably run into hundreds of millions over a forward estimate period.

Keeping the top rating also gives a rigour to financial management that would not otherwise exist. I don't think anyone is under illusions that there would be any focus on managing expenses or limiting borrowings to productive projects if Rees and his team were without it.

Recently, the Government's tough talk on retaining the credit rating has softened. The Treasurer, Eric Roozendaal, said "it could be sacrificed for job creation and infrastructure spending". But this ignores the fact the two are linked. You cannot achieve the best deal for taxpayers if you forgo sound financial discipline.

On budget day, the Government may well come out with its traditional ABC response: A, an excuse, B, an apology, and C, a series of TV advertisements trying to affirm that all is OK.

But as I learnt with my own report cards, no amount of excuses, posturing or PR management can cover up for a lack of hard work and discipline when the final assessments are made. But it won't be just the student who suffers if this Government gets a bad report card. It will be the people of NSW.
 

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