NSW and Victoria are at risk of losing their triple-A ratings if the trends in rising state debt continue unabated, a think tank has warned.
The Centre for Independent Studies (CIS) says while the focus has been on the rapid increase in federal debt levels over the past six years, growth in state government debt has been just as a dramatic.
In 2007, the states collectively had a negative net debt position of just under $30 billion - that is, they had a greater financial assets than debt.
By 2013, this turned to a positive net debt position of $43 billion, or about a $70 billion debt increase in six years.
"Unless action is taken now, state governments will face rising deficits and debt in the long term, just like the federal government, and will be unable to deliver the services the public wants," CIS senior fellow Robert Carling says.
Between 2007 and 2010, the global financial crisis was felt through sagging tax revenue and investment income, while infrastructure investment rose strongly.
From 2010 to 2013, the states' operating surpluses dried up and cash deficits rose even further.
In a study released on Thursday, Mr Carling said to curtail the growth in debt, states must achieve large increases in operating surpluses and greatly reduce capital expenditure, but conceded the latter would be inconsistent with demands for infrastructure investment.
"States need to contain costs such as staff numbers and pay rates, and avoid costly new program commitments," he said, adding states should follow the Queensland Newman government in cutting operating expenses, as much as it has been criticised.
"It is on the right track," he said.
South Australia and Tasmania are in the weakest positions of the states, followed by Queensland and Western Australia.
He said if the trends continued, NSW and Victoria risked joining the ranks of the others, which had lost their tripe-A credit ratings.
"Financial strength is not just desirable for its own sake," Mr Carling said.
"If the states were to return to running operating surpluses, it would mean more funds available for improved infrastructure."
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