S&P Global Ratings will be scrutinising the Victorian state budget when it is unveiled by Treasurer Tim Pallas on Tuesday.
The agency downgraded Victoria's credit rating two notches in 2020 from AAA to AA, the lowest rating of any Australian state or territory.
Fellow ratings agency Moody's followed suit, stripping the state of its AAA status in February 2021 and downgrading it from AA1 to AA2 in 2022.
Credit rating downgrades make it more expensive for governments to service debt, leaving less money for hospitals, roads and schools.
Latest forecasts estimate Victorian taxpayers will be paying $24 million a day in interest by 2026/27 to service $177.8 billion in net debt.
S&P Global Ratings credit analyst Anthony Walker said Victoria's chances of a ratings upgrade were "very remote" in the medium term.
"Right now it's a stable outlook, we're not expecting to change," he told AAP.
"But the data trajectory is potentially heading more towards AA- than a AA+.
"Where we could see some downside pressure is if the debt levels rise beyond 240 per cent of operating revenues - they're currently at 215 per cent in our forecasts."
Another downside trigger would be if the state's annual interest costs rise beyond 10 per cent of operating revenues, with S&P forecasting that figure will hit 8.3 per cent in 2026.
"There is a narrowing in the headroom of the AA rating," Mr Walker said.
"The other downside scenario could be a lowering of financial management if we continue to see these major cost escalations - North East Link, Suburban Rail Loop kicking off - these are the things that could cause a downgrade."
The Victorian budget will be handed down on Tuesday and is likely to point to a surplus by 2025/26. (Diego Fedele/AAP PHOTOS)
In the lead up to his 10th budget, Mr Pallas has flagged government infrastructure spending will be moderated to give the private sector breathing room to build more housing.
Mr Walker was skeptical the treasurer would be true to his word.
"The proof's in the pudding," he said.
"We heard the same thing last year and the budget was upsized and then it was upsized again with the increase in December.
"We really need to see the overall capital spend not just peak but come off and we're not seeing that year-on-year."Â
Even if projects are deferred or delayed, Mr Walker warned it could lead to further cost escalations and drive up overall infrastructure spending.
Victoria is expected to return a modest surplus of $1.1 billion by 2025/26 based on the latest sums from December, but it's not a silver bullet in S&P's eyes.
"We would say unless things change overall in terms of fiscal trajectory, running a operating surplus is not enough," Mr Walker said.
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