There was a decided air of delusion in Canberra yesterday. While Tony Abbott was kicking off his Prime Ministership by refighting the climate wars and displaying how extraordinarily petty he can be, reality was mugging his economic agenda.

Standard & Poor’s downgrading of Western Australia’s AAA rating carries one big message for the new federal government — especially Abbott and Treasurer Joe Hockey — and that’s all about political will.

WA was put on a negative outlook in 2012. Yesterday S&P moved to trim the rating to AA-plus (stable) because of fears about the government’s commitment to bring down the state’s $28.4 billion debt, despite previously pledging itself to do just that. Premier Colin Barnett has recently reversed a number of revenue-raising measures contained in the 2013-14 budget.

As we noted a few weeks back, Barnett’s budget problems reflect those of other Australian governments, including the difficulties Labor faced — and which Abbott and Hockey now face. S&P said in a statement:

“The lowering of WA’s long-term issuer credit rating reflects our view that while the fiscal action plan announced in WA’s fiscal 2014 budget improves the State’s path, in our view there is likely to be slippage, reflecting our view of limited political will, as evidenced by the early revision of some budget revenue and expenditure measures. The ratings are constrained by our view of moderate budgetary flexibility and budgetary performance. WA’s debt burden is now at the high end of the domestic peer group, and in our view is likely to continue rising.”

Even the state’s stable outlook is at risk unless the government came up with a more convincing plan to cut debt, the agency said:

“The rating could be pressured if WA’s consolidated cash operating balance looked likely to fall into deficit without a convincing plan to return to surplus.”

Like Campbell Newman’s Queensland government, which was further downgraded last year after the state lost its triple-A rating under Labor, the Barnett government is giving the lie to Abbott’s claim that better fiscal management is somehow in the Liberals’ DNA. And that’s despite both states enjoying resources booms and both governments boosting mining royalties ahead of the introduction of the ALP government’s mining tax, thinking themselves very clever by undermining the federal mining tax for revenue and partisan reasons.

The problem is, while the Labor government in Canberra copped so much criticism for its fiscal management, it was doing the hard yards while Barnett was sitting on his backside.

After its unnecessary and politically-motivated promise to return to surplus in 2012-13, Labor found itself trapped: revenue forecasts (including the mining tax) kept falling but it couldn’t stomach the idea of abandoning the surplus commitment. So the 2011 and 2012 budget and MYEFO cycles became exercises in cutting and taxing, to offset new expenditures and to match falling revenue. Even after the commitment to surplus was abandoned at the end of 2012, Wayne Swan and then Chris Bowen wore the pain of making spending cuts and lifting taxes — or in the case of the fringe benefits tax rort industry, demanding some basic accountability from those claiming tax exemptions. Labor even bedded down some — though not enough — long-term savings to offset the cost.

Labor thus kept demonstrating to financial markets that it was prepared to suffer the pain that accompanies more restrictive fiscal policy. That’s a key reason why Australia got and received a triple-A credit rating from all three major agencies for the first time in its history in 2011. And that’s why Barnett has lost Western Australia’s. He’s demonstrated no such commitment.

“The message for Abbott and Hockey in all this is that you not only have to talk about the need for surpluses, you have to show commitment to getting there, as Labor did.”

The message for Abbott and Hockey in all this is that you not only have to talk about the need for surpluses, you have to show commitment to getting there, as Labor did.

How much commitment are Abbott and Hockey showing? Well, they’ve incessantly talked the talk while in opposition. But as the time drew nearer to walking the walk, their patter about fiscal discipline and returning to surplus dried up. In the end, they went to the election promising the same fiscal policy as Labor — except, they won’t even commit to returning to surplus at the same time as Labor. Now they’re talking about the need to stimulate the economy. Meanwhile, Abbott is pursuing his ludicrous paid parental leave scheme and Direct Action policies that will cost the budget billions of dollars when the policy settings he’s inherited on those issues are already bedded down and working well. Not to mention a 1.5% tax cut for all companies.

And this morning in Washington, Ben Bernanke and eight other members of the United States Federal Reserve’s Open Market Committee handed Abbott and Hockey another headache by shocking markets in not announcing a start to the trimming of its $US85 billion a month in stimulatory spending. The news saw US markets hit new all-time highs, oil, copper and gold rise sharply and US interest rates fall as the Fed also cut (for the third time this year) its forecasts for the US economy for this year and 2014.

The real impact for Australia was on the value of the dollar: it soared by 1.5 US cents to a new three-month high of over 95 US cents, which if sustained for a while will hurt exporters, raise business concerns and renew pressures on the budget. Every US cent higher the dollar goes, Hockey kisses goodbye to slabs of revenue. He and Mathias Cormann, the West Australian who has risen without trade into the Finance portfolio, will have their work cut out in preparing MYEFO — regardless of how long they want to hide it.

The rise in the dollar is not what the Reserve Bank has been wanting to see, or urging — the currency’s 15% fall from this year’s highs referred to by Reserve Bank governor Glenn Stevens earlier this month has now been trimmed to 10%. With the Fed now leaving its stimulatory spending untouched, possibly until early 2014 (and there’s a huge budget and debt crisis brewing in the US that could push the Aussie higher), there’s every chance the dollar will remain at these levels, or even move closer to parity with the greenback.

The lack of political will in WA is not the first time S&P has judged a country and found it wanting. In downgrading WA’s credit rating, Standard & Poor’s has, like with the US and France, placed a great of weight on political factors and how they affected the capacity of government to management their budgets and economies.

That’s why the looming brawls over the major annual spending bill, and then the debt ceiling by the end of October, could see S&P downgrade the US again if there’s judged to be more damage to the budgetary position (which has improved dramatically) and the political impasse shows no signs of easing.

Meantime, Abbott has given his Treasury secretary Martin Parkinson the flick, with the figleaf of a few months’ grace. The reason? Nothing to do with performance, just sheer unadulterated vindictiveness. Don’t be surprised if, down the track, independent analysts start wondering exactly how committed this government is to sound economic and fiscal management.