Budget 2016: Budget revenue raising ‘limited’: Moody’s

The rating agency says budget measures aimed at increasing government income are “relatively limited”.

Moody’s has taken issue with the government’s optimistic assumptions for revenue growth based on nominal GDP growth. Picture: AAP/Mick Tsikas.

Global ratings agency Moody’s Investors Service says there were “no significant surprises” in terms of revenue measures revealed by Treasurer Scott Morrison in the Federal Budget, and is forecasting larger budget deficits and lower future revenues than the government is anticipating.

Speaking to The Australian after Tuesday’s budget was handed down, Moody’s senior vice president Marie Diron — who authored last month’s warning that Australia’s triple-AAA credit rating was under threat thanks to a lack of revenue measures flagged by Mr Morrison ahead of the May budget — said the measures aimed at increasing government income were “relatively limited”.

“The measure expected to raise the largest amount of revenue is the tobacco excise tax increase, which was announced a few weeks ago,” Ms Diron said.

She said the budget was “in line” with statements in recent weeks, where the government had committed to dropping some proposed revenue measures, such as an increase in the GST rate, that would have helped repair the bottom line.

“There were no significant surprises on that side,” Ms Diron said.

Meanwhile, the government revealed a number of tax relief measures, in particular for small enterprises, which when combined with the commitments on welfare, education and health, meant the deficit is projected to be wider for longer, she said.

Ms Diron also took issue with the government’s optimistic assumptions for revenue growth based on nominal GDP growth.

Nominal GPD, which crucially affects tax revenues, has fallen short of Treasury forecasts every year since the 2012 and budget forecasts are depending on nominal growth to surge to 5 per cent from 2017 onwards.

The nominal figures are highly dependent on commodity prices, and Treasury lifted its assumption for Australia’s largest export, iron ore, by $US16 a tonne to $US55, and for metallurgical coal by $US18 to $US91 a tonne.

“Our forecast for nominal growth is a bit below the government’s projections, in particular over the medium term,” Ms Diron said. “The budget assumes a return to nominal growth of 4.25 per cent by next year, while we have it below 4 per cent. The government then projects growth to further increase to 5 per cent. We don’t have explicit forecasts but I can imagine that is higher than our assumptions,” she said.

Ms Diron said the current environment of low wage growth and lower commodity prices would be more persistent than Treasury was assuming, and during that time nominal growth would stay low — translating into lower revenues.

“That’s one of the reason we would expect larger deficits and higher debt.”

Ms Diron stressed that the budget was just one piece of the formula used to calculate the country’s credit rating, and Australia had the highest rating of fiscal resilience. A collapse in house prices and ensuing economic shock was not the rating agency’s “base case”.

The government has a whole range of considerations when formulating the budget and we certainly don’t make any recommendations,” she said. “We don’t see a housing shock at the moment, but if it does happen the government starts from a weaker position.”