Scott Morrison wins a AAA-rating for his ‘responsible’ approach to stimulus

Standard & Poor’s has backed Scott Morrison’s ‘responsible’ approach to stimulus, saying the commitment to surpluses is appropriate.

Scott Morrison in question time on Wednesday. Picture: AAP

Global ratings agency Standard & Poor’s has backed Scott Morrison’s “responsible” approach to stimulus, saying the government’s commitment to budget surpluses is appropriate and a “critical factor” in keeping Australia among only 11 AAA-rated countries.

The government has come under pressure to do more to support an economy growing at its slowest pace in a decade, even if that extra spending comes at the expense of the projected surplus.

The Prime Minister has called such demands a “panicked reaction” to the economic environment that amounts to a “serious misdiagnosis” of the situation.

“We are investing in our economy from a position of fiscal and fin­ancial strength,” he told parliament on Wednesday.

“The Labor Party would return us to the days of fiscal panic.”

S&P director of sovereign ratings Anthony Walker said his agency was on the “same wavelength” as the Prime Minister.

“There’s lot of concern out there around GDP numbers being very weak and being recessionary — we disagree,” he said. “A 2 per cent growth path is not a recession, and this is where we disagree with the calls around for further stimulus. In a global context, our economic growth path is quite strong.”

S&P forecasts gross domestic product growth to accelerate by 2.4 per cent in the coming two fin­ancial years, from 1.4 per cent over 2018-19, as tax relief, three rate cuts and an improving housing market drive a pick-up in economic activity.

Mr Walker said the “No 1” question he was asked by local and offshore investors was whether his agency would downgrade the country’s debt rating in the event that the government answered calls for a steep increase in spending. The Australian government was on target to return its budget to surplus for the first time in a decade, he noted.

In that context, a “short-term weakening” in the budget position would not be enough to threaten the AAA rating “but if the trajectory of the budget becomes ingrained into a structural deficit — that’s what could cause us to revisit our outlook”.

In a research note, Mr Walker also noted that “while (substantial further) spending initiatives are likely to support the economy, they’re also likely to weaken Australia’s fiscal flexibility to respond to future unforeseen economic shocks”.

Reserve Bank boss Philip Lowe in a speech on Tuesday night again called for help from “other arms of public policy” as the central bank boss said he stood ready to cut rates twice to an “effective lower bound” of 0.25 per cent and to then implement more unorthodox monetary policies if required to meet the inflation mandate.

“There may be better solutions than monetary policy to solving the problems of the day,” Dr Lowe said. “When there are problems on the supply side of the economy, the use of structural and fiscal policies will sometimes be the better approach. We need to remember that monetary policy cannot drive longer-term growth.”

S&P’s intervention came as official data on Wednesday showed the ongoing drag on the economy from slumping construction activity eased over the September quarter. ABS figures showed construction work done declined by 0.4 per cent through the three months, a little better than had been forecast by financial sector economists. Residential construction fell 3.1 per cent in the quarter, better than the 3.9 per cent drop in the prior month but still down 10.6 per cent over the year.