Standard & Poor’s warns Australia’s budget under pressure

RATINGS agency Standard & Poor’s has backed warnings the federal budget is vulnerable to global economic shock.

STANDARD & Poor’s Ratings Services has backed warnings by Australia’s central bank that the federal budget would be vulnerable to a global economic shock, which could put the country’s AAA rating at risk.

Australia’s budget outlook has weakened sharply in the last six months as commodity prices have plunged, said S & P’s sovereign analyst Craig Michaels.

Sliding prices of coal and iron ore, the country’s biggest export, are hurting economic growth, denting corporate profits, driving higher unemployment and eroding government tax receipts.

Goldman Sachs recently calculated that Australia could lose $500 billion in national income in the next decade because of the drop in commodity prices, which includes a 50 per cent drop in iron ore.

“If there is a significant external shock, it’s very likely that that would have a significant budget impact like it did in the global financial crisis,” Mr Michaels told The Wall Street Journal.

Some of the most pressing concerns include uncertainty over Greece’s bailout, which has led to selling of the Australian dollar, and the prospects of a sharp slowdown in China, Australia’s biggest regional trading partner.

Reserve Bank of Australia Governor Glenn Stevens raised the issue of external shocks last Friday, when he urged “reloading the fiscal cannon,” or in other words, cutting government debt to restore surplus.

“The budget deficit would go from 2 per cent of gross domestic product to five or six, in a heartbeat. That would happen very quickly if we had a serious downturn,” Mr Stevens said.

The government’s budget deficit is currently forecast to be 2.5 per cent of GDP in 2014-15, with a return to surplus expected around the end of the decade.

Treasurer Joe Hockey will deliver the budget in May.

Despite some of the pressures, Australia’s economy is now in its 23rd year of expansion, having withstood the storm that engulfed global markets after the collapse of Lehman Brothers in September 2008, thanks in part to massive budgetary stimulus.

Considering Australia’s relatively low government debt, at about 20 per cent of GDP, Mr Michaels said there is no immediate threat to its AAA rating.

Still, the post-crisis stimulus swung the budget to a deficit from a strong surplus quite rapidly. That means there is less room for further fiscal stimulus than before, “but we still are quite comfortable where debt is,” Mr Michaels said. The government also has been slow to cut spending as the economy has recovered.

Mr Michaels said he expects government debt to rise above 20 per cent of GDP in coming years, but said the rating would only come under direct pressure if debt moved closer to 30 per cent of GDP.

“Given that debt is still low there is a bit of wriggle room there from a ratings perspective to absorb some of those revenue shocks, but we still be looking to see ongoing restraint in spending growth,” Mr Michaels said.

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