Australia AAA threat an indictment of political leadership and Treasury

Australian Treasurer Scott Morrison during his media conference responding to the rating agency move today. Picture: AAP

The threat to Australia’s AAA credit rating is an indictment both of political leadership, which has been unable to take action to close the budget deficit, and of Treasury, which has persistently allowed political leaders to get away with painting unrealistically rosy pictures of the outlook.

S&P Global’s decision to put Australia’s rating on negative outlook formally gives authorities up to two years’ notice to get their act together, while signalling the agency thinks there is at least a one-in-three chance that it will fail to do so.

ELECTION LIVE: Reaction to the AAA threat

However, the agency also puts a much tighter time frame on the need for government action saying it will judge over the next six to 12 months whether the new government is able to get tax and savings measures through the parliament.

It notes that savings measures equivalent to around 0.2 per cent of GDP have persistently failed to get through the parliament and says much more is required.

It flatly rejects Treasurer Scott Morrison’s assertion that the budget sets a credible trajectory for the return to surplus, saying the forecasts are too optimistic. It is worried both on the price for iron ore, and for the growth of wage income more generally.

Treasury has persistently been predicting a speedy return to surplus. S&P notes that the current projection for that magic moment of 2020-21 is eight years later than Treasury’s first such prediction.

The ratings agency needs to be satisfied that the budget will be back in balance in the early 2020s. So far, it does not see the policies presented by either party that would deliver that in a more difficult economic environment than the one Treasury projects.