Economic reality bites with AAA rating in the balance

The challenges of Australia’s economic and budgetary position have been highlighted for the Albanese government in a sobering warning from Standard & Poor’s. Jim Chalmers, Finance Minister Katy Gallagher and others have drawn attention to problems they blame on the Morrison government – a common practice among incoming governments, which like to blame the problems they face on their predecessors. But retrospective buckpassing will not suffice in the current economic environment. Moody’s has specifically drawn attention to the potential costs of some of Labor’s campaign commitments. The Albanese government’s $45bn in off-balance sheet commitments, such as the $10bn Future Housing and $20bn Rewiring the Nation funds, could threaten the country’s AAA credit rating if introduced to the budget too quickly, the agency warns. Australia is just one of nine nations, post pandemic, to hold an AAA rating from the three major credit agencies, S&P, Moody’s and Fitch. A top credit rating is highly valued, especially in a time of rising interest rates. It allows access to cheaper funding from international lenders.

The warning from S&P comes after Moody’s last week downgraded the state of Victoria’s credit rating from Aa1 to Aa. The change reflected “persistent material fiscal deficits and a consequent structural increase in its debt burden’’, Moody’s said. Fiscal deficits, it noted, were projected to average 18.8 per cent a year over the four years to 2026. While revenue losses in the latest Victorian budget were much lower than forecast, with strong returns in payroll tax and stamp duties from the property boom, the budget “confirmed the state’s policy to finance very large capital expenditure and as a result maintain wide deficits compared to similarly rated peers internationally’’.

At national level, S&P Ratings Agency lead country analyst Anthony Walker said further spending by the Albanese government risked stoking inflation and a more aggressive Reserve Bank response. That, in turn, would slow Australia’s economic recovery more quickly and add pressure to the commonwealth’s finances.

The government’s challenges will be long-term. Budget repair and the rising interest rate cycle both have a long way to run. While committed to dealing with inflation and budget repair, the government will find progress is harder to achieve than criticising from the sidelines. On Sunday, Senator Gallagher pointed to “serious budget pressures”, telling ABC television “we can’t pretend they are not coming and we can’t pretend that the budget is in good shape and able to absorb this”. Spending on health, aged care, the National Disability Insurance Scheme, defence and national security was growing faster than GDP, she said. Those areas are priorities for the nation and for Labor, as much as they were for the Coalition. Difficult decisions needed to be made about spending allocated in the March budget. Anthony Albanese told Sky News the Treasury and Finance departments were auditing the budget line by line to find savings. “ This is a budget that’s full of waste and rorts,” he said. “We need to get to work to make sure that every dollar of expenditure is regarded as the precious commodity of taxpayers, not a political party.” To his credit, the Prime Minister confirmed Labor would not renege on the Coalition’s legislated stage three tax cuts, which offer relief for people earning up to $200,000 a year and create flatter, lower personal tax rates: “We said on the stage three tax cuts that they had been legislated. People are entitled to operate on the basis of that certainty.”

While the Albanese government is complaining about the financial position it has inherited, S&P is focusing on Labor’s plans. “Net spending was a little bit higher (in Labor’s pre-election costings),’’ Mr Walker said. “There has been a lot of talk of ‘off-balance sheet spending’. When we are looking at the total debt and debt raising requirements, we will be curious to see how that off-balance sheet borrowing is structured, and where it goes.”

S&P is awaiting more information from the Treasurer on the government’s budgetary intentions, which “will set the fiscal tone for the new budget, and set the tolerances they have for spending”, Mr Walker said. Dr Chalmers will provide an economic update when parliament resumes, next month or in July, followed by a new budget in October.