Global ratings agency issues warning on $45bn spending spree by Albanese
Labor’s $45bn in ‘off-balance-sheet’ promises could jeopardise nation’s triple-A credit status, agency says.
Labor risks putting the country’s triple-A credit status in danger if it races to implement nearly $45bn in “off-balance-sheet” election promises, one of the top rating agencies warns.
As Anthony Albanese flags the potential for additional cost-of-living support, Standard & Poor’s Global Ratings lead country analyst Anthony Walker told The Australian that further government spending risked stoking inflation and a more aggressive Reserve Bank response.
Mr Walker also said those risks would provide a further brake on the economic recovery, and place pressure on the commonwealth’s finances.
The Prime Minister has promised a $10bn fund to increase social and affordable housing and a $20bn “rewiring the nation” fund to modernise the electricity grid and build transmission infrastructure. In addition, the government has also pledged a $15bn “national reconstruction fund” to revitalise manufacturing.
While such spending commitments tend not to appear in the underlying cash balance, Mr Walker said the rating agency would include them in its assessment and that they could “pressure the AAA rating” if the spending was frontloaded.
A top credit rating provides a stamp of approval for how the country’s finances are managed and the ability to access cheaper funding from international lenders.
“Talking about the $40bn-$50bn, if it was all spent in the next couple of years, and if we were to see a much slower reduction in the deficits than we were expecting, then that could pressure the AAA,” Mr Walker said.
Finance Minister Katy Gallagher told The Australian that “the budget treatment of Labor’s off-budget investments are no different to the previous government’s establishment of funds or facilities such as the Northern Australian Infrastructure Facility and the Critical Minerals Facility”.
“Our costings, released before the election, included the impact of these investments and these investments were assumed to be made over a number of years,” Senator Gallagher said.
“Our plan is deliberately designed to make key investments to improve productive capacity of the economy without unnecessarily putting pressure on inflation, and not jeopardising the AAA credit rating from the three ratings agencies which was first obtained under Labor.”
Australia is one of only nine countries to hold a AAA rating from all the major agencies: S&P, Moody’s and Fitch.
Senator Gallagher earlier said there were “clearly some huge budget pressures coming”, flagging ballooning costs in areas such as health, aged care, the NDIS, defence and national security.
“All of them (are) growing faster than GDP and (are) going to play significant pressure on the budget,” she told the ABC.
But some of these strains would also be evident in the four-year forward estimates, which Treasury last estimated would include $224.5bn in deficits out to 2025-26, not including an $80bn shortfall in this financial year. “We are looking at those spending pressures and … I don’t expect that all of those will be able to kick beyond the forward estimates. They are real, they are here now, they are growing rapidly,” she said.
“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, but we are absolutely 100 per cent focused on delivering the commitments we made to the Australian people.”
Treasurer Jim Chalmers has said he would provide an economic update when parliament returns in June or July, and has committed to an October budget.
“Ahead of that, we have to look at all of those decisions that were taken by the previous government and see where we can make the budget work better,” Senator Gallagher said.
Mr Walker said while governments had historically structured major capital spending commitments, such as the NBN, off-budget, the ratings agency automatically included the total impact on net debt when assessing the country’s financial position.
Despite Dr Chalmers’ warning the budget he will hand down in October will be in a worse position than Treasury’s pre-election update, Mr Walker said he was “still expecting deficits to narrow sharply in 2022-23 – and even more so than in the March budget”.
Mr Walker said the ratings agency was waiting for more information from the new Treasurer, most obviously his economic update when parliament resumes, which “will set the fiscal tone for the new budget, and set the tolerances they have for spending”.
“Net spending was a little bit higher (in Labor’s pre-election costings),” he 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.”
A paper by the Parliamentary Budget Office in March 2020 found that the growing use of “alternative financing arrangements” was making it more difficult to scrutinise the budget.
With most media focus on the underlying cash balance, the “headline cash balance” in the March budget included an additional $33.7bn in deficits over the forward estimates. These are classified as “net cash flows from investments in financial assets for policy purpose”, and not included in the underlying cash figure.
They include off-balance-sheet items such as a $7.4bn loan repayment from the NBN over the forward estimates, set against the $5.4bn committed through the Northern Australia Infrastructure Facility, among others, notably $18.4bn in spending under “net other”, which Treasury says cannot be itemised for commercial-in-confidence reasons.
Independent economist Saul Eslake said the off-budget accounting for investments in financial assets to fund spending did not have “any basis in accounting standards”, and that mostly it was a way for successive governments to keep the cost of some commitments out of the public eye. But Mr Eslake said it would be virtually impossible for Labor to spend $45bn in the space of two or three years, particularly given shortages of labour and materials.
“I don’t think for a moment they (the Albanese government) are planning to do that all in one or two years,” he said.
Mr Eslake, a former chief economist at ANZ, said “government spending as a share of GDP is on a permanently higher plane by the equivalent of around 2 percentage points of GDP than had been foreseen two or three years ago” – suggesting a $40bn deterioration in the structural budget position.
More Coverage
Home buyers ready for interest rate cuts
After several months of modest price falls, property experts are not expecting a housing market resurgence off the back of an interest rate cut.
Rise of local terror demands better from our leaders
The scourge of anti-Semitism in Australia has become a runaway train that now demands a radically escalated counter-terror mindset from federal and state governments, police and spy agencies.