Budget 2020: Debt will not dent our AAA rating

Rating agencies have given the government’s borrowing plans the green light, suggesting only a rise in interest rates could see it lose its prized AAA rating.

Despite fears that government debt could hit $2 trillion by 2045, the world’s biggest rating agencies have given the government’s borrowing plans the green light, suggesting only a rise in interest rates could see it lose its prized AAA rating.

Standard & Poor’s, Moody’s, and Fitch — the three largest credit rating agencies — each said they would maintain their highest credit rating for the federal­ government, despite its plans to boost borrowing by almost $1 trillion over a decade.

“The significant increase in Australia’s debt levels, reflecting its policy response to the coronavirus shock, is in line with that experienced by Australia’s peers and remains consistent with the country’s AAA rating at this point,” said Moody’s analyst Martin Petch.

Standard & Poor’s, which placed the federal government on “negative outlook” back in April when the future borrowing challenge of the economic crisis became clearer, said federal borrowing­ costs would “remain manageable because the interest-rate environment will remain favourable for some time”.

“Should this scenario not pan out as expected, then downward pressure on our ratings could intensif­y,” it added.

Net debt, which was about $200bn in 2014, will rise to almost $1 trillion by 2024 according to the latest budget papers. Gross debt, which the Howard government reduced to a neglig­ible sum in the mid-2000s, is forecast to reach almost $1.75 trillion by 2030.

Fitch Ratings said the debt outlook was “in line with our expectations­” and Australia had “fiscal space to counter the effect­s of the pandemic in the near term. “Our future rating assessmen­ts will also assess the relative deterioration of Aust­ralia’s fiscal position to its AAA peers, who are all seeing higher debt-to-GDP ratios,” said analyst­ Jeremy Zook.

The free-market Institute of Public Affairs, from its modelling based on the budget papers, said gross debt would peak at $2 trillion by 2045 ahead of the return to budget surplus in 2046. “The devastating lockdown mea­sures have caused a human­it­arian tragedy, and the debt Australia has gone into to pay for them will last generations,” said IPA research­ fellow Cian Hussey.

The budget forecast net interest costs would remain equivalent to about $13bn or 0.7 per cent of GDP over the next four years.

Centre for Independent Studies economist Tony Makin said assuming interest rates would stay low was “highly speculative and overly optimistic”.

“World interest rates are likely to be significantly higher when the public debt has to be refin­anced in light of massive recent global borrowing and the inflationary pressures likely to arise from excess money creation around the world,” Professor Makin added.

Independent economist Saul Eslake said there was “no need for undue alarm at the level of debt”. “As a percentage of GDP, the government’s gross interest payments will be less than they were in the 1970s, 1980s and 1990s,” he said on Wednesday.