Ratings agencies’ warn that optimism misplaced

The government’s projected budget surplus could be whittled away as the economy weakens, global ratings­ agencies warn.

Scott Morrison and Treasurer Josh Frydenberg in Canberra yesterday. Picture: Kym Smith

The Morrison government’s projected budget surplus could be whittled away as the economy weakens, according to global ratings­ agencies, which have warned of a slowing path to restoring the nation’s finances.

Official forecasts for Australia’s GDP growth were pared back to 2.75 per cent in Tuesday’s federal budget, down from 3 per cent in December’s mid-year economic and fiscal outlook.

The downgrade came as falling property prices spook consumers into shutting their wallets, force developers to delay new housing projects and dampen hopes of future­ wage increases.

Although the budget is expected to notch up a wafer-thin $7 billion surplus next financial year, with a total $45bn of surpluses over the forward estimates, tax receipt­s are projected to fall by $15bn over the next four years, even without considering the extra loss of government revenue from its extra $158bn tax cut plan for lower- and middle-income workers as the economy weakens.

Ratings agency Moody’s said the budget position had “improved significantly” over the past year thanks to higher commodity price­s and a strong jobs market.

“Looking ahead, the budget indicat­es an ongoing, but modest­ly slower, pace of fiscal consolid­ation than was previously indicated at MYEFO,” said Moo­dy’s vice-president Martin Petch.

“There are risks to the fiscal outlook. The world and Chinese economies are slowing modestly, while the pace of Australia’s domestic economy will also slow this year. In this climate of slower growth, the impact of still-weak wages growth, lower housing prices­ and a potential easing of employment growth are key uncertaintie­s for spending and government revenues, though personal tax cuts should help to offset these factors.’’

Fitch Ratings sovereign analyst Jeremy Zook said the government’s “prudent” fiscal management had supported the country’s AAA credit rating. But he said he was expecting “lower revenues and a narrower surplus than in the budget” as Treasury’s forecasts for economic growth and employment were overly optimistic.

“The proposed income tax cuts in the budget would provide some support for the economy, which has slowed since mid-2018, but make the fiscal trajectory even more sensitive to commodity prices­, and out-turns for GDP and wage growth,” Mr Zook said.

“As such, the budget could be more sensitive to domestic and external risk factors.”

Retail spending figures released­ yesterday showed turnover rose 0.8 per cent in February, beating market expectations and potentially giving the Reserve Bank some breathing room on any cut to the cash rate. The result gave analysts hope that consumption could turn out to be strong enough to support inflation and economic growth without the stimulus of an RBA rate cut.

National Australia Bank chief economist Alan Oster said he was “a touch more pessimistic” than the Treasury forecasts in the budget. Treasury expects the economy to grow 2.75 per cent over the coming year, but Mr Oster said a more likely rise was just 2.25 per cent.

“As a result, we see higher unemployment and significantly weaker wages growth,” he said, pointing to the fact that consumers were struggling with the cost of living and weren’t spending. “Also house price falls will see construction activity fall another 20 per cent over the next two years.”