Treasurer Scott Morrison stares down Moody’s credit threat

Scott Morrison has stared down a warning questioning the government’s ability to fix the budget through cuts alone.

Treasurer Scott Morrison says any revenue measures in the May 3 budget would offset the tax burden in other areas.

Scott Morrison has stared down a warning from one of the world’s most powerful ratings agencies, after it questioned the government’s strategy to fix the budget and warned that continued ­increases in national debt would risk the nation’s AAA credit ­rating.

The Treasurer, who has criticised Labor’s proposals to increase taxes, declared any revenue measures in the May 3 budget would offset the tax burden in other areas of the economy as he stuck to the government’s strategy of restraining spending and trying to boost growth to rein in the deficit.

The warning from Moody’s credit rating agency, which cast doubt on the government’s ability to balance the budget through spending cuts alone, increases pressure on it less than three weeks from handing down a critical election budget.

Mr Morrison is examining possible income or company tax cuts but faces a revenue squeeze after ruling out reforms such as increasing the GST while continuing to consider a crackdown on superannuation tax concessions.

Labor claimed it was a “wake-up call’’ to the Treasurer to adopt its range of tax increases; the government argued that it underlined the damage inflicted on the budget by Labor’s blocking of previous spending cuts.

Labor is promising a raft of big-spending measures, despite an analysis showing that ambitious programs will wipe more than $400 billion from the budget bottom line over the decade ahead.

The political firefight over the budget comes as senior state government figures suggested the Moody’s statement could push up the cost of their debt financing ­facilities by several basis points. They warned that the loss of the AAA commonwealth credit rating would flow on to the cost of debt to state governments and their statutory corporations.

The debt debate comes as demand for federal government bonds has softened over the past three years as deficits have continued. Moody’s warned that Australian governments’ combined debts — which have more than tripled in a decade to more than 35.6 per cent of GDP — posed a risk to Australia’s credit rating and, ultimately, its interest bill.

“Limited spending cuts are unlikely to meaningfully advance the government’s aim of balanced finances by 2021, and government debt will likely continue to climb, a credit negative for Australia,” said Moody’s analyst Marie Diron.

The statement suggested tax increases could be the only politically feasible way to close the government’s $38bn deficit.

Ms Diron contrasted Mr Morrison’s “focus on curbing spending” with the reality of “previous difficulties in reducing welfare benefits”.

“Actual spending cuts (in May) would be modest,” she said.

Ms Diron said the government’s expenditure challenge had been exacerbated by “significant” spending commitments in education, health and welfare.

She was also critical of the government’s tendency to “shelve” tax reform, noting GST changes and even modest measures to streamline tax returns had been dumped. “Changes that would result in savings to the government are proving difficult to adopt ahead of an election later this year,” she said.

The Australian reported this month that seven big initiatives, all unveiled since the global financial crisis ended years of budget surpluses, include $52bn in pension increases and $57bn in carbon tax “compensation” that continues to be paid, even though the tax was repealed.

Opposition Treasury spokesman Chris Bowen seized on Moody’s comments, urging the government to adopt Labor’s range of tax increases on capital gains, leveraged property investors and smokers to help fix the budget. “Tough decisions are necessary on revenue and spending,” he said. “It’s about time Scott Morrison listened to Moody’s, listened to CEDA, listened to the commentators, and adopted a similar approach to Labor.”

He said losing the AAA credit rating would mean Australia paid more in interest. “It would be a blow to confidence, and it would have flow-on effects to the ratings of major corporate entities as well. Moody’s has presented a wake-up call to Scott Morrison.’’

Mr Morrison said the government did not take the Moody’s warning “as a licence to tax Australians more’’.

“Our plan is to consolidate the budget by being disciplined, by ensuring the government lives within its means,” he said. “It’s not to say there won’t be revenue measures in the budget … what we’re saying is where we will apply those revenue measures is to reduce the tax burden in other parts of the economy, and wherever possible to continue to drive down the deficit.’’

The Treasurer said the government maintained its preference for spending cuts to fix the budget. “We have a very credible trajectory to reduce expenditure as a share of the economy,” he said.

Mr Morrison said the government would continue to focus on reducing spending as a share of the economy and to grow revenues by growing the economy. Revenue was expected to rise to the long-run average of 24.1 per cent next year and is forecast to rise over the next three or four years.

Last year’s budget pushed out the budget’s return to surplus to 2021, which is predicated on no new spending and revenue growth meeting expectations.

Moody’s expects government debt to rise to 38 per cent — near the median for AAA-rated countries — within two years mainly as a result of increasing federal debt (which is about two-thirds of the total).

Moody’s analysis follows similar warnings from National Australia Bank and JP Morgan economists.