Scott Morrison needs to cut to save AAA credit rating

It is a Treasurer’s worst nightmare: to face a credit downgrading of the nation on his watch. (We are still waiting for our first female treasurer.)

But Scott Morrison is sufficiently down-to-earth to realise there is a distinct possibility this fate may befall him. He even took the trouble to seek out the ratings agencies in New York ­recently in an attempt to convince them the country’s books are not really as bad as they seem.

The trouble for the Treasurer is that the government doesn’t have a credible fiscal consolidation strategy. And the fact Labor’s fiscal credentials are even worse than the government’s doesn’t really help Morrison.

We should expect some massaging of the figures in the soon-to-be-released midyear economic and fiscal outlook, particularly if Treasury (heroically) decides to bung in the recently inflated iron ore and coal prices and assume they will apply for the next four years. Even so, we are looking down the barrel of a budget deficit of about $37 billion this financial year.

In the event of our AAA credit rating being lost — and note that the two key ratings agencies, Standard & Poor’s and Moody’s may not act in unison — several things will happen. The credit ratings of some state governments will be downgraded, although Victoria and NSW are likely to be spared, at least in the short term. Likewise, the credit ratings of local governments will be downgraded.

But here’s the real kicker: our banks will be marked down and the cost will feed through into higher borrowing costs for mortgage holders and other borrowers.

In the short run, the impact is likely to be minimal, given the low level of interest rates around the world. But were there to be a period of turbulence similar to the global financial crisis, Australia would pay a high price.

Here’s the thing about the ratings agencies: they are not policy specialists, they just worry about the numbers. They don’t really care about how budget repair is achieved as long as it is.

By contrast, the government should be using the best policy options possible to bring the budget back into balance.

The rating agencies also consider the current account deficit, the ­degree of household indebtedness, and bank and corporate debt. They are slow to downgrade but also very slow to upgrade. If we were to lose our AAA rating, there would be a distinct possibility of more downgrades.

The message for Morrison is clear: he needs to get on top of fiscal repair by cutting government spending. Not just assume that GDP will grow quickly and spending will fall as a percentage of GDP. Actually carve into spending in a sensible way.

There is just so much waste in government spending that it won’t really be too hard once the government decides that real action is ­required.