Rating downgrade looms as Australia sticks to budget plan

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SYDNEY: Australia stuck to its ambition of returning the budget to surplus in 2020-21 on Monday despite downgrading growth forecasts as fears grow it could lose the coveted AAA credit rating.

The country’s resources-driven economy has enjoyed more than 20 years of growth but it is now transitioning out of an unprecedented mining investment boom, and the going has been bumpy with revenues under pressure.

In a mid-year fiscal update, the government revised down the nation’s cash deficit of Aus$37.1 billion (US$27 billion) in 2016/17 — as announced in the May budget — to Aus$36.5 million.

But it forecast widening deficits in the next three years before a return to surplus.


“The government’s plan to restore the budget to balance remains on track,” Treasurer Scott Morrison said in a statement.

Higher iron ore and coal prices would help support tax revenues, the update said, but this would be more than offset by weaker wage and non-mining company profits.

After knife-edge elections last year, Standard and Poor’s warned Australia’s rating could be lowered if Canberra did not improve its budget balances and deliver on surplus plans.

Australia is one of only a handful of countries to hold the top AAA rating from all three major agencies, also including Moody’s and Fitch, having dodged a recession during the global financial crisis.

Generally, losing the AAA means the nation would be forced to pay higher interest on its debt.

Capital Economics’ chief Australia economist Paul Dales said “it probably won’t be long before one or two of the ratings agencies withdraw their AAA rating”.

“The treasurer has admitted that in the four financial years starting 2016/17 the budget deficit will be around $10 billion higher than forecast in May’s budget,” he said.

“The chances of the budget being balanced by 2020/21, which the rating agencies want, has become even less likely.”

Ahead of the update, Deloitte Access Economics’ Chris Richardson put the chance of a downgrade at 50-50.
But he told the Australian Broadcasting Corporation he believed if it did happen, it would not be until next year.

“A budget update is a sufficiently complicated beastie — it deserves some time to be taken for people to go through that in sufficient detail,” he said.

The conservative government does not have a majority in the upper house Senate, meaning it has struggled to pass some spending cuts.

This has stymied efforts to rein in debt and deficits, undermining business and consumer confidence with repercussions for the economy, which contracted 0.5 percent in the September quarter.

Given the poor quarterly number, the update changed the government’s forecast for annual growth to two percent in 2016/17 rather than 2.5 percent as previously predicted, before rebounding to 2.75 percent the following year.

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