Moody's just cast doubt over the Australian government's plan to deliver an earlier budget surplus

Scott Barbour/Getty Images
  • Australia’s federal government expects to deliver a budget surplus in the 2019/20 fiscal year, 12 months earlier than previously forecast.
  • Moody’s Investors Service says an earlier return to surplus is unlikely, citing concerns about the government’s expenditure and revenue projections.
  • It still believes the budget underscores Australia’s fiscal strength, noting this is a key support for retaining Australia’s Aaa sovereign credit rating with a stable ratings outlook.

Treasurer Scott Morrison delivered Australia’s federal budget last week, including news the government now expects to deliver a budget surplus in the 2019/20 fiscal year, 12 months earlier that projected 12 months ago.

Ratings agency Moody’s thinks he’ll be struggling to deliver on his promise, citing doubts on the government’s expenditure forecasts.

“Expenditure slippage is likely to constrain fiscal consolidation, because delivering sustained spending restraint over another four years will likely prove challenging as demands for both current and investment spending persist, particularly in light of forthcoming elections,” Moody’s said in a statement.

In addition, considering establishment of the $A1.3 billion National Health and Medical Industry Growth Plan and commitment to full funding of the previously announced National Disability Insurance Scheme, expenditure on social welfare will rise by up to 6% in the next few years in real terms, leaving limited room for spending increases in other areas.”

Moody’s Investors Service

It also thinks the government’s revenue projections may also be hard to achieve.

“Moody’s also believes that the rise in revenue as a share of GDP may be more moderate than expected,” it said.

“The government has revised upwards its tax receipt forecasts since its mid-year update, in line with expectations for a strengthening economy and an improved labor market outlook.

“Moody’s further expects slower revenue growth than the budget assumes. A rise in revenue as a share of GDP has presented a challenge in recent years and this is likely to continue.”

While the group believes it may take longer to return the budget to surplus, it says the budget underscores Australia’s fiscal strength, noting this is a key support for retaining Australia’s Aaa sovereign credit rating with a stable ratings outlook.

“Government debt will remain broadly in line with the Aaa median and general government debt will remain around 42% of GDP, after taking into account Moody’s forecast for the deficit to persist for longer than the authorities project,” Moody’s said.

“At the same time, this viewpoint remains consistent with our ‘Very High’ assessment of fiscal strength.”

Following the release of Australia’s March quarter Wage Price Index today, a key determinant for the budget’s projections for income tax receipts, several economists expressed doubt over Treasury’s forecasts for wage growth to lift to an annual pace of 3.5% within the next three years.

“The fate of the federal budget rests with the assumption that wage growth will rise sharply in the next couple of years. But so far there is no evidence that wage growth has improved,” said Callam Pickering, Economist at Indeed.

Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, was another to question the government’s budget projections.

“With wage growth stuck in the mud in the first quarter and likely to stay there or thereabouts for a while yet, the prospect of an interest rate rise next year has diminished further,” he said.

“It also makes the fiscal projections the Treasurer published in the Budget last week look shakier.”

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.