Moody's flags wage growth risks in the federal budget

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Here’s Moody’s Investor Services take on Australia’s federal budget.

Australia’s budget for 2018-19 moves more quickly along the path of fiscal consolidation than was expected at the Mid-Year Economic and Fiscal Outlook, with a modest surplus forecast in 2019-20, one year earlier than expected. From a sovereign rating perspective, the constraints on fiscal consolidation in recent years have been one of Australia’s key credit challenges. If its underlying assumptions hold, the budget is a positive step in improving the fiscal outlook.

This outlook is underpinned by solid economic growth and commodity price expectations broadly in line with our assumptions. However, a risk remains that the expectations for commodity prices are optimistic and uncertainty persists on whether wages growth will pick up significantly enough to support revenues.

From a longer-term perspective, if the underlying assumptions underpinning the outlook hold, then the improved outlook for both net and gross debt is positive.

Moody’s says Australia’s current sovereign rating — Aaa with a stable outlook — continues to reflect its “strong institutions, solid growth potential and resilience, and moderate government debt burden relative to its similarly rated peers”.

While Moody’s has Australia’s top-ranked Aaa credit rating on a stable outlook, suggesting no near-term risk of a potential downgrade, rival ratings agency Standard and Poor’s decided to leave Australia’s AAA rating on a negative outlook, implying a one-in-three risk that it could be lowered within the next two years.

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