MOODY’S: Climbing Australian government debt will continue to threaten its AAA status

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Treasurer Scott Morrison is under even more pressure as he readies himself to deliver his first, and election, budget on May 3 after credit rating agency Moody’s Investor Services warned that without revenue measures, the government’s aim of balancing the Federal Budget by 2021 is “unlikely”.

That means Australia’s AAA rating is at risk, Moody’s said because “government debt will likely continue to climb, a credit negative for Australia”.

Moody’s noted that while, “the May budget will provide more detail on measures aimed at limiting expenditure growth,” any chance to curb spending will be limited by “significant spending commitments on welfare, education and health”.

Perhaps the treasurer forwarded notice of the Moody’s report given he outlined this morning. In a speech to the Business Council of Australia, he mentioned plans to “invest” in the key areas of health and education “in a more sustainable way”.

But Moody’s doesn’t appear convinced, saying that, “despite a consensus on fiscal consolidation through successive administrations, the government has been unable to reduce expenditures to significantly below 36.5% of GDP since 2009”.

Moody’s specifically called out the government and opposition for failing to tackle issues such as a GST increase, changes to negative gearing, and streamlined tax returns as barriers to an improved budget position.

That means “fading prospects for tax reform present challenges to boosting government revenues at a time when lower commodity prices are weighing on receipts from corporate profits and income taxes. Changes to superannuation tax concessions are still on the agenda and will raise government revenues, but they will be insufficient in achieving a balanced budget within five years.”

As a result, Moody’s said that the government’s inability to rein in spending, and lack of material revenue measures, means Australia’s federal government debt will continue to increase:

Notwithstanding Australia’s favourable fiscal metrics relative to Aaa-rated peers, Australia has had a prolonged and marked increase in government debt over the past decade (see exhibit). During a period of relatively strong GDP growth, Australia’s government debt has risen to 35.1% of GDP in fiscal 2015 from 11.6% 10 years earlier. We expect government debt to increase further to around 38% of GDP in fiscal 2018.

Source: Moody’s

And that, as the NAB suggested earlier this week, means Australia’s AAA rating is at risk.