Moody’s says this week’s federal budget leaves Australia’s finances vulnerable to shocks, including a downturn in the housing market and a sudden rise in the cost of borrowing.
And the ratings agency estimates the budget deficit will take longer to fix that the government forecasts because lower commodity prices, muted corporate profitability and low wage growth will continue to weigh on tax collection.
Moody’s says the Australian economy has show resilience but the government faces the dual challenges of subdued nominal GDP growth and sizeable spending obligations.
Last month Moody’s warned that Australia’s climbing government debt is threatening the country’s AAA status.
The analysis of the budget is contained in the Moody’s report, “Constraints on Budget Leave Public Finances Vulnerable to Credit-Negative Shocks”.
Treasurer Scott Morrison forecast the deficit at $37.1 billion in 2017, about 2.2% of GDP compared with 2.4% in 2016. According to the budget, the deficit will narrow to 0.1% of GDP by the end of the decade and record a small surplus by 2021.
Debt as a share of government revenues, a measure of the debt burden, has increased 60.9 percentage points since 2009, the largest gain in Moody’s Aaa-rated countries.
And Moody’s says large spending commitments on education, health, and social security and welfare — about 60% of the budget — will make it challenging to achieve the cuts to balance government finances.
This chart shows Australia’s increasing debt compared to other triple-A rated countries:
Moody’s says Australia is becoming increasingly leveraged.
“A high level of debt affordability mitigates the upward trend in Australia’s debt, although interest payments are absorbing around 4% of revenues, compared with below 2% in the late 2000s,” Moody’s says.
“In an environment of low interest rates, affordability will likely remain high, albeit vulnerable to a change in financing conditions.”
Moody’s sees a mixed economic environment for the budget, including lacklustre economic growth, and muted corporate profitability and wage growth.
“This expected modest nominal level of GDP growth will challenge the government’s revenue projections,” Moody’s says.
“Revenues have undershot previous projections, partly because of the fall in commodities prices and its impact on profits and wages.
“With the adjustment to these lower prices still underway, profit tax and income tax revenues are likely to grow only modestly in the next few years.”
Moody’s says the risks to Australia’s outlook include a potential correction in the property sector and an elevated level of household debt.
“The rapid increase in property prices in the key Sydney and Melbourne markets has led to a marked rise in household leverage to high levels, both by Australia’s historical standards and relative to other economies.
“This situation implies that households and the economy as a whole are increasingly vulnerable to negative economic shocks.”
In a falling property market, homeowners pay their mortgages first over other spending, dampening economic growth.
“It could also place the historically strong credit profiles of Australian banks under pressure, potentially leading to credit rationing,” Moody’s says. “High leverage would thus magnify the overall impact of any negative shock on the economy.”
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