Moody's gives the budget an all-clear for Australia's AAA credit rating

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Credit rating agency Moody’s has given its tick of approval to the 2017 federal budget.

“Taking the budget and our forecasts into account, we assess Australia’s Fiscal Strength as very high, one key support to the government’s Aaa rating and stable outlook,” the agency said soon after the federal budget was released by treasurer Scott Morrison.

“Our assessment of fiscal strength is based on overall government debt, which we expect to rise gradually from around 37.5% of GDP. This debt burden is in line with the debt burden of other Aaa-rated sovereigns. Debt affordability is also in line with other Aaa-rated sovereigns.”

There are challenges, however. Moody’s isn’t as optimistic on the pace of budget repair as the Treasury forecasts. More from Moody’s:

We continue to forecast a slower deficit consolidation than projected in the budget. Achieving sustained spending restraint will be challenging. Moreover, the budget projects a rise in revenues as a share of GDP, a trend which has failed to materialise in recent years. Finally, we assume that GDP growth will be somewhat slower than projected by the government, at 2.5-2.7% in the next few years. Productivity growth has slowed in Australia, like in other high-income economies. We estimate that this slowdown is partly related to long-lasting factors that will continue to weigh on growth. In turn, somewhat less strong growth will weigh on government revenues and will tend to raise expenditure compared with the budget projections.

The budget includes a number of revenue-raising measures, including medicare and bank levies, that offset higher spending on schools and the cancellation of A$13bn of net savings measures that were in previous budgets but not yet passed by parliament. Overall, the changes to both revenues and expenditure projections are small.

The removal of the net saving measures pending parliament approval from the budget enhances the transparency and predictability of budget outcomes, a credit positive.

Given the expected marked increase in social security and welfare expenses that the government budgets for, other spending areas such as education and health would see very limited increases. Sustaining such spending restraint over several years will be challenging.

Meanwhile, we estimate that GDP growth will be less revenue intensive than shown in the budget, consistent with somewhat lower tax buoyancy observed in recent years.

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