The ratings agency Moody’s says subdued commodity prices are limiting tax revenue and the chances of cutting government debt quickly.
Moody’s forecasts government debt will rise to 38% of GDP by the end of June 2018 from around 35% last June.
This will limit the government’s room to buffer against potential negative shocks, says Moody’s in its latest credit report on Australia.
And subdued commodity prices, caused by weaker demand in China, will continue to drag on government revenues through weaker corporate and income tax receipts.
However, overall key economic metrics, including GDP growth and unemployment, will continue to outperform most developed economy peers.
At the same time, a weaker Australian dollar is benefiting sectors such as education and tourism, including airlines which have been further buoyed by lower fuel costs.
Moody’s says big revenue raising measures are no longer being considered by the federal government while possibilities to restrain spending will be limited by promises on welfare, education and health.
“The government’s objective to balance the budget by fiscal 2021 will be challenging in the absence of broad-ranging revenue raising measures and given existing commitments to spending,” Moody’s says.
“As a result, we forecast a further increase in debt in the next few years, a credit negative.”
However, Moody’s says government debt is performing better than its peers, as this chart shows:
The ratings agency says economic and financial developments in China will continue to pose a downside risk to Australian growth.
And Australia’s reliance on external financing is unusually high for a Aaa credit rating.
“Domestically, the stock and rate of change in private debt, particularly household debt, raises the economy’s vulnerability to negative shocks,” Moody’s says.
“Nevertheless, we view these as risks as manageable. Both fiscal and monetary policymakers have some room to buffer a slowdown in growth.”