This analyst thinks losing Australia's AAA credit rating is 'all but inevitable' on the current budget trajectory

Andrew Flintoff (right) of England consoles Brett Lee (left) of Australia after England won the 2nd Ashes Test in 2005. Photo by Tom Jenkins / Getty Images

While it may have been enough to see Moody’s and Fitch affirm Australia’s top-notch AAA credit rating, not everyone has been as sanguine about the federal budget position unveiled in the mid-year economic and fiscal outlook (MYEFO) released by the government on Monday.

Stephen Walters, chief economist at the Australian Institute of Company Directors, is one analyst who is not overly convinced about the government’s plan to return the budget to surplus by 2020/21, suggesting that it now looks “even more heroic than before given the slippage since the budget was released back in May”.

Walters, formerly of JP Morgan, says that on the basis of the latest fiscal slippage, Australia’s coveted AAA credit rating is under greater threat than before, albeit at the margin.

“Revenue projections have been downgraded along with the expected rates of growth in the economy, and government spending is projected to remain stubbornly high above 25% of the economy,” he says, suggesting that ratings agencies would be “disappointed” by today’s announcement.

“The government still has a plausible plan for the return to surplus, but the state of the public accounts clearly has moved in the wrong direction since the budget. The journey back to surplus, therefore, is slightly longer than before.”

Walters says this makes it “all but inevitable” that Australia will lose its AAA credit rating without further action from the government.

“On the current trajectory, the loss of the highest ranking is all but inevitable. Without further significant remedial action, it seems only the timing of the downgrade is uncertain,” he says.

After Australia last lost its top-notch rating back in 1986, it took 25 years to regain it with all three major ratings agencies.

“History tells us then that, once lost, it is hard to get it back,” says Walters.

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