Ratings group, Moody’s Investor Services has made a significant intervention in the local political and economic debate by warning that without revenue measures, the federal government’s aim of balancing the Federal Budget by 2021 is “unlikely”.
Moody’s said that this means Australia’s AAA credit rating is at risk 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”.
"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.
"However, given previous difficulties in reducing welfare benefits, actual spending cuts may be modest. Moreover, Mr. Morrison’s announcement excluded measures to raise revenues.
"Without such measures, limited spending cuts are unlikely to meaningfully advance the government’s aim of balanced finances by the fiscal year ending June 2021 and government debt will likely continue to climb, a credit negative for Australia.
Moody’s included the opposition, as well as the Federal government 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 failing 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.
"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,” Moody’s said.
