Ratings agency Moody’s has emerged as the most credible critic of the Federal Government’s 2016-17 budget. So concerned is Moody’s that it seems to be preparing the way for a possible official warning about the viability of our AAA rating later this year.
Moody’s analysis and criticisms of the budget doesn’t mean any change to the AAA rating, but it clearly establishes the groundwork for a possible downgrade, which would be the first of its kind since the late 1980s.
Before a cut, however, the agency would first put the nation on notice of a pending downgrade by putting the rating on a creditwatch downgrade – indicating a cut to the AAA standing could come in 18 months.
Moody’s says the 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 sees a mixed economic environment for the FY2017 budget, and while forecasting robust real GDP growth at around 2.5% during FY2017, also expects lackluster nominal growth, weighed down by muted corporate profitability and wage growth, which will adversely affect budget outcomes,” the firm said.
"This expected modest nominal level of GDP growth will challenge the government’s revenue projections. 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."
In analysis of the budget, released yesterday, the ratings firm challenged Treasurer Scott Morrison’s budget, and said the government’s inability to curb spending and weak income growth means future deficits will be even larger and last longer than claimed in the budget.
Moody’s said that while Australia’s debt was low by international standards, it was rising faster than lower-rated countries such as Finland and the US.
Most alarmingly, Australia’s debt burden – measured as interest payments as a share of revenue – has increased since 2009 by the most out of all the countries Moody’s regards as AAA-rated.
The comments follow a statement before the budget where Moody’s told the government it wanted to see major revenue measures in the budget.
Moody’s noted that the government’s budget tax hikes on tobacco and super concessions have been wiped out by business tax rebates and the plan to lower the corporate tax rate.
As a result Moody’s warned that delivering on the government’s claimed return to surplus by 2020-21 will be “challenging”.
“Constraints on the ability of the government to curb spending and moderate nominal GDP growth will lead to somewhat wider deficits for longer than currently budgeted,” Moody’s said in its analysis of the budget. The firm’s comments will apply to the ALP as much as to the government, no matter what Opposition leader Bill Shorten said last night.
When combined with state finances, Moody’s estimates total government debt will rise further from 36.1% GDP in 2015, compared with around 10% a decade ago.
Moody’s warned that Australia’s rising debt load will constrain its ability to buffer economic shocks, with interest payments doubling to 4 per cent of revenues since the late 2000s.
“In an an environment of low interest rates, affordability will likely remain high, albeit vulnerable to a change in financing conditions,” Moody’s said.
The agency takes issue with huge long-term promises on education, health, and welfare spending, which it you says could eat away any savings the governments finds elsewhere. It also notes that spending in those areas now accounts for 60% of total spending.
“The persistence of overshoots in expenditure suggest that successive governments have faced challenges in implementing significant spending restraint, despite a broad-based consensus on the objective fiscal consolidation," it says.
"We expect similar constraints to continue.”
And the ratings agency estimates the budget deficit will take longer to fix than the government forecasts because lower commodity prices, muted corporate profitability and low wage growth will continue to weigh on tax revenues collection.
Moody’s says that while 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 budget analysis is contained in the Moody’s report, “Constraints on Budget Leave Public Finances Vulnerable to Credit-Negative Shocks” (https://www.moodys.com/research/Moodys-Budget-constraints-leave-Australian-public-finances-vulnerable–PR_348314).
