Australian credit rating still under a cloud after update

Te Australian Government said its projected Budget deficit for the current fiscal year had increased by A$4.4 billion as the economy slows. Photo / 123rf

Australia's forecast budget deficit is soaring as New Zealand continues to outperform its neighbour on the fiscal front - putting pressure on the Lucky Country's coveted credit rating.

In its fiscal update, the Australian Government said its projected Budget deficit for the current fiscal year had increased by A$4.4 billion to A$41.5b as the economy continued to slow after a China-driven mining boom.

Ratings agency Standard and Poor's said the fiscal update had no immediate effect on the credit rating but that the worsening position had put pressure on it.

"We remain pessimistic about the Government's ability to close existing Budget deficits and return a balanced Budget by the year ending June 30, 2021," the agency said.

"Over the coming months, we will continue to monitor the Government's willingness and ability to enact new Budget savings or revenue measures to reduce fiscal deficits materially over the next few years."

Paul Bloxham, HSBC's chief economist in Australia and New Zealand, said more fiscal reform would be needed if Australia was to retain its AAA rating.

"You have two forces at work here; on one side you have weaker GDP, wages and inflation, but offsetting that you have higher iron and coal prices," he told the Herald.

Australia has been in deficit since the global financial crisis.

"Part of that is structural, that's why it is imperative for the Australian Government to reform otherwise they will not get back to those surpluses," Bloxham said.

New Zealand had outperformed Australia on the fiscal front, he said. "New Zealand's policy makers have been more diligent. You are well and truly back in surplus. Australia is still struggling," Bloxham said.

New Zealand has been in Budget surplus for past two fiscal years and is projected to report a small surplus in the current 2016/17 year.

S&P rates New Zealand at AA plus.

The budget forecast follows data from the Australian Bureau of Statistics which showed the economy contracted in the September quarter for the first time since early 2011.

The deficit for the year ending June 30, 2017, had been forecast to reach A$$37.1b when the annual Budget was released in May.

But updated forecasts released yesterday said growth in the A$1.7 trillion economy had slowed to 2 per cent for the year from the 2.5 per cent expected in May.

Last month S&P reiterated its warning that Australia's AAA sovereign credit rating would come under threat without more Budget savings or revenue measures.

In July, the agency put Australia's credit rating on a negative outlook, meaning there was a one-in-three chance of a downgrade from AAA within the next two years.

Australia is one of only a handful of countries that enjoys a AAA rating. A cut to the rating - which would be the first since 1986 - would push up the cost of borrowing for state and federal governments and the cost of Australians' mortgages.

Bloomberg reported that ratings agency Moody's Investors Service had said the update was broadly in line with its rating but maintaining the rating would be "difficult in an environment of weaker nominal GDP growth".

In its fiscal update, the Government said higher prices for iron ore and coal - Australia's biggest exports - would increase profits in the mining sector and increase the tax paid by mining companies.

"However this will be more than offset by the impact of weaker growth in aggregate wages and non-mining profits," the Government said.

Australian Treasurer Scott Morrison said the Budget would return to surplus in 2020-21.
Additional reporting AP