Australia's AAA rating saved despite bigger deficits in budget update

The government has been successful with its concerted bid to reinforce Australia’s AAA credit credentials by ensuring the budget is still projected to return to surplus in 2020-21 in Monday’s mid-year budget update.

All three rating agencies quickly said the AAA rating will be preserved.

The total deficits over the forward estimates are projected to worsen by more than A$10 billion compared with the official Pre-election Economic and Fiscal Outlook (PEFO). But this deterioration is not as bad as some of the speculation before the release of the figures.

The projected deficits total A$94.9 billion, compared with PEFO’s A$84.6 billion.

The estimated deficit for 2016-17 is now just under the PEFO estimate - A$36.5 billion compared with A$37.1 billion.

But in each of the later years the deficit is worse than PEFO projected.

By 2019-20 the deficit is projected to be almost A$10 billion, compared with nearly $A6 billion in PEFO.

Treasurer Scott Morrison said the budget update “confirms that the government’s plan to restore the budget to balance remains on track”. But he stressed this was a projection not a promise – reflecting the trouble Labor got into by firmly pledging a particular timetable.

The government breathed a sigh of relief when Moody’s, Standard and Poor’s and Fitch said the update was consistent with Australia’s AAA rating.

But there were reservations and questioning of the numbers.

Moody’s Investors Service said that legislating fiscal consolidation measures remained challenging, and “we expect that the budget deficits will be somewhat wider for longer than currently projected”.

S&P Global Ratings said the update “has no immediate effect on the credit rating or outlook”. But “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”.

Shadow Treasurer Chris Bowen said that the 2020-2021 surplus was “a wafer-thin surplus which could be blown over by the slightest breeze”. Labor renewed its call for the government to review its company tax cuts.

The net impact of decisions taken since PEFO is to improve the underlying cash balance by A$2.5 billion over the budget period, with new spending more than offset. This is excluding policy decisions, parameter and other variations have had a negative impact of $12.8 billion.

It includes a revenue write down of A$30.5 billion, mainly because of weaker growth in wages and profits and weaker collections. There is an offset of A$16.5 billion in reduced estimates for payments.

The government notes it has legislated A$22 billion of budget repair measures since the election, but says A$13.2 billion in measures still need to be legislated including A$12.5 billion in savings in payments.

Net debt is projected to peak at 19% of GDP in 2018-19 and then decline over the medium term.

Real GDP is forecast to grow by 2% in 2016-17, which includes the effect of the recent quarter of negative growth. Growth is expected to increase by 2.75% in 2017-18.

Nominal GDP growth is expected to be stronger than PEFO in 2016-17 but below PEFO in 2017-18 as commodity prices come down.

Unemployment is expected to be 5.5% in 2016-17 and 2017-18. The latest rate is 5.7% in November.

Among the savings will be the abolition of Tony Abbott’s Green Army (A$224.7 million over four years), and scrapping the pension supplement to people who permanently live overseas or have been absent temporarily six weeks or more (A$123.6 million over four years). Failure to go ahead with the same-sex marriage plebiscite is also saving about A$150 million in 2016/17.

The government has also decided not to proceed with the establishment of a Asset Recycling Fund, which then treasurer Joe Hockey announced in his 2014 budget. This decision is projected to reduce gross debt by more than A$10 billion by 2019-20.

Hockey said of the initiative at the time: “This is an important initiative to remove debilitating infrastructure bottlenecks, stimulate construction and drive real activity in the economy when it is most needed, as investment in the resources sector declines.”

A much talked about crackdown on welfare fraud is aimed at yielding large savings.

The Australian Chamber of Commerce and Industry said the update showed the need for parliament to act to put the budget on a credible path to surplus.

Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.

This article was originally published on The Conversation. Read the original article.