Budget deficit worsens, AAA rating vulnerable

The Mid-Year Economic and Fiscal Outlook (MYEFO), released by Treasurer Scott Morrison, has revised the federal deficit for 2016-17 down $600 million to $37.1 billion.

However, over the forward estimates (i.e., for the three years following 2016-17) the federal deficit has been revised upwards from $84.6 billion in the Pre-election Economic and Fiscal Outlook (PEFO) to $94.9 billion in MYEFO.

The Coalition government is projecting a return to surplus in 2020-21, with net debt expected to peak lower at 19 per cent of GDP.

The further deterioration of the federal budget could spark a ratings downgrade of Australia's sovereign credit by the global ratings agencies.

S&P Global downgraded Australia to a 'negative' outlook in July 2016 following the release of the May budget.

BlackRock Australia managing director warned last week that Australia could lose its AAA rating even if it escapes an immediate downgrade following the release of MYEFO.

Immediately following the release of MYEFO yesterday, Moody's Investors Service released a statement that expressed some doubt about the Coalition's forecasts about the deficit.

"Although progress has been made since the budget in implementing fiscal consolidation measures, this has been achieved mainly through appropriations and regulations. Legislating fiscal consolidation measures remains challenging," said the Moody's statement.

"We expect that the budget deficits will be somewhat wider for longer than currently projected."