Federal Treasurer Scott Morrison appears to have done enough in the federal budget to retain Australia’s AAA rating, with Moody’s noting the government’s “ongoing commitment to fiscal consolidation”.
Moody's Investors Service, which issued a warning on Australian government debt in April 2015, has assessed Australia's fiscal strength as 'very high' following the release of Tuesday night's 2017-18 budget.
The 'very high' rating is one of the "key supports" of the Australian government's AAA rating and 'stable' outlook, said Moody's Investors Service associate managing director Marie Diron.
Moody's expects overall government debt to rise gradually from around 37.5 per cent of GDP, which puts Australia in line with other AAA rated sovereigns when it comes to debt burden.
"[Tuesday's] budget is closely aligned to last year’s budget and the mid-year update, projecting a net cash balance moving towards balance at the end of this decade. These projections denote ongoing commitment to fiscal consolidation," said Ms Diron.
However, Moody's is less optimistic than Treasury in its forecasts about Australia's deficit consolidation.
"Achieving sustained spending restraint will be challenging. Moreover, the budget projects a rise in revenues as a share of GDP, a trend which has failed to materialise in recent years," Ms Diron said.
"Finally, we assume that GDP growth will be somewhat slower than projected by the government, at 2.5-2.7 per cent in the next few years," she said.
However, Moody's is pleased that Scott Morrison has abandoned his predecessor Joe Hockey's austerity measures contained in the 2014-15 budget, which have failed to pass the Senate.
"The budget includes a number of revenue-raising measures, including medicare and bank levies, that offset higher spending on schools and the cancellation of $13 billion of net savings measures that were in previous budgets but not yet passed by Parliament," said Ms Diron.
"Overall, the changes to both revenues and expenditure projections are small. The removal of the net saving measures pending Parliament approval from the budget enhances the transparency and predictability of budget outcomes, a credit positive."
S&P Global Ratings, which downgraded Australia's credit outlook from 'stable' to 'negative' in July 2016, is set to release a statement on the federal budget later in the week.
S&P has said there is a one-in-three chance that Australia's sovereign debt rating will be downgraded from AAA by July 2018.
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