Australia Debt Will Rise Without Revenue Steps, Moody's Says

  • Modest spending cuts to make budget balance difficult: Moody's
  • Sees higher government borrowings as a credit negative

The Australian federal government’s debt pile is set to increase further without measures to boost revenues, Moody’s Investors Service said.

Spending cuts set to be outlined in the May 3 budget “may be modest” and with Treasurer Scott Morrison having excluded steps to bolster income, these “limited" reductions are unlikely to meaningfully advance the government’s aim of returning to fiscal balance by 2021, the credit assessor said. The likely rise in borrowings would be credit negative for the country, Moody’s said in an e-mailed report Thursday.

“Notwithstanding Australia’s favorable fiscal metrics relative to Aaa-rated peers, Australia has had a prolonged and marked increase in government debt over the past decade,” Moody’s said. “We expect government debt to increase further.”

While the Australian economy has expanded without interruption for about a quarter century, the federal budget hasn’t been in surplus since before the 2008 financial crisis and a collapse in commodity prices is now adding further pressure to public finances. Morrison, set to deliver his first budget as the government’s popularity shows signs of waning, reiterated on Thursday he will focus on fiscal discipline and that Australia must live within its means.

Australia currently carries a stable Aaa credit rating from Moody’s, and also holds equivalent scores at both Standard & Poor’s and Fitch Ratings. While Moody’s says the country’s fiscal metrics are favorable in comparison with its top-rated peers, it estimates government debt will increase to about 38 percent of gross domestic product in the 2018 fiscal year from 35.1 percent in 2015.

“The best way to protect our Aaa credit rating is have a strong budget, a solid budget that is backing growth and is backing jobs,” Morrison said in Sydney following the Moody’s warning. The upcoming budget will focus on reducing government spending as a share of the output and growing revenues through economic expansion, he said.

Moody’s also said that “fading prospects for tax reform present challenges to boosting government revenue,” and that, while changes to tax concessions on pensions are still on the agenda, “they will be insufficient in achieving a balanced budget within five years.”

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