Deficits have increased over the forward estimates by $10.3bn in the latest midyear economic forecast (Myefo) as weaker wages growth and profits growth have hit revenue collections.
In news which has not entirely reassured the ratings agencies currently considering cutting Australia’s AAA credit rating, the deficit position has deteriorated over the four-year forward estimates when compared with the May budget projections, with revenue collections down by more than $30bn.
S&P Global Ratings said the new economic forecast prompted no “immediate effect” on Australia’s prized AAA rating, but it said the new mid-year outlook confirmed a worsening fiscal position which “further pressures the rating.”
“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,” S&P 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.”
Moody’s issued hedged guidance, on the one hand giving a tick to the government’s actions, and saying the fiscal metrics were in line with other AAA-rated “sovereigns” – but the agency, like S&P, put a question mark over the validity of the new projections.
Moody’s said it expected budget deficits “will be somewhat wider for longer than currently projected” and it would be “challenging” to achieve the revenue collections and expenditure restraint outlined on Monday.
It also noted the ongoing difficulty the government faced in the parliament by observing “legislating fiscal consolidation measures remains challenging.”
Fitch for its part was unequivocal, saying the latest budget outlook was consistent with AAA ratings.
The latest economic update from the Treasury shows the deficit is expected to narrow from $36.5bn in 2016-17 to $10bn by 2019-20.
The projected return to surplus was outside the four-year estimates period, but the trajectory outlined in Monday’s statement was consistent with previous Treasury forecasts.
Net debt was projected to peak at 19% of gross domestic product by 2018-19.
Treasury said a recent rebound in commodity prices was not sufficient to offset weaker growth in aggregate wages and non-mining profits over the four-year budget cycle.
The government has for the last couple of weeks been attempting to inoculate itself politically against a potential downgrade, which would be the first since 1986, and the first downgrade delivered on a Liberal treasurer’s watch.
The treasurer, Scott Morrison, moved to reassure the financial markets and the ratings agencies on Monday, telling reporters the latest midyear economic forecast confirmed “the government’s plan to restore the budget to balance remains on track.”
Morrison said the government had managed to put the budget on an improving trajectory despite it being an election year.
He said the net impact of policy decisions made by the government since the last budget update, “including fully funding all election commitments”, had improved the budget bottom line by $2.5bn over the forward estimates.
The treasurer said Australia’s economic performance remained strong and there were reasons to be “positive and optimistic”.
“When we look at particularly the issues of Australia’s international standing on debt and our performance vis-a-vis other countries, with growth rates at 2%, at the top end of the scale for advanced and AAA-rated economies and an improving global outlook, as the statement sets out, and continuing evidence that the Australian economy is successfully transitioning from the mining investment boom, – there is reason to be positive and optimistic.
“Australia continues to be well supported and rated by international debt markets reinforcing our global reputation and standing as a secure place to invest. The statement provides a responsible, conservative and transparent update of the Australian government’s fiscal position and an optimistic but very realistic outlook on our future economic performance.”
Asked by reporters whether he expected a downgrade as a consequence of the new figures, and whether a downgrade would be unfair given the new forecast contained conservative projections on commodity prices, Morrison said that decision was ultimately for others, but he suggested the government believed it had done enough to produce credible and conservative economic forecasts.
He said when assessing the behaviour of institutions “who actually make the purchases on Australia’s debt – hedge funds, sovereign wealth funds, the central banks of other countries and others – when they are making their own independent assessments of Australia, they are buying”.
“They’re buying.”
As expected, the new economic update confirms the government will cut Tony Abbott’s “green army” program, saving the budget $224.7m over four years, although the cut is offset by spending, including the $100m for Landcare agreed with the Greens to pass the backpackers tax.
The statement also pockets a substantial improvement to the debt position by closing off the asset recycling initiative – which was a program introduced in the Coalition’s first budget encouraging the states to privatise government-owned assets.
Shutting that program down will reduce gross debt by more than $10bn by 2019-20.
The shadow treasurer, Chris Bowen, said the latest economic update lacked credibility because it contained “zombie” savings measures that had no hope of passing the parliament.
Bowen said the government had declined to take up budget-improving policy proposals, such as changes to negative gearing and capital gains tax, and was persisting with tax cuts for big business that would cost the budget close to $50bn.
The shadow finance minister, Jim Chalmers, said: “Scott Morrison had a choice today – he could cling to his big business tax cut, or he could cling to Australia’s AAA credit rating – and not for the first time Scott Morrison made the wrong choice.”
