Dark clouds gather around Australia’s triple-A rating - The Centre for Independent Studies
Donate today!
Your support will help build a better future.
Your Donation at WorkDonate Now

Dark clouds gather around Australia’s triple-A rating

Triple-A credit rating budgetThe bongo drums of credit ratings agencies just became louder, and the message is that at least one agency is poised to strip the Commonwealth of Australia of its triple-A rating within the next six months. This will happen if the budget deficit is revised up in next month’s mid-year budget update, and the government fails to take policy action to steer the budget back onto the currently projected path of balance by 2020-21. The ratings agencies may wait until next May’s budget to make their determinations.

A single notch downgrade in itself would be unfortunate and best avoided, but not a disaster. It would add slightly to the cost of borrowing for the Commonwealth and others whose borrowing costs are linked to it — such as the states (among which the triple-A borrowers would also be downgraded) and the banks. More important is what the downgrade would say about the failure of budget repair, the sustainability of Australia’s public finances and the risk of further downgrades in the future.

The government’s budget repair Plan A has been to attempt modest expenditure savings combined with heavy reliance on bracket creep to boost personal income tax revenue by 27% over four years. The Senate has always been a threat to implementation of the expenditure savings, but the latest threat to Plan A is the extremely low annual rate of increase in average wages (1.9%) reported by the Bureau of Statistics. If wage increases remain very low, bracket creep on the scale projected by the government will not occur. The recent surge in commodity prices would help offset low wage increases, but nobody expects the surge to be sustained.

Relying on bracket creep was never a good idea. It is a large tax increase by stealth. It will not be a bad thing if the government is forced to develop a Plan B, which should place much greater emphasis on spending restraint. We will find out next May whether the government chooses that path. But if they do, they must start now to make the case in the court of public opinion.