The three major credit ratings agencies have given the 2021-22 budget a guarded tick of approval, though two of them are maintaining a negative outlook on the economy.
In comments after the budget was brought down on Tuesday night, the trio – Moody’s S&P Global and Fitch – indicated they expect the government’s fiscal strategy to boost economic growth.
As a result of this thumbs up, Australia maintains its AAA credit rating despite the forecasts in the document of budget deficits out into early the 2030’s and a still large jump in government debt (though to a smaller peak than forecast in 2020).
The agencies praised the government’s medium-term measures to support the economy and employment, enabling Australia to remain one of just 11 countries to maintain the top credit rating through the coronavirus-induced global recession.
But two of the big three – Standard & Poor’s and Fitch Ratings – say the outlook still remains uncertain which is why they are keeping Australia’s rating on a AAA – negative outlook, meaning it could be cut in coming couple of years.
Fitch said the negative outlook reflects uncertainties around the medium-term gross government debt outlook, which is destined to hit $1 trillion in the 2022-23 financial year.
“These uncertainties remain in light of the evolving global pandemic, risks to the growth outlook, along with the government’s commitment to bring down the unemployment rate through sustained fiscal support,” it says.
Standard & Poor’s warns, which has been gloomy on Australia now for more than a year, again repeated its previous point that the risks to Australia’s triple-A rating still lie to the downside.
“(The) budget confirms that the pandemic, and the government’s response, will have a huge effect on fiscal outcomes relative to the pre-pandemic trajectory,” S&P said.
“Unsurprisingly, the fiscal 2020/2021 year will take the brunt of the hit. In our view, trade tensions and geopolitical risks are also likely to hinder parts of the economy.”
But Moody’s Investors Service, which has been far more relaxed than S&P in particular said the budget forecasts remain consistent with its expectations of moderate fiscal consolidation in the wake of the strong economic recovery and continued falls in the unemployment rate.
“Australia contained the pandemic much more effectively than most other countries, paving the way for eased restrictions and a rebound in the economy,” Moody’s said in their rating announcement.
“Looking ahead, balancing fiscal support for growth to drive unemployment lower and addressing the need for fiscal consolidation, in a context of higher spending on areas including aged care and skills development, will be important in maintaining the current triple-A credit rating,” Moody’s said.
“Strong consumer sentiment, credit availability and record-low interest rates support growth,“ Moody’s said but also pointed out the recovery will be uneven given than borders remained closed, and airlines, tourism and migration will be disrupted.
Meanwhile the budget revised downwards the federal government’s total debt issuance program for the 2020-21, and confirmed it will issue a much smaller $130 billion of debt into bond markets in the next financial year as the projected deficit will be much smaller than forecast.
In the middle of 2020 when it looked like the economy could be in free fall the Federal Government’s Australian Office of Financial Management (AOFM) had simply advised it would be issuing up to $5 billion a week and did not put a cap on it.
In the delayed 2020-21 budget, handed down in October, the AOFM said it would likely issue $240 billion of Treasury Bonds in 2020-21. In the mid-year economic update in December this was lowered to $230 billion.
But now the AOFM says it will actually only need $210 billion, of which $198 billion has already been completed, meaning $12 billion to raise in the next six weeks.
The 2021-22 budget deficit is projected to be around $106.6 billion, so there’s the possibility that debt issuance next financial year will be smaller than the projected $130 billion.
More details will be provided in early July at the start of 2021-22, but if the AOFM resumes bond buy-backs Australia may not reach $1 trillion of government debt after all. Total federal debt currently stands at $836.5 billion.
A lot of that debt is now owned by the RBA which has been buying bonds around April 2024 to keep the yield the same as the cash rate at 0.10% and has also been buying 10-year bonds to put a lid on the appreciation of the Australian dollar.
The deficit for the year to June 30 has been revised down by $52.7 billion from $213.7 billion to $161 billion. That’s thanks to the rapid recovery in the labour market, the higher-than-forecast iron ore price and better than forecast terms of trade which will see higher tax revenues this year and next.
This improvement in jobs and taxes has seen deficits in the three years from 2021-22 revised down another $29.4 billion. But the cumulative figure will still add up to $285.4 billion.
The budget forecast net debt is expected to peak at $980.6 billion in 2024-25, or 40.9% of GDP. That’s a revision down of debt reaching 44% of GDP projected in last year’s budget.