Ratings agencies have delivered the Turnbull government a much-needed Christmas reprieve but warned growing budget deficits, a worsening economy and Parliamentary gridlock could still see the loss of the coveted AAA rating in 2017.
The decision by the three major ratings agencies to retain the rating was delivered just hours after Treasurer Scott Morrison revealed that despite the federal budget deficit blowing out another $10.4 billion, the government was still on track to deliver a promised budget surplus by 2020-21.
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Budget still tracking for 2020-21 balance
Treasurer Scott Morrison says the budget will still balance in four years time despite difficulties revealed in the mid-year budget update.
Ratings agency S&P; put Australia's rating on negative watch after the July 2 election, citing high levels of external and household debt and potential difficulties in passing savings and revenue measures through the Parliament.
The government had been bracing for a downgrade, which would be a devastating blow to its economic credibility.
While Monday's mid-year budget update forecasts a slight improvement in the budget bottom line this financial year - with a deficit of $36.5 billion rather than $37.1 billion expected - the following three years will see the budget bottom line head further into the red than expected.
The deficit in 2017-18 will be $28.7 billion, up from $26.1 billion forecast in May. In 2018-19 it will be $19.7 billion and in 2019-20 the deficit will nearly double from $6 billion to $10 billion. In total, deficits over the next four years will total $94.9 billion.
In a statement, S&P; said the latest budget forecasts would have "no immediate impact" on Australia's credit rating, but added a strong warning about the nation's worsening forecast fiscal position placing further pressure on 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. 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."
![Treasurer Scott Morrison will arrive in London on Sunday (Australian time).](/web/20170509151802im_/http://www.canberratimes.com.au/content/dam/images/g/t/d/u/n/7/image.related.articleLeadwide.620x349.gtdum1.png/1485051603890.jpg)
A cut to Australia's AAA rating - the first since 1986 - would push up the cost of borrowing for state and federal governments, and the cost of Australians' mortgages. It would also blunt the Turnbull government's claims to be better economic managers than Labor and likely have a flow-on effect on consumer confidence, which is already sagging in the lead-up to Christmas.
Another ratings agency, Moody's, predicted future budget deficits would actually be "somewhat wider for longer than currently projected" and that legislating budget savings remained "challenging", but ticked off on the AAA rating, as did Fitch.
Australia's last four treasurers - Wayne Swan, Chris Bowen, Joe Hockey and now Mr Morrison - have predicted a return to surplus in 12 consecutive budgets and budget updates, but so far none have delivered.
Asked about that series of promises, Mr Morrison said unlike his Labor predecessors, "we don't go around making these sorts of promises".
"The net impact of policy decisions made by the government including fully funding all election commitments has been to improve the budget by $2.5 billion over the forward estimates," he said.
Finance Minister Mathias Cormann said that the projected surplus for 2020-21 would be a tiny 0.1 per cent of GDP, or just $1 billion.
Labor treasury spokesman Chris Bowen said that amounted to a "wafer-thin surplus, which could be blown over by the slightest breeze".
Asked about the likelihood of a downgrade to Australia's AAA rating, Mr Morrison said that was a matter for the ratings agencies but "when those 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".
According to the budget update, tax receipts have been hit hard since the May budget, with the amount of tax collected by government hit by softer wages growth and domestic prices. Government receipts are down by $3.7 billion in 2016-17 and $30.7 billion over four years.
This tax hit has not been fully offset by strong recent commodity prices. But $16.5 billion in spending reductions, including $12.2 billion just from reduced payments for childcare and seniors and carers income support, has helped make up the shortfall from falling tax revenue.
Mr Morrison noted that government spending as a share of GDP had fallen from 25.8 per cent to 25.2 per cent in 2016-17.
A series of cuts and savings, including to employment programs, Tony Abbott's Green Army and nanny pilot programs, and to pensions supplements are outlined in the budget update, as is a $2.1 billion crackdown on welfare rorts promised during the federal election. The asset recycling fund announced by Joe Hockey in 2014 has also been axed.
Another $150 million was booked through the same-sex marriage plebiscite not proceeding, despite Mr Turnbull insisting it remained government policy just days ago.
The total value of unlegislated budget repair measures - the so-called "zombie measures" that date back, in some cases, to Joe Hockey's first budget in 2014-15 - are now put at $13.2 billion.
The budget update also shows the unemployment rate is expected to remain stable at 5.5 per cent over the next two years, while real GDP forecasts are down in wake of negative growth in the September quarter.
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