Australia risks credit downgrade if restraint not shown in election cycle

Australia's top ranked lender on Monday has warned the federal government it risks losing its coveted AAA credit rating unless the governing and opposition parties can show fiscal restraint in the upcoming election cycle.

Australians are due to go to the polls in 2016, with election campaigns unofficially kicked off after Australian Prime Minister Malcolm Turnbull announced July 2 would be a double dissolution election if a controversial bill to reinstate the construction industry watchdog was not passed.

While there has been modest fiscal tightening in recent years, National Australia Bank global head of policy research Peter Jolly said the government's debt load is pushing against rating agencies' AAA boundaries, a clear sign investors are becoming uneasy on government promises and policy initiatives that are designed to appease voters. It is compulsory for every Australian over the age of 18 to vote.

"A quick look at Australia's recent fiscal trajectory makes it clear why restraint will be required... at least if keeping the AAA rating is a desired policy outcome," Jolly said in the note, published Monday.

In January, S&P said the current AAA rating is based on the assumption that "Australia's continued conservative budgetary policies will result in consistently narrowing deficits over the forecast horizon, maintaining general government debt near or below current levels."

Australia's government debt, which stands at 15 percent of GDP, raising to 18 percent GDP within two years, is almost three times greater than when global ratings agency Standard & Poor's cut the sovereign bond rate to AA in 1989.

"With a General Election at some point over the next six months, where the government and opposition will be releasing policy initiatives and making promises, a question for investors is whether fiscal restraint will continue," Jolly said.

"The good news is that for now the ball remains in the court of the government. But it's clear that to keep the ratings agencies comfortable with Australia's AAA, the 3 May Budget will need to demonstrate ongoing fiscal restraint."

Australian Treasurer Scott Morrison on Monday deflected questions about what provisions would be announced in his first budget delivery, telling reporters in Sydney the central government would ensure it is "living within its means."

However ongoing restraint in fiscal policy will "remain a modest headwind for the economy", which has already cost the Australian economy 0.25-0.50 percent of GDP in recent years, Jolly said.
Source: Xinhua