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Australia keeps TripleA rating after Morrison’s confidence on cutting deficit

Australian share markets surged ahead on Monday after federal treasurer Scott Morrison presented the government’s mid-year economic outlook (MYEFO) reaffirming a return to budget surplus by the financial year ending June 30 2021. After listening to Morrison’s numbers, and his four-year timeline, the three main ratings agencies, Moody’s, Standard & Poors, and Fitch, announced they would retain Australia’s AAA rating, confounding predictions by ABC, the national broadcaster, and the Australian Financial Review, the country’s business newspaper.coal-and-iron-ore

The detailed forecasts presented by the treasurer were nowhere near as pessimistic as many analysts had predicted, but indicated that the budget deficit would blow out by an additional $410.3 billion before moving back towards surplus.

In a well-choreographed and competent presentation jointly with finance minister Matthias Cormann, Morrison predicted GDP growth this year at a reduced 2%, rising to 2.5% in 2017-18, and 3% for the ensuing two years, partly built on higher commodity prices for iron ore and coal.  However, the government is not expecting the recent increases in these prices to hold much beyond 18 months, a judgement applauded by Moody’s in a statement made shortly after the presentation. The government gave the main reason for the additional blowout as a significant shortfall in tax revenues from individuals and corporations, due to flat wages growth and lower company profits.


Colin Chapman comments: The statements by Scott Morrison and the able Matthias Cormann sounded more credible on Monday than on many previous occasions, and there were signs of more grit and determination from the ministers than has been apparent in the recent past.

By comparison Labor’s Chris Bowen, a normally competent shadow treasurer, seemed adrift and evasive in his comments to the media, particularly in an interview with Sky News’ political editor David Speers, who asked him at least four times to say what Labor would do to stimulate jobs and growth, if elected.  After avoiding the question, Bowen said that Labor would provide more support for the National Broadband Network, but declined to advance any other ideas.

While Morrison’s refined projections have economic credibility – involving modest tax cuts for business – the government will continue to face difficulties in getting passage for a swathe of spending cuts through Senate, including trimming welfare payments. It’s noteworthy that S&P only kept its AAA rating afloat after two other agencies had given their backing, and did so reluctantly, perhaps because it did not want to have to justify being the odd one out. The agency said it remained “pessimistic about the government’s ability to close existing budget deficits.”.

It seems clear that the government has been spared by the recent rises in the prices of coal and iron ore, but it not counting on sustained higher prices.  Early in the New Year a Treasury razor gang will be reconvened to seek more cuts. In the meantime, the share market will end the year on a higher note, the Australian bond market is enjoying a boom comparable, in relative terms, to that of the United States, and the housing market can look forward to a six month period of stable interest rates.

Canberra is now on holiday for six weeks, and Coalition MPs can go to the beach in a more comfortable position than seemed likely just days ago.


Read the MYEFO documents.