The AFR has a series of quotes from Moody’s and Fitch this morning that helps clarify that Australia has more room to run up public debt. First Moody’s:
“To maintain the triple A rating we want to see the debt trajectory not rising very steeply from where it is now. And we don’t see that it’s necessary to have a severe austerity program in order to prevent that trajectory from going up…It’s true the government has found itself in a difficult position, particularly in an election year, and therefore it’s unlikely to take any offsetting measures.
On Australia’s long term prospects and the slow moving debate around how demographics will weigh on government revenue Moody’s said, “We’re not convinced of that yet.”
“The debt ratio is not expected to rise, and that’s not necessarily inconsistent with a modest budget deficit.”
A few points. It is S&P that has been most severe on Australia in insisting on a surplus “across the cycle” to maintain the rating. That means that you have some leeway to run up debt on the basis of counter-cyclical spending but when things improve you’d better start cutting. Moody’s and Fitch are offering a bit more headroom.
But most important is that these chaps are still seeing current budget weakness resulting from terms of trade falls as cyclical. There is a significant danger that this is wrong. If China is committed to rebalancing just as commodity supply climbs then falls in the terms of trade are a structural shift and permanent. That will seriously hurt government revenues even as global growth recovers.
This sets us up for a shock when the agencies wake up to it.