The ratings agencies are yet to comment on the Budget which is quite unusual. They do not usually take this much time. While we wait, here’s Goldman’s take on whether the Budget has done enough:
Has enough been done in the 2016-17 Budget to avoid a potential downgrade? On the surface, the answer appears to be yes. In particular, the Budget assumes economic growth is close to our own expectation and the deterioration in net government debt is not too alarming. However, this Budget assumes:
- Iron ore will average $55/t FOB and the terms of trade will rise in 2016-17. This iron ore price assumption is close to one-third higher than our GS commodity team’s estimate.
- A relatively sharp improvement in the underlying cash deficit in the remainder of 2015-16. Monthly numbers from the Department of Finance suggest that the underlying cash deficit was $42.6bn in the 12 months to March 2016. Assuming no further deterioration in the remaining 3 months of the financial year, this is $5.6bn worse than projected in the Budget. This seems ambitious given the trajectory of corporate earnings and slowing domestic demand growth which contributed to the RBA seeing the need to ease interest rates early Tuesday.
- o It should be noted that the 2016-17 Budget year received a $2.3bn boost from a higher RBA dividend payment and deferred receipts on spectrum sales. Treasury’s assumption that a crackdown on multinational tax avoidance will result in $2.2bn of extra revenue over the next 4 years also appears ambitious from our perspective.
- The Government estimates that the delay of passing legislation in the Senate from the last 2 Budgets has cost a further $2.2bn over the 4 years to 2019-20; however, this Budget still assumes $13bn worth of expenditure savings and $1.5bn worth of revenue increases will be passed by the Parliament in coming months.
- It is notable that over the 5 years to 2019-20 there has been only $1.6bn of policy “savings” compared to a further $10.6bn deterioration in “parameter variations”. Although the Budget does show a path to surplus by 2020-21 (and this remains an important attribute in rating agencies assessments), it concerns us that the rating agencies’ call for action of expenditure cuts or tax hikes has been largely ignored. Moreover, the rating agencies would be aware that the Budget predates any promises made during the election campaign and it would therefore be prudent to reserve judgement until the election is complete. In such a close political contest, it is unlikely that fiscal restraint will prevail. On the numbers presented in this Budget, a ratings warning will likely be averted in the near term; however, on our commodity forecasts this would appear more tenuous by the end of the calendar year. Should the double dissolution see the Government returned to power but fail to deliver a more workable Senate, then the Government would no longer be able to claim the large saving and revenue measures that remain blocked in the Senate and the credit rating would be at even greater risk. It is worth observing that favorable movements in global bond yields since MYEFO have also helped avoid a more alarming deterioration in the debt outlook, although this may well change if our forecasts for US interest rates transpire. As such, in terms of the nation’s AAA rating, it is a case of “watchthis-space” in the coming months rather than a categorical statement that a ratings warning has been averted.
