Moody’s endorses (and warns) Budget

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Moody’s has endorsed the Federal Budget but has also uttered something of a quiet warning against the Budget’s forecast current deficits, as well as the levels of private borrowing that they will represent. There is reassurance and disquiet in this note.

New York, May 08, 2012 — Moody’s Investors Service says that, by demonstrating continued commitment to fiscal discipline, the Australian budget presented on May 8 is consistent with the government’s Aaa rating. While the projected surpluses in the 2012-13 and 2013-14 fiscal years are roughly the same size as projected by the government in earlier budget updates, further spending restraint and the delay of some tax reductions were necessary to achieve these surpluses, because revenues are lower than earlier estimated.

While low government debt relative to many other countries means that Australia has considerable flexibility in the timing of a return to surplus, the commitment to budget balance over time is a credit strength in a country that depends on continuing inflows of foreign financing. Access to international capital markets at an affordable cost is important not only for the government but for the economy as a whole. It is notable in this context that the government projects the current account deficit to double to 6% of GDP in 2013-14 from its level in the current fiscal year, despite historically high prices currently commanded for the country’s major exports. As a result, the economy’s reliance on foreign borrowing will increase once again.

The fiscal correction of about three percentage points of GDP in 2012-13 will be a drag on economic growth, and the balance between this negative effect and positive impetus from the resource investment boom will determine whether the targeted budget surplus is ultimately achieved. External risks from global growth and commodity market developments will also affect the fiscal trajectory. From a credit point of view, however, a substantial positive move in the government’s fiscal position is the most important factor.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.