Staff Reporter
S&P Global Ratings has issued a warning that Australia’s coveted AAA sovereign credit rating could be jeopardized by election pledges that lead to larger structural deficits and increased debt and interest costs. This highlights the fiscal challenges awaiting the next government.
Analysts Anthony Walker and Martin Foo noted in a report on Monday, “The budget is already moving toward moderate deficits as public spending reaches post-war highs, global trade tensions escalate, and economic growth slows. How the new government finances its campaign promises and rising expenditures will be crucial for preserving the rating.”
As the election campaign heats up ahead of Saturday’s vote, major political parties have made significant spending commitments. These include billions set aside for new homes for first-time buyers, tax cuts, and increased health spending.
S&P also flagged over A$100 billion ($64 billion) in “off-budget” spending expected between fiscal 2025 and 2029, raising further fiscal concerns.
So far, financial markets have remained largely unfazed by the surge in government spending, with Australia’s debt and deficits remaining relatively low compared to global standards.
Early Monday saw a strong rise in Australian government bond futures, with yields on 10-year bonds well below their U.S. counterparts.
Following U.S. President Donald Trump’s “Liberation Day” tariffs, Australian credit-default swaps rose along with many others but have since returned to levels consistent with the past year.
Economists suggest that the implications of increased spending for the Reserve Bank could be mixed, particularly as U.S.-led trade disruptions threaten the global economic outlook.
Morgan Stanley strategists, citing current opinion polls, predict that the ruling Labor Party will form a minority government, necessitating partnerships with smaller parties and independents for a parliamentary majority. This scenario could exert downward pressure on public spending.
“Government spending accounted for all of Australia’s economic growth in 2024, making the trajectory of fiscal policy critical for future outlooks,” they reported. “A minority government could pose immediate risks for growth, reminiscent of the public spending slowdown during the last minority government in 2010.”
The Reserve Bank of Australia’s monetary policy board is set to meet on May 19-20, with expectations for a quarter-point interest rate cut to 3.85%. Money market pricing suggests the cash rate could dip below 3% by December, while economists estimate it will settle at 3.35%.
A Bloomberg survey released Monday forecasts that Australia’s economic growth will rise to 1.9% this year from 1.1% in 2024, with further acceleration to 2.3% anticipated by 2026. However, this outlook may change with clearer insights into U.S. trade policies.
“Sound fiscal management across multiple governments over several decades supports our ‘AAA’ rating on Australia,” the S&P analysts stated. “Strong fiscal outcomes have kept Australia’s debt metrics as a key rating strength.”
Australia’s fiscal balance is expected to revert to deficit in the year ending June 2025, following two consecutive surpluses, while state governments are also increasing spending.
“This could widen the general government fiscal deficit to 2%-2.5% of GDP, a level rarely seen since the global financial crisis, aside from pandemic years,” S&P cautioned. “If major election commitments are not funded through additional revenues or savings, the deficit could expand further.”
Australia stands out as one of the few nations worldwide to maintain a AAA rating from all three major agencies: S&P, Fitch Ratings, and Moody’s Investors Service.
