The Mid-Year Economic and Fiscal Outlook (MYEFO) revealed a deterioration in Australia’s fiscal situation, largely due to lower estimates for inflation and wages growth. Most of this deterioration occurs in the out years, but the projected return to surplus in 2020/21 remains intact.
The MYEFO reiterates the government’s commitment to fiscal consolidation and discipline, suggesting that retaining the AAA credit rating remains a key objective of fiscal policy.
Whether this remains a binding constraint is in the hands of ratings agencies, but in the meantime, it implies that there will be no change to the policy mix in Australia – accommodative monetary policy and modestly contractionary fiscal policy.
It will, therefore, fall to the RBA to address any further slippage in inflation and/or growth in coming quarters.
There was a modest improvement in the deficit for 2016/17 – from $37.1 billion in May to $36.5 billion now – but accumulated deficits over the next four years now total $95 billion, up from a total of $85 billion at the time of the May Budget.
Most of this deterioration relates to changes to the economic parameters underpinning the Budget forecasts, rather than the influence of recent policy decisions. The Budget is expected to remain in structural deficit until 2020.
This latest update projects an annual average pace of fiscal consolidation of around 0.5% of GDP per year, but the worse starting point for consolidation will mean that the hurdle to keep the nation’s AAA credit rating is higher, all else being equal.
This is an unenviable proposition given the current composition of the parliament, and might just be enough to convince Standard & Poor’s (S&P) that the AAA credit rating is no longer sustainable.
A number of state governments have also recently provided fiscal updates, with surpluses revised higher in both NSW and Queensland on the back of higher property-related and commodity-related revenues, respectively.
However, in the event that the sovereign loses its AAA credit rating, better fiscal outcomes may not be enough to prevent state issuers from a credit rating downgrade as well.
For the full report, please contact your Ord Minnett Adviser.