S&P Global puts nation’s credit rating on negative watch

S&P Global puts nation's credit rating on negative watch

But the spending related to the pandemic, plus the economic hit facing the country, meant the nation’s credit rating could be downgraded within the next two years.

“The COVID-19 outbreak has dealt Australia a severe economic and fiscal shock,” it said.

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“We expect the Australian economy to plunge into recession for the first time in almost 30 years, causing a substantial deterioration of the government’s fiscal headroom at the ‘AAA’ rating level.

“The large budget deficits that we project in fiscal years 2020 and 2021 are likely temporary and do not represent a structural weakening of fiscal performance.

“Net government debt and relative interest cost nevertheless are likely to remain at elevated levels for a number of years.”

Australia has the top rating from the world’s three major agencies – S&P, Moody’s and Fitch.

Australia is the first of 11 nations rated triple A by S&P that have been put on negative outlook since the coronavirus outbreak.

A downgrade in ratings is normally associated with an increase in international borrowing costs.

S&P said it expects federal and state budgets to deteriorate sharply this year and next with only a recover starting in 2022.

But it said it will take time for the budget to repair even if stimulus measures end quickly, adding government revenues will take years to properly recover.

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“Revenue headwinds, including company and personal income taxes, consumption taxes, and property conveyance duties, and rising social welfare payments and health costs will drag on Australia’s general government balance during the next few years, even as the government’s large stimulus packages cease,” it said.

“We believe there could be more fiscal stimulus packages to come and that economic conditions could further deteriorate, pushing the expected recovery beyond our current expectation of late 2020.”

The agency believes Australia is already in recession, and forecasts GDP per person to shrink by 6.4 per cent this year and then by another 7.2 per cent in 2021.

The announcement followed Treasurer Josh Frydenberg ruling out an increase in the GST to help pay for the government’s spending.

Mr Frydenberg, pressed on Sky News if he would look to increase or broaden the GST, said it was not on the agenda.

“We’ve no plans to do that,” he said.

The Treasurer said the government’s budget management of recent years had given it the space to develop large measures to protect the economy.

“We have been able to spend in a much more targeted way and in a much more substantial way than many other countries because we had got our books into shape before this crisis hit,” he said.

Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.

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