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Moody's Investors Service says that Australia's budget for the fiscal year ending 30 June 2018 (FY2018) supports Moody's assessment of the sovereign's very high fiscal strength, but the country's deficit will likely prove wider than the Australian government (Aaa stable) expects.
Moody's says that Australia's fiscal strength relies in part on Moody's projections for general government debt, which should rise gradually to slightly above 40% of GDP over the next 2-3 years from around 36.0% of GDP in FY2015. Such a debt burden would be in line with that of other Aaa-rated sovereigns. Australia's debt affordability is also in line with other Aaa-rated sovereigns.
Longer term, drivers of Australia's credit profile will include: 1) whether the country's fiscal policy stabilizes government debt levels, especially in the aftermath of potential future negative shocks to growth; 2) whether financial stability is preserved through a potential housing correction, thereby limiting the related fiscal costs as Moody's currently expects; and 3) whether Australia will continue to attract foreign funding to finance its investment needs, as it has done in the past.
Moody's analysis is contained in its just-released report titled "Government of Australia: FY2018 Budget Supports Fiscal Strength, Although Deficit Likely Wider for Longer".
Moody's forecasts a more gradual narrowing of the general government deficit than implied by the FY2018 budget, although Australia's fiscal metrics will remain consistent with the Aaa rating. Specifically, Moody's expects that revenues will not rise as fast as the government projects, and that expenditure spending will remain higher than budgeted.
Moody's points out that in this budget, like in the previous ones, the government projects a rise in revenues as a share of GDP; a trend that has not materialized in the last three years. By contrast, Moody's forecasts broadly stable revenues as a share of GDP.
Moreover, Moody's says that delivering sustained expenditure restraint over the next four years will likely prove challenging, because of the demands on current and investment spending.
