When Treasurer Scott Morrison delivers the mid-year budget update at noon on Monday, it is not expected to be good news, especially for him.
The MYEFO (or Mid-year Economic and Fiscal Outlook) provides an update on the federal budget and the state of the national economy since the budget was released in May, and the global ratings agencies will be among the keenest observers.
Standard & Poor’s already has Australia’s top-tier triple-A rating on a negative outlook.
As we write here, a feared downgrade would result in banks paying more for funding in overseas markets and accelerate the risk of higher interest rates for their customers. It would also be a big hit to confidence.
What to expect
It’s likely the deficit will blow out over the next four years, and experts will question whether the government’s promise of a surplus will ever eventuate on its watch.
Much has been made of Mr Morrison’s sudden epiphany that not all government borrowing is “bad debt” and that there is such a thing as “good debt” (investment in infrastructure). But don’t expect him to spend big any time soon.
“Once borrowing for recurrent expenditure is under control, we will have more headroom to take on and deploy so-called good debt,” he told a conference in Sydney last week.
Nor is this year’s surprise rally in commodity prices expected to fix the government’s revenue problem.
The Turnbull government predicted in May that the federal budget would be in deficit in 2016-17 to the tune of $36 billion. Many expect MYEFO to report a worse figure, closer to $40 billion.
The government also predicted the budget would return to surplus by 2020-21. This is seriously in doubt.
It is likely to be an embarrassing outcome for the Liberal-National government, which came to power warning of a “budget emergency” that would inflict onerous debt repayments on the nation’s grandchildren.
And the worst could be yet to come.
AAA credit rating at risk
If the MYEFO does reveal that the budget has deteriorated dramatically, many expect that ratings agencies S&P and Moody’s will downgrade Australia’s sovereign credit rating from ‘AAA’, the best there is, to ‘AA+’, which is one notch down.
S&P is the most likely to cut, as it has already put Australia’s rating on “negative watch”.
This isn’t too much of a concern for the government, as its bonds (the way it borrows money) are still in high demand. Australia would simply join a growing number of countries in the AA+ category, including the US, UK and New Zealand.
The concern for the average Aussie, however, is that this will result in the big four banks losing their AAA ratings as well.
The banks rely heavily on funding from overseas, and lower ratings drive up the cost of borrowing in these markets. Any increased costs could be passed on to customers.
More spending cuts
Because S&P is looking over its shoulder, the government is widely expected to announce more spending cuts on Monday.
“The negative outlook on Australia reflects our view that without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement,” the ratings agency said in a statement in July.
Welfare will probably be in the firing line, given recent comments by Social Services Minister Christian Porter.
And Tony Abbott’s pet project, the ‘Green Army’, which aimed to put unemployed youths to work on conservation projects, may be dumped. The expenditure review committee, a sub-committee of cabinet, recommended its abolition in recent weeks.
Whoever the victims, we know foreign aid is likely to be safe. Foreign Minister Julie Bishop recently told reporters last week that she expected her department had won a reprieve.