(Bloomberg) -- S&P Global Ratings warned Australia’s prized AAA sovereign credit rating may be at risk if election campaign pledges result in larger structural deficits, debt and interest costs, highlighting fiscal pressures facing the next government.
“The budget is already regressing to moderate deficits as public spending hits post-war highs, global trade tensions intensify, and growth slows,” analysts Anthony Walker and Martin Foo wrote in a note on Monday. “How the elected government funds its campaign pledges and rising spending will be crucial for maintaining the rating.”
Australia’s major parties have made large spending commitments during a tight campaign ahead of Saturday’s election, from setting aside billions of dollars to build new homes for first-time buyers to tax cuts and higher health spending. S&P also pointed to more than A$100 billion ($64 billion) in “off-budget” spending that’s expected between fiscal 2025 and 2029 to reinforce its fiscal concerns.
To date, markets have remained largely unperturbed by higher government spending, with Australia’s debt and deficits both relatively low by global standards. Australian government bond futures rose strongly on Monday while yields on the 10-year paper are well below US peers.
Australian credit-default swaps jumped along with many others after US President Donald Trump’s “Liberation Day” tariffs, but they have since come down to be back in line with the average over the past year.
Bond strategists and economists agree that Australia’s fiscal settings are stimulatory, with government spending almost solely contributing to the country’s economic growth in 2024.
“However, in an environment where other countries are loosening the strings of fiscal responsibility, and structural deficits are set to rise globally, Australia still stands out as a safe harbor for international investors,” said Prashant Newnaha, Singapore-based macro-strategist at TD Securities.
That lower starting point for debt and deficits has led to “complacency” around Australia’s budget position, said Su-Lin Ong, Sydney-based chief economist at Royal Bank of Canada.
“It will ultimately mean higher borrowing costs, a vulnerability to external shock, lower quality services and ultimately living standards,” she said. “A louder and more rigorous debate is needed in terms of measures to structurally lift revenue.”
The Reserve Bank will similarly be watching closely for any signs of revived inflation while also considering the potential hit to global growth from Trump’s tariff regime.
The RBA’s monetary policy board next meets on May 19-20 and is widely expected to cut interest rates by a quarter percentage point to 3.85%. Money market pricing implies the cash rate will slip below 3% by December compared with economists’ estimate of 3.35%.
“The last thing the RBA would want to do is derail inflation expectations and ease too quickly when weak productivity and rising government spending could add to inflation risks,” Newnaha said.
Australia’s center-left Labor government is on track to win the May 3 national election. Irrespective of the election outcome, the country’s fiscal balance is projected to tip back into deficit in the 12 months through June 2025, following two consecutive surpluses. At the same time, the nation’s state governments have been spending heavily as well.
“This could drive the general government fiscal deficit wider to 2%-2.5% of GDP, a level rarely seen since the immediate aftermath of the global financial crisis (outside of pandemic-affected years),” S&P said. “If major election commitments aren’t funded via additional revenues or savings, the deficit could widen further.”
On Monday, Treasurer Jim Chalmers said Labor’s overall budget position would be more than A$1 billion better off when compared to the Pre-Election Fiscal Outlook, helped by cuts to government consultants and hikes in student visa fees.
The Liberal-National Coalition opposition has promised to release its policy costings before election day. More than 2 million Australians have already voted.
--With assistance from Garfield Reynolds and Ben Westcott.
(Adds comment from rates strategist, Labor’s budget costing.)