This report does not constitute a rating action.
MELBOURNE (S&P Global Ratings) May 14, 2024--Australia is pivoting from combating inflation to supporting growth and industrial policy. This change in fiscal stance could add slightly to inflation and public debt. Meanwhile, strong tax receipts--which result from elevated export prices coupled with nominal GDP growth, inbound migration, and a firm labor market--are papering over emerging spending pressures in social welfare and defense.
Australia's (AAA/Stable/A-1+) federal budget, announced today, underscores an impressive consolidation. It reveals that the central government should achieve a small headline cash surplus of 0.2% of GDP in fiscal 2024 (year ending June 30). This follows a headline surplus of 0.6% last year and represents a dramatic turnaround from the 6.6% deficit booked at the height of the pandemic. Fiscal performance, while solid by Australian historical standards, is midrange compared with 'AAA' rated peers.
A remarkable terms-of-trade boom has turbocharged corporate tax revenues and mining royalties. But it has also masked growth in underlying spending. The end of the last commodity boom around 2014 coincided with repeated delays in reining in deficits.
Policy is now tilting to a more expansionary footing. While the Labor administration estimates that it has banked (rather than recycled into new outlays) approximately 88% of unexpected tax revenue upgrades since coming into office, today's budget slightly loosens the purse strings.
Headline cash deficits could therefore widen on the back of new spending. This will include the rollout of new "cost of living" support measures; a "Future Made In Australia" industrial policy, which props up domestic manufacturing and critical technologies; and fast-growing structural expense pressures in at least five areas: defense, health, aged care, disability support, and debt interest. A notable feature of today's budget is the expansion of so-called off-budget spending through investment vehicles like the Clean Energy Finance Corp. and Housing Australia, up a net A$21 billion (over a five-year horizon) since last year's budget. These are not captured in the administration's preferred cash deficit measure but are in our metrics.
New policy measures could be mildly inflationary. For instance, rent assistance or electricity rebates might be administered in a way that lowers measured consumer price index inflation, but they also put more money into consumers' pockets to spend on other goods and services. Consequently, the "last mile" of the Reserve Bank of Australia's (RBA) inflation fight could remain challenging. Trimmed mean inflation was tracking at 4.0% over the year to March 2024, well above the RBA's target range of 2%-3%. Before the budget, we revised our global policy rate forecasts to reflect a more hawkish U.S. Federal Reserve. We no longer expect the RBA to cut its policy rate in calendar 2024.
The government's commodity price assumptions remain conservative, in our view. Our house view assumes iron ore prices will remain US$90-US$110 per metric ton, well above the budget assumption of US$60 per metric ton, implying upside to the official projections. On our preferred general government measure--which consolidates all three tiers of government in Australia--overall fiscal deficits could average a modest 1%-2% of GDP each year. Sizable deficits at state government level are a drag.
Our 'AAA' rating on Australia continues to benefit from the country's strong institutions, which favor swift and decisive policymaking, credible monetary policy, and a floating currency. These strengths have ensured Australia's economy remained resilient throughout the pandemic, despite high external vulnerabilities.
Related Research
- S&P Global Ratings Metal Price Assumptions: Prices Rise On Tight Supply And Higher Costs, May 3, 2024
- Global Economic Update: Policy And Exchange Rate Forecasts Revised On New Fed Funds Rate Expectations, May 2, 2024
- Australia, Feb. 12, 2024
- Economic Research: Australia Can Avoid A Hard Landing, Dec. 6, 2023
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