Will Australia retain its AAA credit rating? Marie Diron Moody’s

Marie Diron from Moody’s Investors Service talks about what needs to happen in the budget, for Australia to retain its AAA credit rating

Introduction Will Australia retain its AAA credit rating?

Ross: The most important part of the budget in many ways tonight, is what happens with the credit rating. Do bear in mind that the government is going to put a credible plan in place to make certain it gets back into surplus in the foreseeable future and at the moment that’s the year 2021. The second part of that is also, is that it’s got to have some idea about long term managing debt.

Now do bear in mind a lot is said right now in regards to, say for example, the whole idea of good debt versus bad debt, is going to be a part of it as well but do bear in mind that the ratings agency Moody’s, in particular, has already put the government on notice in reg

ards to the budget, the deficit and the debt because it said that we are on a negative credit watch for that Triple-A credit rating. Let’s now go to Marie Diron who is the associate managing director of Moody’s Investors Service, who does look to Australia and indeed the way in which our budget will be set tonight. Many thanks for your time Marie.

Interview with Marie Diron, Moody’s Investor Service

Marie: Thank you for having me.

Ross: So far you’ve been at least patient with the federal government in regards to its plans to get back into surplus, its plans to reduce long term, the national debt. It really comes down to the importance of this budget to maintain that plan, doesn’t it?

Marie: Well, what we look at is indeed the pace of fiscal consolidation. Previous budgets have consistently shown consolidation in public finances and move towards budget balance over time, and we will look at whether that pace is expected to be maintained or whether there are changes based on the economic environment, based on the commodity price environment and also on the measures that the government will propose tonight.

What we have said and what we think is that Australia has high fiscal strength and that is compared to other sovereigns that we rate Triple-A based on the current level of government debts, that is we’re receiving moderates. We expect that to be maintained but we will look of course at this budget with that medium perspective in mind.

Ross: In this regard, just take me through also the thinking in terms of good debt versus bad debt, is there such a thing in the eyes of a credit ratings agency?

Marie: This is a distinction about really the nature of government spending between current spending and spending for investment. That is something a lot of governments are all looking at as well and sometimes I’m betting is in their budget processes. From a credit, from a sovereign rating perspective, we do look at overall government debt, that is what the governments need to repay over time and that is really the metric, the overall scope of the debt that we consider.

We also look at the spending decisions today, the composition of spending with the view to then project what that spending will do to future growth, enhance future revenue generation for the government. Investment today can boost growth tomorrow and that would generate revenues. We will look here at what the proposals are and how the composition of spending is expected to evolve.

Ross: What we do know already is that there is going to be some extra spending in the budget, the government has already leaked that out. It comes to education. It comes to the National Disability Insurance Scheme. It comes to a range of other areas. These are big items of expenditure. There’s even some small compensation for households in regards to rising utility bills. Now what you will want to see, I presume, is that there are countermeasures, measures that will actually save money or indeed that there is economic growth to pay for those measures. That’s the key to this budget, isn’t it?

Marie: We will look at countermeasures. We’ll look at potential reshuffle in spending and different spending areas, potentially revenue raising measures. In general, our expectations so far, projections so far, have been that the narrowing of the deficit would happen at a slower pace than what the government has projected over the previous budget. We will look at this update with that starting point in mind. What we have pointed out before is that the restraint on expenditure that the government had projected before is challenging when a big part of the overall government spending goes to fairly– to areas such as education, social welfare in half that we had really cut are difficult to implement.

Ross: That’s the real problem because it is hard to cut some of that recurrent expenditure. In other words, pensions welfare, those types of areas are very difficult to cut so, as a result, you’ll be looking for efficiency dividends as well but one other aspect of this, if the government can make the pace of the economy grow more quickly, then you would presume it will get more income through taxes in the door. Now the Reserve Bank last week has said it will see an increase in the growth forecast up to three and a quarter percent over the coming three years. That quite clearly would help the bottom line of the budget, so that’s the other part of the equation, isn’t it?

Marie: That is a very important part of the equation the nominal growth environment in which the government operates that determines to a large extent really the revenue flow for the government and to some extent as well the spending need. We have in the past had projections that were more cautious on the growth side and then the government embedded in budget, that gap closed in the media of days.

Interestingly, the government revised their gross assumption down, so now we’ll be looking forward. We assume that real GDP growth will be around two point five, two and three quarters, over the next few years, somewhat below what the RBA is projecting. We will look at what the government assumes in this budget and assess the risks here to budget implementation from that perspective.

Ross: I’ve got to tell you that’s always one very interesting because nobody can guarantee future economic performance of any economy because you don’t know what wildcards might come out of the blue as well. Always great to have a chat with you here on the program. Marie Diron is the associate managing director of Moody’s Investors Service and Marie, we always appreciate your time here on the program.

Marie: Thank you very much.

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