Treasurer Josh Frydenberg’s fourth budget has received a tick of approval from a major global credit rating agency, ensuring the nation’s top-tier standing remains intact.
Standard & Poor’s said the improvement in the budget bottom line has been faster than previously anticipated, underpinning Australia’s AAA rating and stable outlook.
“The outcome would have been stronger had the government not announced additional spending in the budget to ease cost-of-living pressures,” S&P said in a statement.
Australia remains one of a small group of 11 countries that is AAA-rated by S&P, a level it has held since 2003.
For the 2021/22 financial year the budget deficit is forecast at $79.8 billion, compared with $99.2 billion predicted in the mid-year budget review released last December.
For 2022/23 the deficit is $78 billion compared to a previous forecast of $98.9 billion.
Moody’s Investors Service vice president Martin Petch said this improvement reflects the flexibility of the Australian economy and effectiveness of its macroeconomic policy response to the coronavirus pandemic.
“This, and unexpected strength in commodity prices have driven a solid economic recovery and lift in government revenues,” he said.
The budget, coming days ahead of the May election being called, includes an $8.6 billion household support package that halves the fuel excise, a tax break for low and middle-income earners and a cash handout for pensioners and the unemployed.
Committee for Economic Development of Australia chief economist Jarrod Ball said these short-term quick fixes will be welcomed by many.
“But the budget has only taken modest steps to permanently lift the capacity of households to navigate the growing pressures on the economy,” he said.
“With growing inflationary pressures and interest rate rises on the horizon, cost-of-living pressures will not dissipate any time soon and these measures do not provide a long-term solution.”
Treasury’s inflation forecasts have been increased, starting with a spike to 4.25 per cent this financial year and staying at the top end of the Reserve Bank’s two to three per cent target over the next few years.
The annual rate of inflation was already running at 3.5 per cent in December.
However, economists are expecting an inflation rate of five to six per cent in coming quarters, which could potentially see the RBA lift the cash rate as early as June.
Financial markets may get a better idea of the interest rate outlook after next week’s monthly RBA board meeting.