Australia retains AAA as tax changes and spending cuts help bottom line

Australia has retained its triple-A credit rating from S&P Global, with the federal budget’s property tax changes and proposed cuts to the NDIS highlighted as reasons for the nation’s strong fiscal position.

One of just 11 nations with the highest level credit rating, S&P said Australia’s budget performance was sound and was likely to be even stronger than what Treasurer Jim Chalmers unveiled in his May fiscal blueprint.

A strong credit rating is critical to the interest rates on government debt. A high federal rating is also pivotal to the states and territories, helping to keep a lid on their growing borrowing costs.

The budget contained reforms to negative gearing, capital gains tax and trusts that are expected to raise more than $80 billion in revenue over the coming decade. Cuts to the NDIS are forecast to save up to $230 billion over the same period.

In a statement, S&P noted that the budget was in a strong position, with Labor’s changes likely to improve the bottom line.

“Australia’s planned property tax increases and savings measures should help mitigate rising structural spending pressures,” it said.

“Fiscal metrics are solid, with recent revenue-raising and savings measures creating room to accommodate spending growth.”

The agency noted that Australia had modest public debt by international standards, although it said state government debt was climbing.

It said the budget deficit, forecast this year to be $31.5 billion, and net debt that is expected to climb to $616.6 billion would “remain modest” over the next two years. It believes the government’s commodity price forecasts are conservative, suggesting the deficit may be smaller than forecast.

While relatively upbeat about the budget, the agency noted that economic growth is likely to slow in the coming year as the Reserve Bank holds interest rates relatively high.

“Australian consumers are sensitive to interest rate movements. We therefore anticipate contractionary policy to gradually squeeze household cash flows and spending power,” it said.

Chalmers said the retention of the credit rating was a “powerful endorsement” of the government’s budget policy, noting only nine nations had the highest rating from the world’s three key credit agencies.

He said while the budget had improved from where it was expected to be, there were growing structural pressures on the nation’s finances that required action.

“S&P specifically calls out the government’s ambitious tax and savings reforms for helping improve Australia’s fiscal position over the next decade,” he said.

“Our responsible approach of finding savings and reprioritisations, spending restraint and banking revenue upgrades has delivered one of the strongest budgets in the developed world.”

This week, shadow treasurer Tim Wilson confirmed the Coalition would repeal all three key tax measures in the budget, saying they were hurting the economy and hitting “those who are backing themselves to get ahead”.

“We’ll change the rules back on negative gearing and of course on trusts,” he told News24.

“What the government is doing is not just tightening a sort of economic noose around the small businesses of the country, they’re undermining the very basis in which small businesses are the foundation of the Australian economy.”

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