Years of spending beyond our means has caught up with Australia today, with ratings agency Standard and Poor’s lowering Australia’s credit rating outlook to negative.
While Australia retains its prized AAA credit rating for now, it is a strong warning Australia could lose its coveted credit rating if our budget position fails to improve.
In a statement, Standards and Poor’s said, “There is a one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s.”
One such improvement could be the grandfathering of negative gearing and the reduction of the capital gains discount from 50 per cent to 25 per cent, forecast to save tax-payers over $6 billion a year.
Standard and Poor’s later today placed NSW, Victoria and the ACT on a negative outlook indicating “no state entity can receive a higher rating than the Commonwealth of Australia.”
Subsequently, for similar reasons our big four banks – ANZ, CBA, WBC and NAB were placed on a negative outlook.
S&P remarked, “The negative outlooks on these banks reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia”
S&P described government debt as low, but indicated its biggest concern is Australia’s “high external and household indebtedness”.
“A portion of Australia’s external debt has also funded a surge in unproductive household borrowing for housing during the 1990s and 2000s.”
Australia has the highest level of household debt as a percentage of GDP in the world. Approximately 30 per cent of bank funding comes from external wholesale markets, exposing Australia to external shocks.
Ireland was in a similar situation pre GFC with low government debt and significantly high household debt. When the Irish people could no longer service their mounting debts, the banking system buckled, the government was forced to bail out them out, effectively shifting the household debt onto the balance sheet of the government.
» Australian Government, major bank credit ratings put on negative watch by Standard & Poor’s – The ABC, 7th July 2016.