Credit ratings at risk with political gridlock

By John Daley. Chief Executive, Grattan Institute

The prospect of a hung parliament increases the risk of Australia having it credit worthiness downgraded, Grattan Institute chief executive John Daley warns.

Mr Daley said credit rating agencies are already worried that Australia isn’t doing enough to reduce its structural budget deficit, and that a hung parliament and a minority government will be interpreted as a sign that there isn’t the political will to reduce spending and raise taxes. He said the structural deficit is running at 2-3 per cent of Gross domestic Product, and is material enough to cause the ratings agencies real ongoing concerns.

“The big implication of the election result is that the credit rating agencies have an objective reason to be worried,” Mr Daley said.

“They have been making noises about disliking Australia’s budgetary situation and disliking the lack of political will or otherwise to deal with it. Those noises will now get louder,” he warns.

“If there is an actual downgrade, and that is a very real possibility, then the Australian government will pay more for its debt, Australian banks will pay more for their debt, and that will ultimately be passed on to Australians who will have to pay more for their mortgages.”

“There were few signs of political will to deal with the deficit when the government had control of at least one of the houses of parliament. Now at best a government will have only a tenuous hold on the lower house, and the Senate will be even trickier than the last Senate. So you would understand why a ratings agency would be more nervous about the ability of a government to make any of the changes needed to get the structural deficit under control.”

He warned that reducing the deficit requires tough and unpopular decisions on controlling the rise in health care costs and raising taxes in a way that doesn’t damage the economy or hurt the disadvantaged too much. He said a new government will also need to adopt policies to reduce the cost of housing in metropolitan areas and to increase the participation of women in the workforce. However, addressing both these issues will create losers as well as winners in a tight budgetary environment, and therefore are tough to do politically.

Mr Daley said the problem will now be made worse because any new government will struggle to persuade crossbenchers to back unpopular measures. Unlike a government, he said, crossbenchers don’t have the same responsibility for overall economic and policy outcomes. “It is governments that have to live with the overall outcome. Individual Senators have to live with the outcomes on a particular bill, but they tend to bear less responsibility for the overall outcome.”

“Not surprisingly, the policies that will help aren’t particularly popular. If they were popular someone would have done them by now,” he said.

Credit agencies Moody’s and Fitch both affirmed Australia’s Aaa and AAA rating following the May budget but both warned that the deficit made the country’s finances more vulnerable to external shocks.

Image credit: Wendell/Flickr

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