(Bloomberg) — S&P Global Ratings warned Australia’s prized AAA sovereign credit rating may be at risk if election campaign pledges result in larger structural deficits, debt and interest costs, highlighting fiscal pressures facing the next government.
“The budget is already regressing to moderate deficits as public spending hits post-war highs, global trade tensions intensify, and growth slows,” analysts Anthony Walker and Martin Foo wrote in a note on Monday. “How the elected government funds its campaign pledges and rising spending will be crucial for maintaining the rating.”
Australia’s major parties have made large spending commitments during a tight campaign ahead of Saturday’s election, from setting aside billions of dollars to build new homes for first-time buyers to tax cuts and higher health spending. S&P also pointed to more than A$100 billion ($64 billion) in “off-budget” spending that’s expected between fiscal 2025 and 2029 to reinforce its fiscal concerns.
To date, markets have remained largely unperturbed by higher government spending, with Australia’s debt and deficits both relatively low by global standards. Australian government bond futures rose strongly early on Monday while yields on the 10-year paper are well below US peers.
Australian credit-default swaps jumped along with many others after US President Donald Trump’s “Liberation Day” tariffs, but they have since come down to be back in line with the average over the past year.
The implications of increased spending for the Reserve Bank are potentially mixed, economists say, given the US-led upheaval in trade is already threatening to dim the global economic outlook.
Morgan Stanley strategists said that based on current opinion polls the ruling Labor Party will form a minority government, requiring deals with smaller parties and independent candidates to secure a parliamentary majority. Such an outcome could put downward pressure on public spending, they said in a note.
“Government spending contributed the entirety of Australia’s economic growth in 2024, so the trajectory of fiscal policy is clearly consequential to the outlook,” Morgan Stanley said. “A minority government would pose more near-term risk for growth, given the experience of the last minority government (2010) was a subsequent sharp slowing in public spending.”
