Roundup: Debate on Australia's fiscal position gathering steam

Debate over Australia's fiscal position is gathering steam after the chief business lobby calls on Australia to maintain its coveted triple-A credit rating, despite the nation's economy needing stimulus.

Though the Business Council of Australia is all but resigned to a ratings downgrade following warnings from Deloitte earlier this week, its new president Grant King reiterated the importance of a high rating.

"The government is like the community's insurer of last resort. We expect our governments to look after our community and our citizens if there's a disaster, like cyclones in Queensland," King told Australia's national broadcaster on Wednesday.

"In order for the government to have that capacity to support the community, it has to maintain a good credit rating to be able to fund whatever those circumstances are."

Global ratings agencies have warned Australia that a halt to ballooning government spending was not enough to ensure sovereign AAA ratings were maintained, arguing that revenue raising measures are also needed to curb growing debt which was "credit negative."

The deteriorating metrics presented in Deloitte Access Economics' budget monitor report on Monday showed a downgrade is all but certain, given the boost in Australia's terms of trade from iron ore and coal prices will not offset weak wages growth.

Global ratings agency Standard & Poor's in July placed Australia's sovereign debt on a negative watch with the eye to assess the government's ability to pass revenue and expenditure measures through both houses of parliament following the July election.

The ruling government does not hold power in the Senate, making it difficult for much needed fiscal reforms to become law.

"If the government does meet its current target of a 2020-21 surplus, that would still be consistent with the rating," S&P sovereign ratings chief Craig Michaels told a superannuation conference in Canberra, according to Fairfax Media.

"But if there's more slippage beyond that, then that probably wouldn't be."

Though Australia's debt is low to its similar rated peers, the private debt is among the highest in the world. Combined private and government debt stands at approximately 250 percent of GDP, Michaels said, using data from McKinsey.

"(The government's balance sheet) is quite strong, but the economy's balance sheet is very weak," Michaels said.

"What it means is that Australia's economic prospects are beholden to the ongoing willingness of foreign investors to roll over that debt and to continue to fund what is a structural current account deficit.

"Those things are fine provided foreign investors remain comfortable and confident in the Australian growth story."

Australia's economy however is operating at two-speeds driven by the south-eastern states after the downturn in mining investment and construction.

"In fact, it's largely Sydney and Melbourne propping up national incomes," CBA senior economist Gareth Aird said in a note to clients.

"The big influence that NSW (New South Wales) and Victoria have on the national figures means that pretty soft conditions throughout the rest of Australia have flown under the radar."

Headline figures show Australia growing at 3.3 percent over the year to June thanks to public investment in transport infrastructure by state economies offsetting the falls in Australia's resources sector. These public works are occurring in New South Wales state and Victoria.

Australia needs stimulus to boost the economies outside of Sydney and Melbourne, however the Reserve Bank of Australia (RBA) will not ease monetary policy over housing fears in those economies.

"Of course, that stimulus could come via fiscal policy," Aird said.

The benefit to Australia's economy of any targeted infrastructure investment will be far in excess of the cost of borrowing - Australian 10-year bond was 2.67 percent on Wednesday - but the ratings agencies "may not see it that way," AMP Capital chief economist Shane Oliver told Xinhua.

"(Australia) is not at the point where we've optimally separated welfare and the running of government from capital spending, it's all part of the general budget," Oliver said.

"Most economists wouldn't have much problems if the government made a case to invest more in infrastructure and decided it would be prepared to increase the size of the budget deficit by 0.5 percent of GDP for a number of years whilst at the same time, running current government spending at the same rate."

But the loss of the triple-A rating would be a psychological blow after regaining the top tier following the economic reforms of the Hawke-Keating government in the late 1980s.

The increased offshore funding costs are unlikely to be significant, given Spain, Italy and the United States all have lower 10-year bond yields than Australia despite lower sovereign ratings, while the RBA can offset any potential increases in mortgage costs by easing monetary policy.

"It's in some ways much ado about nothing, but then again it is symbolic that a country which used to manage its finances pretty well has suddenly gone off the rails a little bit," Oliver said. Endit