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Aussie debt rising faster than euro area puts AAA rating at risk

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Australia's debt, already rising faster than the euro area's, will keep ballooning as Prime Minister Malcolm Turnbull's government prioritizes growth over balancing the books.

[SYDNEY] Australia's debt, already rising faster than the euro area's, will keep ballooning as Prime Minister Malcolm Turnbull's government prioritizes growth over balancing the books.

The budget Tuesday will flag a slightly wider shortfall of A$35 billion (S$35.55 billion) for 2016-17, compared with official forecasts six months ago, the median of 17 economists surveyed showed.

With a surplus not expected for five years, net debt is forecast by the International Monetary Fund to swell to 19.5 per cent of gross domestic product - still less than a third of European levels but up from just 3.9 per cent in 2010.

"At some point you're going to be testing the patience of ratings agencies when you persistently miss your budget forecasts and you don't have a plan," said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada.

"The trajectory of the debt is similar: each year the government tells us where it will peak and each year it revises that number. It's a persistent miss."

Mr Turnbull has been emphasizing the need to bolster growth and jobs rather than rushing to surplus to pay down debt.

The change was forced on him by an electoral rebellion against the Liberal-National government's first budget in 2014 that attempted to impose austerity; instead it brought a collapse in poll ratings and the eventual ousting of former Prime Minister Tony Abbott.

Australia has run a budget deficit every year since the 2008 global financial crisis - a period that encompassed soaring iron ore prices and a once-in-a-century mining investment boom. Still, the IMF forecasts the overall deficit to be one of the lowest in advanced economies this year, at 1.8 per cent of gross domestic product.

Central bank governor Glenn Stevens, whose board cut interest rates to a record 1.75 per cent on Tuesday just hours before the budget's release, has urged the government to come up with a medium-term plan to balance the books.

After 25 years without a recession, Mr Stevens said last year a significant downturn in the economy would see the deficit jump from 2 per cent of GDP to as much as 6 per cent in a "heartbeat."

Treasurer Scott Morrison, who will deliver the budget at 7:30 pm Canberra time, says the government won't spend any more than it saves on outlays, but also pledged not to increase the overall tax burden.

He expects the government's debt pile to peak within about five or six years and then start to shrink again.

"To start reducing the debt you've got to get the deficit down. To get the deficit down you've got to get your spending down," Mr Morrison said in a Channel Nine television interview on Sunday.

General government debt, which includes central, state and local, is projected to exceed 19 per cent of GDP this year, from 3.9 per cent in 2010, according to IMF data. The pace of the deterioration is almost double the average of advanced economies and faster than the euro area's 12.7 per centage point increase over the period.

Despite the blowout, Australia's still part of an exclusive club. It's one of just 13 nations to carry the AAA rating at S&P Global Ratings, among 14 with the equivalent score at Moody's Investors Service and one of 11 at Fitch Ratings.

Moody's said last month the government's debt pile is set to increase further without measures to boost revenue, warning that would be credit negative.

"Notwithstanding Australia's favorable fiscal metrics relative to AAA rated peers, Australia has had a prolonged and marked increase in government debt over the past decade," the rating company said.

Where Australia differs from those AAA counterparts is in its more concentrated economy - with a greater emphasis on agriculture and mining - and a narrower export base that's heavily dependent on one emerging country. Among developed economies, it's the most reliant on China - the biggest consumer of Australia's largest export, iron ore.

That puts pressure on Australia to keep its debt-to-GDP ratio lower than that of top-rated peers. S&P said in 2014 it could potentially change Australia's rating or outlook if net debt approached 30 per cent of GDP.

"Where the ongoing and key ratings threat for Australia probably lies is around the external profile for the economy, linked to China," said James McIntyre, head of economic research at Macquarie Group Ltd, who worked in the previous government.

Tuesday's budget will be delivered against a backdrop of a rebounding currency that's likely to crimp services exports that benefited most from the Aussie dollar's earlier depreciation. It also comes as a surge in house prices in Sydney and Melbourne that fueled a residential construction boom starts to slow.

The government's books have also been hit by slumping terms of trade, or export prices to import prices, as demand from China for minerals cools. Add to that record-low wage growth, which is curbing the number of workers moving into higher tax brackets.

"The budget will in many ways be what we now think as typical," said Michael Blythe, chief economist at Commonwealth Bank of Australia, the nation's biggest lender.

"That is, deficits persisting through the four-year projection period. And public debt continuing to creep higher. Budget balance will continue to beckon from the far horizon."

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