Federal election 2025: Spendathon risks Australia’s AAA credit rating in rare rebuke

A rare rebuke by global ratings agency S&P has overshadowed Labor’s attempts to paint itself the more responsible economic manager, as election sweeteners threaten Australia’s top AAA credit rating.

Treasurer Jim Chalmers on Monday attempted to outplay the Coalition in the dying days of the campaign by releasing its election costings early. He taunted the Opposition to “come clean on what their secret cuts” for nuclear reactors mean for Medicare, pensions, housing and other essential budget investments.

But the Government’s own announcement was undercut when international rating agency S&P Global warned Australia’s top tier ‘AAA’ rating could be jeopardised as election spending commitments pile up.

The warning came just hours before the Government released its long-awaited final costings ahead of the May 3 poll. In a report titled Hey Big Spender, S&P warned the nation’s top tier AAA rating could be jeopardised if election promises result in “larger structural deficits, and debt and interest expenses rising more than we expect”.

In the lead-up to the pre-election Budget, delivered on 25 March, Labor outlined an additional $70b in new spending over the forward estimates, resulting in an underlying deficit of $42.1 billion next year, pushing Federal debt above $1 trillion in the 2025-26 financial year.

Of particular concern to S&P was the continued use of so-called ‘off budget’ spending, such as the National Broadband Network, Clean Energy Finance Corporation, Snowy Hydro, and Housing Australia. Labor’s decision to wipe $16b from student HECS debt also falls into the category.

The continued use of off budget spending was becoming a concern for S&P, who said they would look past the government’s preferred fiscal metric, the underlying cash balance.

“A proliferation of “off budget” spending programs... is increasingly obfuscating Australia’s fiscal position and borrowing needs. The annual change in net general government debt... better reflects the country’s underlying fiscal position because it captures all spending within it. “Off-budget” spending would be more than A$100 billion between fiscal 2025 and 2029,” S&P country analyst Anthony Walker wrote.

The Budget is relying on a return to long-run growth levels that are also in serious doubt if the trade war instigated by Donald Trump continues to wrack the global economy.

“These commitments... will need to be funded at a time when the government is grappling with rising international trade tensions, economic uncertainty, and fast growing structural spending such as the National Disability Insurance Scheme, defence, health, aged care, and interest on government debt,” Mr Walker wrote.

“If major election commitments aren’t funded via additional revenues or savings, the deficit could widen further.”

Spending by the States was adding to Australia’s poor fiscal position, with S&P noting that “lax fiscal discipline at the state level has seen big-spending state governments remain in large deficits”.

Federal and State public spending has hit a post war high of almost 27 per cent of Gross Domestic Product, while total Federal and State deficits that are predicted to hit 2.5 per cent of GDP — a level not seen since the global financial crisis — notwithstanding the pandemic.

With the Federal government likely to act as a backstop for any State defaults, S&P Global combines total government debt in its rating calculations, which can have an impact on how much Australia would pay for borrowing money on global markets.

Australia has held the top AAA rating since February 2003 and is one of only 11 countries among the 139 rated by S&P to be accorded the top status. Other countries with AAA ratings include Canada, Denmark, Germany, Singapore and Sweden.

S&P said Australia had maintained the status thanks to “sound fiscal management across multiple governments over several decades” but the agency worries that the current round of election commitments don’t have a clear revenue offset.

Mr Chalmers accused the Coalition of committing more than $60b in policy pledges during the campaign, on top of a $600b investment for its nuclear power plan — a figure the Opposition disputes.

“The test for the Coalition, which should release their costings and their cuts immediately, is whether or not the costings that they release includes all of those tens of millions of dollars of commitments they’ve made,” he said.

Labor’s costings suggested a $1b improvement over the Pre-Election Economic and Fiscal Outlook, with additional spending, such as the $10b first home buyer scheme, to be offset by $6.4b in savings from reducing spending on consultants in the public service and and additional $760m in revenue from higher visa application fees for international students.

Dr Chalmers said this added to the overall “responsible economic management” that had seen Labor engineer the biggest nominal Budget turnaround in a Parliamentary term on record.

Labor has consistently touted an improved Budget position of more than $207b over the seven years to 2028-29, although deficits are forecast well into the future and debt is now projected to exceed $1 trillion in the 2025-26 financial year.

Labor’s costings announcement now adds pressure to the Coalition to reveal the financial details of its own policies.

Shadow treasurer Angus Taylor refused to be drawn when pressed on Sky news to do so, only revealing that “you will see them in the next couple of days.”

“The sneak preview is our position will be stronger. You can rest assured that under a Liberal National Government, you will have a position which which delivers a stronger economy, stronger productivity, stronger real wages,” he said.

The Coalition has come under fire in recent weeks to explain how it intends to save its estimated $7b by cutting 41,000 Canberra public servants, and how it will pay for a $21b hike in defence spending.

Independent economists, Chris Richardson and Saul Eslake have both lamented the lack of vision and transparency across both parties in addressing the country’s long term fiscal future.

Mr Richardson said the warning from S&P had come too late, and that the “horse has well and truly bolted” in terms of the trend of Budget discipline.

Mr Eslake was scathing that costings had come so late in the campaign. “Both major parties are treating voters like mugs dropping this stuff in the last week of the election campaign, when at least a quarter, if not more, of the electorate have already voted,” he said.

Greg Jericho, chief economist at the Australia Institute, described Labor’s savings over four years as a “bit of a rounding error” but added this was to be expected as most of the party’s costings had already been included in the March Budget.

He downplayed the risk of any change to Australia’s AAA rating but highlighted the spotlight on “off budget funds” that had snowballed over the past two decades.

“That does make for more of an opaque budgetary situation,” he said.

More generally, the country had become “too fixated on the deficits” rather than on the quality of spending, added Dr Jericho.

Both parties were guilty of avoiding necessary structural reforms to the tax system.

“We have a lot of tax breaks that don’t do a lot of good for our economy,” he said.

“Neither party has looked at improving our tax base.”