Budget 2014: Downgrade Risk of Australia's AAA Credit Rating a 'Political Blow' to Abbott Gov't

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By Reissa Su | May 20, 2014 5:03 PM EST

Standard & Poor has warned Australia its AAA credit rating may be reviewed unless "significant cuts" were made in the budget. This may have provided the Abbott government leverage to win support for its budget.

Reuters
An office worker is reflected in the window of the Australian Securities Exchange building displaying the ASX50 curve for Wednesday in central Sydney August 7, 2013.

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Craig Michaels, a leading independent analyst for S&P, said a review may be required if the Australian government was unable to pass part of the $37 billion in savings the Coalition has announced in the previous week.

Australia's Labour has promised to block $18 billion in budget cuts and tax hikes while Clive Palmer, leader of the Palmer United Party, has vowed to veto policies targeting Australia's deficit.

The Abbott government is expected to reduce healthcare costs after an audit in May has recommended sweeping changes to prevent what the government has described as a "fiscal crisis." In Australia, the federal government spends 16 percent on healthcare. Many healthcare companies depend on government spending in growing their business.

Abbott has been criticized for telling Australians that they will "thank the Coalition" after the new budget has been announced. He has to convince the people who are used to the government's generous welfare benefits that Australia's debt has worsened, justifying the need for reductions on spending, including welfare.

According to the Wall Street Journal, critics said the country's public debt and government deficit remained "modest" compared to the debt situation of Europe and the U.S. Australia's Coalition government may be slowing down an economy already when dealing with declining mining investments.

A downgrade of Australia's credit rating will only increase the country's cost of borrowing. Michaels said the government will sustain political damage. Ratings agency S&P wants Australia to improve its budget in the coming years. For Australia to retain its AAA rating, public finances will need to be strong, including everything else.

Michaels rated Australia has having a one in three chances of being downgraded by S&P. He said there will no pressure on the rating if the country's budget deficit remains relatively small. 

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(Photo: Reuters / )
An office worker is reflected in the window of the Australian Securities Exchange building displaying the ASX50 curve for Wednesday in central Sydney August 7, 2013.
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