S&P Global has warned that the Albanese government's run of budget deficits leaves Australia's finances exposed to a negative shock, including a slump in mining commodity revenues.
The credit rating agency says record government spending on debt interest, disability and defence is driving those deficits. Three big, sticky budget lines. None shrinks easily.
The Rating Agency's Warning
Martin Foo, S&P's sovereign rating analyst, went further than flagging that vulnerability. He said federal spending, now the highest in 40 years outside the pandemic, is working against the Reserve Bank of Australia's efforts to tame inflation with interest rate rises.
That's a pointed claim. Canberra pulls one lever while the central bank pulls another, and the two are working against each other. Households and businesses feel the squeeze from higher rates, yet the public sector keeps adding demand to the economy at a pace unseen outside a once-in-a-century health emergency.
Mining revenues add to the risk. A budget that depends on commodity income to stay on course has little margin if prices turn. Deficits that persist in good times leave no cushion for bad ones.
The RBA Misjudgment
The second part of the picture comes from inside the central bank's orbit. Ian Harper, a former Reserve Bank of Australia board member, acknowledged that the RBA was caught off guard by last year's resurgence in inflation.
Harper explained the miscalculation. The bank assumed the Australian economy could sustain more demand without generating price pressures. It couldn't. Spending ran ahead of what the economy could supply, and prices rose.
That admission sits awkwardly beside S&P's analysis. If the economy has less room to absorb demand than the RBA believed, then a government spending at 40-year highs is adding fuel at precisely the wrong moment.
More Rate Pain Possible
Harper also said the central bank could raise interest rates again before the end of the year. For mortgage holders and small business owners already stretched, that's unwelcome news.
He added that the RBA is beginning to give short-term inflation expectations more weight in its cash rate decisions. That marks a shift from its traditional approach. Central banks move carefully when changing how they read the evidence, and this shift suggests the bank isn't confident in its older assumptions.
The pieces connect. A government running deficits on record spending. A rating agency flagging the risk. A central bank that misread demand and may have to tighten again. Each raises the cost of the others.
Why This Matters:
When fiscal and monetary policy pull in opposite directions, ordinary borrowers and businesses pay through higher rates for longer. S&P's warning carries weight because rating agencies influence what the government pays to borrow, and debt interest is already one of the biggest items in the budget. Spending that's hard to wind back, combined with exposure to commodity prices, leaves little room to absorb a shock. From a fiscally cautious perspective, the case for restraint is practical: it would ease the burden on the RBA, protect the nation's credit standing, and keep a buffer in place for the downturn that eventually arrives. The alternative is leaving interest rates to carry the whole load.