How Australia Got Its Triple-A Credit Rating Back
September 2, 2011
Australia lost its AAA credit rating in 1986, suffered a further downgrade in 1989, and then got back to triple-A in 2003. The story of how Australia got its fiscal groove back explains why it has fared so much better in recent years than other major industrialized nations, says USA Today.
- In 1986, it had been running deficits for decades.
- Many of its industries were heavily regulated.
- And the same natural resources companies that are booming now were in the doldrums.
The downgrades came as a shock and had a transformative impact on the entire political landscape. The government immediately began offering much more austere budgets.
- The country later adopted a measure called the Charter of Budget Honesty, which requires government leaders to go before Parliament to explain what went wrong if their budget projections fall short.
- The law has no automatic trigger mechanism to force cuts if goals are not met, but the potential for a public shaming has been enough to keep government leaders from overpromising.
- Australia has shifted most current workers out of a state-run pension plan like Social Security and into a compulsory 401(k)-type savings plan.
- It also, quite fortuitously, steered clear of the types of housing policies prevalent in the United States, where the federal government subsidizes mortgage debt with generous tax breaks and exposes taxpayers to risk through Fannie Mae and Freddie Mac.
As a result of these and other policies, Australia's accumulated government debt is less than a quarter of its annual total economic output, and it's projected to shrink. In fact, it has one of the lowest debt-to-gross domestic product ratios in the industrialized world. By contrast, the United States' national debt, including obligations to Social Security, topped 100 percent of economic output this month and is forecast to grow.
Source: "How Australia Got Its Triple-A Credit Rating Back," USA Today, August 31, 2011.
Browse more articles on Economic Issues