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SYDNEY, Dec 19 (Reuters) - Australia's conservative government will on Monday give an update on the national budget that could trigger a downgrade in the country's prized triple A credit rating and push up borrowing costs on over a trillion dollars of debt.
Facing slowing economic growth and a seemingly intractable deficit, Treasurer Scott Morrison is expected to reaffirm a pledge to return to surplus by 2020/21 through a mixture of spending cuts and tax-raising measures.
Many of the most contentious measures, however, are blocked in the Senate while record low wages growth and lacklustre nominal growth have badly crimped the government's revenue take.
S&P Global Ratings put Australia on negative watch back in July and might even cut the rating a notch later Monday should Morrison's plans fail to inspire.
Australia is among a dozen countries with the top rating from all three credit agencies.
A downgrade would likely nudge up borrowing costs on the Federal government's A$465 billion in debt and on some of the states' A$327 billion of borrowings and lead to Australia's major banks being downgraded as well as their debt pile mounts to more than A$500 billion.
It would also be a political nightmare for the Liberal National government of Prime Minister Malcolm Turnbull, which has long sold itself as a competent economic manager that can be trusted to balance the books.
Morrison took to the airwaves early on Monday to essentially blame the opposition Labor Party for blocking budget savings measures in parliament, though many of the proposals are deeply unpopular with voters as well.
The budget update is due at midday and there are expectations that the A$37.1 billion deficit originally forecast for the year to June, 2017 could be revised to around A$40 billion.
"Australia's push back towards an underlying budget surplus has felt a bit like "groundhog day". It's there in the forecasts but continually recedes into the distance," says CBA chief economist Michael Blythe.
The Treasurer will also have to revise down estimates for growth after the A$1.6 trillion economy surprisingly contracted by 0.5 percent in the September quarter, the first shrinkage since 2011.
However, one bright spot has been a recovery in prices for many of Australia's major commodity exports, with coal and iron ore surging in the past few months. If sustained, that will add billions to the tax take and could ease the pressure on the ratings.
And even if the country is downgraded, analysts said they doubted that it would have much of an impact on bond yields or investor confidence.
"Our feedback from clients across Asia is that they seem quite relaxed about the issue, with many noting that their mandates allow purchases of AA rated securities and any rise in yields would allow them to purchase AUD bonds at better levels," said Andrew Ticehurst, an economist at Japanese broker Nomura. (Editing by Greg Mahlich)