Financial Scare heading towards Australia.

A SCARE over the nation’s AAA credit rating has weakened the Australian dollar, amid new ­government warnings about the scale of future budget deficits and the need for urgent fiscal repair.

Joe Hockey predicted yesterday that people would “fall off their chairs” when they saw some of the charts in a long-awaited report­ on the country’s financial future, which is due to be issued within weeks.

The report will outline the natio­n’­s­ economic health through to 2055 and will be used by the federal government to make the case for spending cuts or tax increases in the May budget.

Australians needed to accept sacrifices today in order to live up to a “compact between generations” and avoid putting a bigger burden on the young, the Treasurer said yesterday.

Ratings agency Standard & Poor’s forecast that tax revenue would be downgraded in the budget and said both major parties needed to keep up their commitments to achieving surpluses.

An initial report of S&P’s view of the budget triggered a surprise fall in the Australian dollar of ­almost half a cent against the US dollar yesterday afternoon.

But market economists said that on closer inspection of the ratings agency’s comments the concerns were “exaggerated” and S&P moved to ease concerns.

S&P analyst Craig Michaels told The Australian “our view hasn’t changed” and said that the company continued to have a stable outlook on Australia’s AAA rating, with no significant risk to that outlook on current trends.

He forecast another hit to tax revenue in the budget as iron ore and coal prices fell.

“We wouldn’t be surprised to see some material revenue writedowns in the May budget, given what we’ve seen in commodity prices,” he said.

“We still think there’s a polit­ical consensus for governments to run finances prudently, and a consensus on both sides of poli­-t­ics that surpluses are a good objectiv­e. We don’t think that’s fundamentally changed.”

The government is pressing ahead with new policies that could eat into tax revenue or push up spending, including a tax cut for small business and an overhaul of childcare assistance.

The commonwealth’s net debt is forecast to reach $315.8 billion or 17 per cent of GDP by 2017, which is low by global standards.

S&P bases its rating on the combined impact of federal and state debt. It estimates these will add up to 21 per cent of GDP this year or next, but will stay below the 30 per cent level that might trigger a ratings downgrade.

“There’s still a buffer there, but that’s one factor we’ll be looking at,” Mr Michaels said.

The government has played down expectations of a tough ­budget, but has started “razor gang” meetings of the expenditure review­ committee to consider more savings.

Mr Hockey used a speech in Sydney to restate the need for budget reform, as he hinted at some of the grim news to come in a new Inter­generational Report that will outline trends in population, productivit­y, budget deficits and economic growth over the next 50 years.

“When people see some of the graphs in the Intergenerational Report they are going to fall off their chairs,” he said in response to questions after the speech.

“Because for all the effort we’ve put in so far — and some of it has been controversial — for all the effort we’ve put in so far we still don’t get anywhere near being able to reduce spending over the medium term to the same level that exists today as a percentage of GDP.

“So there is a huge task that is ahead of us. If we want to remove the shackles — if we want to give people an incentive to work harder, to earn more money, to be more innovative — if we want to do that, we’ve got to start living within our means.”

Mr Hockey argued for budget savings today on the grounds that it would ease the burden on those yet to be born, in a “compact betwe­en generations”.

“Our parents made enormous sacrifices for us — unbelievable sacrifices through war, depression, immense adversity,” he said.

“We are being asked to make sacrifices for the next generation. I don’t know about you, but I’m stepping up to the plate.

“That’s the compact between generations and I think Australians are ready for that, and the Inter­generational Report and the number of announcements that we’ve got over the next few months are going to be directed at putting meat on the bones of that compact between generations.”