A day after S & P put the nation on negative credit watch, the agency warned it would pay close attention to Mr Morrison's pre-Christmas mid-year budget update and next May's budget. It said the nation's off-shore debt – which has soared above $1 trillion, a record, in the March quarter – means it must be held to a higher standard than other top-rated economies.

"We're really looking at the government to stick to its latest forecast which is [to balance the budget] in 2020-21," said Anthony Walker, S & P associate director.

"There have been a number of years of fiscal slippage and it's really time for the government to step up and deliver."

Mr Walker said S & P was "specifically looking at the government's ability to negotiate with the Senate" which will be more unwieldy than the previous Senate and shows no sign of passing $12 billion in welfare and other spending cuts carried over from the 2014 budget.

Senator Xenophon, whose three-person Senate team will have a balance of power role in the new Senate, is already making spending demands, including wanting to put together a package to protect manufacturing jobs.

On Friday, he suggested the government make permanent the three-year temporary deficit levy, which is due to expire on June 30, 2017, and increase the Medicare levy a "smidgin".

The deficit levy was a 2 percentage point increase to the top marginal tax rate, taking it to 49 per cent. A further 1 point increase to the Medicare levy would leave Australia with a 50 per cent top tax rate. Making the deficit levy permanent is already supported by Labor and the Greens.

"The so-called temporary deficit levy needs to be extended until we get the deficit under control," Senator Xenophon said.


He claimed further benefits from giving the Commonwealth Auditor-General greater power to scrutinise government spending, including payments made to the states.

S & P's Mr Walker declined to comment on whether the government should lean more heavily on tax cuts versus spending reductions to offset any deterioration in the budget.

"As long as the budget does improve and gets back to surplus that would actually support the AAA rating. It doesn't actually matter whether it's revenue or expenditure."

Asked whether he thought the Senate cross-bench parties may refuse to support budget repair measures, Mr Walker indicated he thought S & P's warning about the AAA could help shake them out of resistance.

"We've signalled to them that the time to act is now, there is no more room. That might have some impact on the minor parties. We'll have to wait and see."

Former Liberal minister Peter Reith urged Malcolm Turnbull to take risks on economic reform, to both save his leadership and repair the budget.

Mr Reith told AFR weekend that Labor took risky reform proposals to the election – changes to negative gearing and capital gainst tax foremost among them – and was far from punished.

Mr Reith suggested Mr Turnbull should look at taking similar risks, if not on these measures, then others.

"He's does need to be a bit more bold because he's got so many problems to face. It's an open situation for him. He should have some confidence that the public will go with him," he said

In a further sign of the likely cost to investors and mortgage holders of a downgrade, S & P confirmed on Friday three of the big-four lenders – Commonwealth Bank, Westpac and NAB Bank – could offset a reduction in the federal government's AAA by raising $7 billion to $8 billion each in extra capital.

Raising those funds would help them avoid an automatic downgrade that S & P confirmed would follow any federal cut.