However Labor treasury spokesman Chris Bowen said the development underlined the government's "fiscal failure" and cast further doubt on its budget projections. Scott Morrison should stick to his guns on planned superannuation changes, OECD research suggests. S&P on Thursday revised the credit rating outlook from "stable" to "negative", which means the rating may be slashed in future without an improvement in budgetary performance, potentially increasing Australia's government borrowing costs and deterring international investment. In a statement, Standard and Poor's said prospects for this improvement had been weakened by the recent uncertain election outcome, which could affect the ability of a new government to pass revenue and expenditure measures through both houses of parliament. This could see debt continue to rise over the forecast period "unless more budget savings measures are legislated or there are improvements in the revenue outlook".

It said Australia's sovereign credit ratings benefited from the country's "strong institutional settings, its wealthy and resilient economy, monetary policy flexibility, and low government debt". Prime Minister Malcolm Turnbull and Treasurer Scott Morrison during the election campaign. Credit:Andrew Meares But this was moderated by high external and household debt, and vulnerability to weak commodity export demand. External debt refers to the total debt a nation has borrowed from foreign lenders. S&P said without remedial action, "the government's fiscal stance may no longer be compatible with the country's high level of external indebtedness". The agency said there was a one in three chance it could lower the rating within the next two years if it believed Parliament was unlikely to pass savings or revenue measures that would bring the budget deficit into balance by the early 2020s.

Over the next six to 12 months, the agency will monitor the new government's ability to legislate such measures. The prospect of a hung parliament, and a larger, more difficult Senate crossbench, has substantially complicated this task. S&P said the ratings could stabilise if new budget savings or revenue measures were enacted that sufficiently reduced fiscal deficits over the next few years. Credit ratings are used by sovereign wealth funds and other investors to assess Australia's credit worthiness, and can impact on the country's borrowing costs. Mr Morrison said the AAA-rating had been retained by S&P and other agencies, but said the statement reaffirmed the government's fiscal plans and provided important context for a new government. "The message is we need to stick to the plan to maintain the fiscal trajectory that wasn't only outlined in the previous fiscal budget but also in previous budgets," he said, adding it reinforced the government's message that Australia must "live within its means".

He said S&P were clearly concerned about the outcome of the election and that "the pace of fiscal consolidation may be postponed". "That's why I say, as an invitation more than anything else to the parliament as a whole, is this is something we have to work on together," he said. Mr Morrison said it would be irresponsible to increase the deficit over the next few years, because "that increases the debt and you can't get that money back". During the election campaign, the government criticised Labor costings that showed a worse short-term budget outlook due to more spending on Medicare, education and infrastructure. Labor argued it was implementing structural improvements that would leave the budget better off than under a Coalition government by 2026-27.

Mr Bowen on Thursday said the S&P outlook was "a sombre day for the Australian economy" which increased the likelihood of a credit rating downgrade. "During the election campaign we ... pointed out that the government's budget projections were based on fantasy, that the iron ore price was highly heroic, that the assumptions on wages and nominal growth were highly optimistic," he said. Mr Bowen said S&P made the same observations, citing the agency's comment that it was "more pessimistic about the central government's revenue outlook than the government was in its latest budget projections". "And of course what we see today is Standard & Poor's calling out the Liberal National Government for three years of fiscal failure and passing a vote of no-confidence in this government's ability to deal with the budget situation," he said. "Particularly since Malcolm Turnbull and Scott Morrison took the reins we've seen a lack of strategy and a lack of coherence in their economic approach."

He pointed to Labor's proposed reforms of negative gearing and capital gains tax concessions, saying it was "necessary for the long-term budget health of the nation".