Australia has almost a one-in-two chance of being downgraded next week, following the Federal Government's mid-year economic update, which could see borrowing costs rise.

Angus Coote, the co-founder of Jamieson Coote Bonds, said with a slowing economy and widening budget deficit he sees a "reasonably high" 30 to 40 per cent chance of Australia being downgraded by at least one of the world's leading ratings agencies next week.

"They are certainly looking at us," he told Business PM.

"Given what's gone on in recent weeks, we've had a negative GDP print for the last quarter, the construction work done was the worst in 15 years, wages growth has been terrible, full-time employment is waning and [business investment] has been terrible as well."

If not next week, Mr Coote is "confident" the downgrade will be in May next year when the Government's annual accounts are released, unless it can pull off some major reforms.

"They are going to do it at some stage if we keep going as we are, it's just a matter of time, unless [Treasurer] Morrison can get some savings through the Senate," he added.

That seems unlikely, given the hostilities at the end of the sitting year in Canberra.

So what if we're downgraded?

"A downgrade from AAA to AA+, if you look at offshore examples the US, UK, New Zealand and France have all be downgraded to AA+ and it is no disaster."

The biggest problem is for borrowers who rely on Australia's banks, which in turn rely on offshore markets for 25 to 30 per cent of their funds.

If the Federal Government is downgraded to AA+, or worse, then the banks will almost certainly be downgraded and so funding costs for the banks must increase, which will hit borrowers.

Mr Coote does not expect a huge change in the Government's borrowing costs as sovereign bonds are "still very well sought after by international investors."

The Australian dollar would be sold off a little in the aftermath, which would be a positive for the economy.

Jamieson Coote Bonds is an Australian Government bond investor with some big names on its board, such as economist Saul Eslake and former head of the Australian Government Future Fund Mark Burgess.