What will a credit downgrade mean for consumers and interest rates? Picture: Glenn Hunt/Getty

Australia is currently on negative watch and the government is reportedly worried the midyear budget update could be the catalyst for losing its prized AAA rating, according to The Australian.

The rating means Australia enjoys a lower interest rate on money it borrows, but a downgrade could see rates go higher for consumers too.

St George economist Janu Chan said the rating was just one of the factors that could influence interest rates for consumers but she didn’t think a downgrade would make much of an impact, although this could change.

“At this point in time credit ratings are not having a huge impact on interest rates,” she said.

This is partly because interest rates are low around the world.

But even if interest rates don’t go up, it doesn’t mean Australians won’t feel any pain from a downgrade.

Ms Chan said it would likely put pressure on the government to improve the budget deficit.

She said the debt itself wasn’t necessarily the problem, but predictions about its growth were concerning.

“It’s where the debt levels are going, if nothing is done,” she said.

She said Standard & Poor’s which sets the rating, may be sceptical of the government’s ability to make changes based on the make-up of the parliament and Senate following the Federal Election.

“I think it’s a matter of time,” she said of the possibility of a downgrade. “I don’t see how measures that are necessary can be put in place in time.

“But if we do get downgraded it’s something that could jolt both paries into action to address the budget issues.”

She also noted that the AAA club was getting smaller and smaller.

“We won’t be any different from other major countries around the world including the US and UK,” she said.

But a downgrade would be a “political blow” for the government.

“No one wants to be in a position where the credit rating has been downgraded under their watch. It’s a scorecard for the government.”

On Thursday, Treasurer Scott Morrison downplayed the possibility of a downgrade.

“I stress all three (agencies) have actually confirmed Australia’s triple A credit rating since the election,” Mr Morrison said.

“There’s no real change here,” he told ABC radio on Thursday.

The government believes it’s on track for a small narrowing in the deficit, from the $37.1 billion forecast in May, especially in light of soaring coal prices. However, there’s a question mark over whether those prices can be sustained over a longer period.

Mr Morrison said parliament had passed more than a quarter, by value, of its budget repair measures.

This would be encouraging and welcome news to the credit ratings agencies, he said.

“We’re making progress, the issue is we’ve got to keep making progress and that is a very strong message to the parliament.”

— With AAP

charis.chang@news.com.au