Australia's prized AAA credit rating is increasingly at risk, setting the scene for some nasty knock-on effects across the entire economy, the head of the government's financial systems inquiry has warned.
David Murray says ratings agencies would be increasingly uneasy about Australia's budget position.
Mr Murray said continued budget deficits would bring Australia's debt levels closer to a point agencies like Standard and Poor's believed unacceptable for a AAA rated economy.
"The change in the terms of trade and the difficulty of quickly bringing that debt to a more stable position ... means it will be increasingly apparent that we will get close to those benchmarks with the ratings agencies," he told AAP.
"And the more they believe it (the debt situation) can't be resolved quickly, the more likely they will be to reconsider the rating."
Treasurer Joe Hockey also conceded Australia could lose its Triple A rating if it doesn't rein in spending.
He told ABC Radio that if the government didn't get back to living within its means the risk to its credit rating would flow through to banks in the form of higher costs.
The loss of the rating would have a major impact on Australian companies, including the big four banks, who could expect to lose their own AA ratings, Mr Murray said.
"It means they would lose at least one notch in their rating but that would be the case for all Australian corporations as well and state governments," he said.
That would make it more expensive for them to finance their debt, pushing up borrowing costs across the economy.
"Their institutional debt would be more expensive and the knock on effect to the economy would set up the sort of spiral that you don't want."
Addressing a banking conference earlier on Tuesday, Mr Murray reiterated the Financial Systems Inquiry's recommendation that banks be forced to hold more capital against their loans, to alleviate the need for a taxpayer funded bailout in the event of a financial crisis.
"Capital should be set so that banks are unquestionably strong and the potential call on taxpayers are minimised to the greatest extent possible," he said.
The comments by Mr Murray and Mr Hockey come after Deutsche Bank chief economist Adam Boyton warned Australian stood to notch up deficits for another decade.
In a research note, Mr Boyton said he did not believe the federal budget would return to surplus until the 2023/24 financial year.
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