Australia risks losing top investment ranking, Standard & Poor's warns

One of the world's largest credit rating agencies has warned that Australia risks losing its top investment ranking if the budget deficit does not improve.

Standard & Poor's has warned that continued parliamentary gridlock or an economic shock from overseas, such as more big falls in commodity prices, could see Australia lose its AAA credit rating.

"We could lower the ratings if Australia's budgetary performance does not improve broadly as we currently expect," Standard & Poor's (S&P) said in its latest report.

But the report reaffirmed Australia's credit rating at AAA, citing its resilient economy, strong public policy and monetary and fiscal flexibility.

China's slowing economy and oversupply of iron ore has lowered demand for Australia's biggest export earner, hitting government revenue.

Craig Michaels, director at Standard & Poor's, said that could further blow out Australia's budget deficit.

"Where we are seeing the bigger impact from our perspective is the falls in commodity prices and how that's flowed through to government revenues," Mr Michaels said.

"The Commonwealth Government, for a number of years, has been projecting budget deficits to narrow and for the government to get back to surplus."

"Those forecasts have proven to be too optimistic over the past few years mainly because of the impact of falling iron ore prices."

The Federal Government estimates the budget will return to surplus by 2020 from a deficit of $35 billion in the May budget.

But some budget measures lack support from opposition parties in the Parliament.

Mr Michaels said that was another risk to the AAA rating.

"We are looking for the Government to get some actual runs on the board now in terms of budget deficits narrowing considerably over the next few years," he said.

"There isn't as much room for the sort of fiscal slippage we've seen in the past few years to continue if the rating is to remain at AAA level."