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(Recast, add comments, political implications)
SYDNEY, March 9 (Reuters) - Ratings agency Moody's Investor Service says Australia might lose its AAA sovereign credit rating should the country's conservative government give up on deficit repair, raising the stakes ahead of the annual budget in May.
"If we saw the government's priorities shifting away from a fiscal consolidation, it would be a trigger for a ratings downgrade, but it's not our baseline assumption," Marie Diron, associate managing director at Moody's, told Reuters on Thursday.
Lower wage and profit growth are overshadowing a rally in coal and iron ore prices and the government has failed to get so-called “zombie” savings measures through a hostile senate, threatening attempts to rein in a A$37 billion ($27.87 billion)budget deficit.
Diron emphasised that Australia's robust institutional framework and stronger fiscal metrics than many of its similarly rated peers justified a triple A rating and the outlook remained stable.
"The rating is not tied to certain thresholds in terms of fiscal debt or deficit measures, it's more tied to the capacity of the government to support its economy without endangering public finances," Diron said.
Australia is one of only a dozen countries still rated triple-A by all three major credit agencies, but S&P Global Ratings has repeatedly warned it might downgrade should there be any slippage in the surplus deadline.
"We remain pessimistic about the government's ability to close existing budget deficits and return a balanced budget by the year ending June 30, 2021," it said in December.
A ratings cut would be a political nightmare for the Liberal National government of Prime Minister Malcolm Turnbull, which has long sold itself as a competent economic manager that can be trusted to balance the books.
A cut in the country's prized rating would likely also push up borrowing costs on over a trillion dollars of federal, state and bank debt. ($1 = 1.3277 Australian dollars) (Reporting by Cecile Lefort; Editing by Kim Coghill)