Australia Politics July 2016

Australia

Australia: Bittersweet victory for Turnbull government; thin majority could compromise economic reforms

July 13, 2016

Australia’s triple A credit rating hangs in the balance after the 2 July double dissolution election. With 85% of the vote counted, the Coalition looks set to retain a narrowed majority in the House of Representatives, Australia’s lower house. The victory does not necessarily strengthen the Liberal–National Coalition’s mandate, however, as the party is likely to have lost 13 seats in the lower house, while the Australian Labor Party, Australia’s major traditional party and official opposition, picked up 13 seats and received the popular vote across the country. Other independent parties and individuals also gained seats. The slimmer majority calls into question the government’s reduction of the fiscal deficit, an outcome that could impact the rating of Australian sovereign debt.

The Coalition had enjoyed a comfortable 90 seats in the lower house prior to the elections, 14 more than the required 76 seats needed to form a majority. The Australian election commission predicts that the Coalition will walk away from the election with 77 seats. Several independents have also claimed that they would back Turnbull’s government, which gives the government some breathing room when it comes to passing legislation through the House of Representatives.

The 2 July double dissolution election was different from normal federal elections in that seats in the Australian Senate, the country’s upper house, were also in contention. A double dissolution can be triggered when the upper and lower house disagree on a piece of legislation. Such a disagreement occurred twice in 2016 over a particular construction industry bill and allowed Turnbull to call for the election. Turnbull was likely hoping for a more decisive victory in the Senate that would have eliminated blockages between the two houses, but a clear senate majority has not materialized, which leaves the possibly of further blockages open and raises the potential for more unscheduled elections, this time prompted by an emboldened Labor party.

The Coalition had campaigned on tax reform, cutting the corporate tax rate from 30% to 25% over the next 10 years. Since the party does not control the Senate, the proposed tax reform is unlikely to pass without being watered down or concessions being made. Against this backdrop, S&P Global Ratings changed its outlook for Australia’s sovereign credit from stable to negative. A fractured parliament may make passing deficit-reducing measures more challenging. When the 2016 budget was passed, credit ratings agencies also cited concern over the deficit reduction plan.

Business confidence appears to be resilient in the face of political uncertainty, though July’s reading is yet to be released. The forward-looking consumer confidence indicator faltered somewhat in July, which was likely due to concerns over Brexit as well as potential for a hung parliament after July’s elections. However, the drop in consumer confidence was less than feared as Australians still have much to be optimistic about, including a supportive monetary policy stance. Things could change, for better or for worse, depending on what political allegiances are formed in the upper and lower houses. The most likely situation is that the Turnbull government will have to select only the reforms it feels it can negotiate through the divided senate, making it difficult to pass the comprehensive or wide-sweeping reforms it had campaigned on.

The Reserve Bank of Australia (RBA) sees the economy growing between 2.5% and 3.5% for both 2016 and 2017. FocusEconomics Consensus Forecast panelists see the economy expanding 2.6% in 2016, which is unchanged from last month’s forecast. For 2017, the panel expects economic growth to accelerate to 2.8%.


Author:, Economist

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