The Election That Will Not Die and its uncertain outcome will have both short- and medium-term economic consequences — possibly serious ones.
Shorter-term first: ratings agencies won’t be too concerned about either the uncertainty about government or about a minority government (they’re common around the world, remember). Their main concern is the Senate and what it says about the capacity of whoever is in government to not merely take difficult political decisions but implement them through legislation.
Moody’s and Fitch yesterday noted that while Australia’s triple-A rating is not under immediate threat from the election non-result, it could be if the deficit isn’t wound back. Moody’s senior vice-president, Marie Diron, said the short-lived political uncertainty would have “limited” credit rating implications for Australia and its sovereign credit profile only if the outcome “changed broad policy priorities and the effectiveness of their implementation”.
“Moody’s expects fiscal consolidation to remain a key policy objective of the new government when it is formed,” it said.
The problem is implementing the objective — which is reliant on what is likely to be an unruly Senate and economic neophytes like Pauline Hanson. In May, Moody’s warned the deficit reductions outlined in the 2016-17 budget were at risk given “subdued nominal GDP growth and given sizeable spending obligations”. And rival, Fitch Ratings, warned that the close result from Saturday’s poll could see a budget outlook and set of policies “significantly different to those set out in the 2016 budget, with negotiations potentially necessary to implement key policies”.
“Fitch will assess the government’s ability to manage public finances prudently following the election result, as well as flexibility in responding to a volatile global economic environment,” its Asia-Pacific sovereigns group director, Mervyn Tang, said in a statement. “Fitch views Australia’s overall credit profile as still consistent with a triple-A rating, but political gridlock that leads to a sustained widening of the deficit would put downward pressure on the rating, particularly if the economic environment deteriorates.”
Then there’s Standard & Poor’s, which yesterday said “we could lower the rating if parliamentary gridlock on the budget continues” and which is due to reveal its annual assessment of the Australian economy on July 24. That means 23-24 July could become one of the more important dates of recent Australian economic history: July 23 will be when they tell the government, assuming there is one, a day ahead of the announcement.
The 23rd is a Saturday and the 24th is a Sunday, which is a worry because that means S&P have selected a date on financial markets will not be trading — an announcement, say of a change of the outlook from stable to negative, can be made by S&P without shares and bonds reacting immediately and overshooting. There will be at least 12 hours for the government (and whoever is federal treasurer) to get on the front foot and start spinning the rating.
The medium-term issue is more troubling. This is a Coalition government that now lacks an economic policy, a competent treasurer and the ability to get its measures through the Senate. Despite claiming to have a “national economic plan”, Malcolm Turnbull has only one idea — a company tax cut. The other elements — free trade deals and defence protectionism — will have minimal or even negative economic benefits.
Free trade deals, as the Productivity Commission has repeatedly shown, deliver little economic gain and might harm Australia in areas such as copyright. The defence industry protectionism that the Coalition, Labor, the Greens and NXT all support is economically harmful, like all forms of protectionism, billing taxpayers for billions of dollars of unnecessary costs to employ a tiny number of South Australians at a cost millions of dollars per job.
As for the corporate tax cut, despite the best efforts of The Australian and the Coalition, the dearth of benefits to anyone other than large companies of the Coalition’s $50 billion tax cut were steadily exposed during the campaign. And Turnbull himself began walking away from the tax cut for large companies, insisting there would be multiple elections before the multinational tax cut was introduced, allowing voters to reject it in the meantime. And at this point, the chances of a Coalition government securing the numbers in the Senate for its tax cut — which it plans to legislate in one hit — look slim.
The other problem is Scott Morrison. Morrison had a woeful campaign, making a joke of himself with his “black hole in the black hole” costings bungle and failing utterly to effectively prosecute the government’s scare campaign against Labor’s negative gearing proposal. This political failure comes on top of his policy failures as Treasurer and the noticeable distance between Morrison and his Prime Minister, who seemed to treat him with contempt earlier this year by changing the date of the budget and telling some junior ministers like George Brandis but not the Treasurer.
Abbott-aligned Liberal Party figures are scathing about Morrison’s performance, too, saying he simply doesn’t have what it takes to run the portfolio and that he should make way for Christian Porter.
An effective treasurer is the political and economic key to a successful government. Morrison has displayed neither political nor economic aptitude and doesn’t have the trust of his Prime Minister. It’s true that he was thrust into the most difficult portfolio without preparation, but he has shown no signs of a learning curve over the nine months he’s been in the job.
That leaves Malcolm Turnbull — should he continue to lead the country — with having to find a sensible economic agenda, an effective treasurer and a set of negotiating skills to finesse his agenda through a difficult Senate. And possibly under the eye of a ratings agency poised to end Australia’s triple triple-A rating.