Wealthy Nations Daily Update - Australia

“A double dissolution occurs when both the Senate and the House of Representatives are shut down (dissolved), in order for a federal election to take place. A double dissolution election is different to regular elections, when only half the Senate seats are contested. In a double dissolution, the Governor-General dissolves both the Senate and the House of Representatives at the same time, meaning every seat in both chambers is contested. This is the only time that all senators stand for election at the same time (see Federal Elections). A double dissolution can only happen when there is a deadlock between the two houses of Parliament; it usually occurs at the request of the Prime Minister.” Australian Parliamentary Education Office Factsheet.

Australian politics remains as cut-throat as ever with Malcolm Turnbull, the Prime Minister, threatening to call a “double dissolution election”, the first since 1987, if parliament fails to pass the stalled industrial relations legislation.  This is an interesting gamble as not only would all the seats in both the ‘House of Representatives’ and the ‘Senate’ be up for re-election but the Senate voting laws have recently been reformed to make it harder for independents, which control the balance of power in the Senate, to be re-elected.

Moreover, if the double dissolution is triggered, it is possible Turnbull could secure enough votes to get the legislation passed anyway as the bills can be presented to both houses again and if there is still deadlock “the Governor-General may order a joint sitting of both houses of Parliament. At a joint sitting, all members of parliament from both houses meet together to vote on the bill(s).”  Given an election has to be held by January 14 2017 anyway one can see why Turnbull has taken this gamble.  Turnbull stated he wants to pass this legislation as he seeks to promote investment in the economy; the Registered Organisation Bill and the Australian Building and Construction Commission (ABCC Bill) are seen as key as the construction sector is one of the largest employers.

Meanwhile, the Australian budget has also been moved forward to 3 May and the media rhetoric is starting to build.  Seemingly, the priority will be growth over deficit reduction: the Prime Minister has said returning the budget to a position of balance “is a long-term project” and “the critical thing that we have to do is to ensure we maintain strong economic growth.” While it is true Australia can boast 25 years of growth without a recession the Federal Budget has also run a deficit for the past eight years: the last December budget was forecast to remain in deficit until 2020-2021 and the deficit for the fiscal year to June expanded to AUD37.4bn (USD28.7bn).

Interestingly, the Committee for Economic Development of Australia (CEDA) advocate returning the budget to a surplus by 2018-2019 primarily through AUD 15bn in revenue increases and AUD 2bn of spending reductions.  The report notes “The case for balancing the budget quickly rested mainly on the agreed imperative to maintain balance over the business cycle, and the fact that Australia is in the positive phase of the business cycle so this is when we should be running surpluses not deficits.”

Although we will reserve final judgement until the budget announcement, retaining a budget deficit is unquestionably credit negative.  S&P noted in their July 2014 review that “We could lower the ratings if external imbalances were to grow significantly more than we currently expect,…..We could also lower the ratings if significantly weaker than expected budget performance leads to net general government debt rising above 30% of GDP.”  General government debt to GDP was 35.1% for 2015 on Moody’s figures (June fiscal year end).  Australia is currently AAA rated by all 3 rating agencies and at this stage all the rating agencies all retain a stable outlook so any negative adjustment is likely to be made first to the outlook rather than the rating itself.

But for us, Australia fails the ‘wealthy nation’ test with net foreign liabilities at 81.5% of GDP which is well in excess of our 50% of GDP cut-off, the threshold that IMF research indicates is associated with increasing risk of external crises.