Tough roads ahead

We finally know now that the Coalition government was returned at the recent federal election. In the lower house, the Coalition looks to have secured the 76 seats (of 150) needed to govern in its own right, and could eventually hold 77 seats, to Labor’s 69, with 5 independents. The final make-up of the upper house is yet to be determined, but the so-called cross bench of minor parties could number as many as 19 (of 76) senators.

For the economy, the uncertainty over the election outcome has damaged confidence, and some businesses may postpone hiring and investment. Confidence was already fragile because of concerns about the faltering transition of the economy away from mining investment as the main source of growth, and an array of offshore issues, including the fallout from the UK “Brexit” vote and slower growth in China, Australia’s major export market.

The final configuration of the parliamentary chambers will have an important influence on the stability of the government and the outlook for the economy and policy. The government now is free to move forward and present the legislative agenda that it took to the people. The contested nature of the parliament, though, means achieving longer term reform in areas like taxation and industrial relations probably has become more difficult.

There are, however, some important positives to note. First, sometimes, a government having only a slender majority can be an unexpected blessing in disguise, particularly for budget policy. It imposes discipline that may be lacking from a complacent administration enjoying a thumping majority (and, perhaps, control of both houses). Similarly, a slim majority can focus the mind on achieving only what is important and not, as they say, on trying to “boil the ocean”.

For the economy, the uncertainty over the election outcome has damaged confidence, and some businesses may postpone hiring and investment.

Moreover, not all of the Coalition’s legislation will be opposed, with the opposition and minor parties supporting some parts of the government’s agenda. There is, for example, a decent chance the planned company tax cuts will be passed, although only for smaller companies. Similarly, the government’s proposed changes to superannuation concessions seem to have broad support, as does the rise in the tobacco excise and the crackdown on multi-national tax avoidance.

The prospects for other legislative measures, though, have dimmed. The 45th Parliament is unlikely to rubber stamp the government’s planned changes to education funding, the welfare changes announced in earlier budgets, or the increase in the pension age. That said, there may be calls from minor parties for more spending in the regions and perhaps on corporate welfare.

As it is, the promised return to surplus is receding further into the middle distance, which helps to explain why ratings agency Standard & Poor’s downgraded Australia’s ratings outlook from stable to negative. This means the chances of Australia actually losing the coveted AAA rating have increased, which should be a warning to all sides of politics – fiscal repair should remain a top priority.


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