Few international organisations are watching the long and mostly predictably dreary Australian election campaign more closely than the ratings agencies – and they don’t like what they see and hear. There is now a very real chance that later this year Australia could lose its Triple A rating, a move that would hit both investors and living standards.
There are two reasons for this. First, the election on July 2 may be unwinnable by either of the major parties. With one quarter of the long campaign now behind us, the Coalition, led by Malcolm Turnbull, are shading where they were two weeks ago – very slightly ahead of a resurgent Labor party led by former union boss, Bill Shorten. The chances are that under Australia’s compulsory, proportional representation voting system, neither will command a workable majority in the House of Representatives. If that happens the Greens (as always stronger in the cities than the countryside) and a handful of independents will hold the balance of power. An impasse is the most likely result and, ironically, it is that same impasse in the Senate (upper house) that led to the election being called early in the first place.
Even if Turnbull or Shorten wins a small majority, the AAA rating will not be safe. Australia’s finances are no longer under control, partly the result of a collapse in the price of two of its principal exports, iron ore and coal, but also because of wayward economic management by four prime ministers in five years – Kevin Rudd (twice), Julia Gillard, Tony Abbott and, now, Turnbull.
Managing an economy that is in transition from resources to one based on services, innovation and agriculture was never going to be easy. Considerable progress has been made, with unemployment cut and growth at 3%, higher than any country in G-7. But facing an electorate with the mindset of a child approaching a visit by Father Christmas, one in which the sense of entitlement has exceeded the rational, both parties have been making promises that can only be satisfied by blowing out the Budget deficit well beyond its forecast $40 billion next year. (In 2008 Kevin Rudd inherited a surplus of $20 billion from John Howard’s government).
Turnbull’s main thrust in this campaign is a policy for jobs and growth, with an immediate cut in company tax for businesses with a turnover of up to $10 million, extending that to larger companies over coming years; all corporations would see their tax reduced to 25% by 2026. Treasury officials estimate the cost of this to be about $50 billion over the next decade. The cost is predicated on higher growth rates, with notional GDP rising to 4.5% next year. Few economists give credence to this assumption.
On the other side of politics, Shorten has been spraying money around like confetti, promising huge increases in spending on health and education. Somewhat disingenuously, he has adopted Turnbull’s growth assumptions; Labor has rejected tax cuts to ‘big’ business, with over $2m turnover.
Moody’s has cast doubt on these assumptions. Marie Diron, senior vice president, points out that the government forecasts are based on a return to robust nominal growth. “Our forecast for nominal GDP growth is somewhat more muted than the government’s”, she says “We estimate that the adjustment to an environment of lower commodity prices is still underway and will continue to weigh on corporate profitability and wage growth. As a result, improvements in the government’s revenues may be somewhat more muted than currently budgeted.”
Or, as the heads of Treasury and the Finance department put it in their very latest medium term economic forecast, “Should Australia experience a significant negative economic shock, the fiscal position would be expected to deteriorate rapidly and not be consistent with the projections.”
In other words, we don’t trust politicians’ numbers. Nor do I.