Will the election delay trigger the loss of Australia’s AAA rating?

To think that the election result will by itself be the trigger of a loss of Australia’s triple-A credit rating is to be ignorant of the last few years of economic and budget news.

While the hotch-potch of new Senators will make it difficult for the new government, which ever side that may be, to get legislation passed, the Turnbull government’s economic policy agenda was limited to just one meaningful policy – a cut in company tax rates.

Even if Turnbull had won the election convincingly, there would still only have been that lame and expensive company tax cut policy, which in fact undermined the medium term structural integrity of the budget.

Also read: Political gridlock risks AAA rating: Fitch

It might even be the case that the failure to get the company tax cut legislation through the Parliament, if that happens, will stave off a downgrade to the credit rating given the money saved!

In the last few years, the Liberal government presided over a budget deficit blow out to the point where, even on optimistic forecasts, the budget would not return to surplus until 2020-21.

Net government debt was increasing to a peace-time high just under 20 per cent of GDP.

Had the Liberal government undertaken budget repair rather than blowing it up in its last three budgets, the triple-A rating with a stable outlook would be safe.

Instead, it tried in its 2014 budget to implement policies so extreme, so unfair that most failed to pass the Parliament or were dropped like a hot potatoes when it was obvious the electoral poison they were.

Having been burnt so badly with that effort, 2015 saw a do nothing budget. A few little tinkers here and there but there was nothing to arrest the loss of revenue from weak commodity prices or the surge in spending that occurred as the Liberal Party ramped its spending at a worrying rate.

And just two months ago, in the 2016 budget, the policy framework plus more problematic economic parameters saw the deficit blow out again.

There was nothing in that budget to address the concerns of the market or the rating agencies about the medium term budget position.

Worryingly, it was only the rosy forecasts of Treasury on commodity prices, inflation and wages that stopped the budget blow out from being more dramatic.

There seems little doubt that the ratings agencies will emerge soon to put Australia on a negative credit watch.

Also read: RBA to hold rates after election, Brexit

Many will blame the election result and the make up of the new Parliament, but to root cause of the problem was policy apathy and errors of recent years.

To be sure, the Parliament might make it more difficult to get reforms through, but that is where the underlying credibility of each policy will be tested.

Good policies should still be able to pass the Parliament if the cross benchers are walked through the benefits of what can still be meaningful policy changes.

We should not hope, but rather demand, that whichever side forms government after the final vote has been counted, we see pragmatism with vision on policy that ensures it passes through the Parliament, with benefits for the economy and budget bottom line over the medium term.

That shouldn’t be too much to ask and it would be a vital step in Australia holding its triple-A credit rating.

 

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.