We may get another 3 years of 'fiscal policy paralysis'

Photo: Darrian Traynor/ Getty Images.

In two days time Australia will head to the polls to elect its next government. It looks like it’ll be an incredibly tight race, again.

The incumbent, the Liberal-National Coalition, is favoured by the bookmakers to be returned, but as we have all learnt over the past week, what the bookies have as favourite doesn’t automatically translate to what will happen on election day. Just ask the British.

Two-party preferred polling is far closer, providing no clear indication as to whether the LNP or Labor party will take control of the lower house.

A Labor victory would be deemed as an outlier. 19 additional seats to obtain, without losing any currently held, seems a stretch too far in the minds of many political pundits.

As for the Senate, well, who really knows how the new voting rules introduced in May will impact its composition, particularly as this is a full rotation given it’s a double dissolution election.

Despite those uncertainties, Annette Beacher, TD Securities chief Asia Pacific macro strategist, has been brave enough to predict the outcome of the election.

As has been the case of the past three years, she believes that the LNP is likely to retain the lower house, with a “mash of minor parties preventing a outright majority in the Senate”.

More of the same, in other words.

“We see the House of Representatives remaining skewed towards the Coalition on a smaller margin (around 80) while the Senate remains obstructionist as voting blocks of minorities are needed to pass Coalition legislation,” says Beacher. “We attach an 80% probability to this occurring, and see this outcome as market neutral as it maintains the status quo.”

As for an outlier outcome, Beacher believes that there is a 15% chance that the LNP will take control of both the lower and upper house, something she suggests is “bond, equity and AUD positive as the Coalition are more business-friendly”.

As you can tell by the maths, she only attaches a 5% chance of there being a “shock” dramatic swing towards a Labor majority government.

“The recent poll and boundary mathematics make this improbable for this election,” says Beacher.

So what will be the outcome if the status quo is maintained? Beacher doesn’t mince her words.

“We attach a significant probability to Australia experiencing another three years of fiscal policy paralysis, implying that the RBA remains the only public authority with tools to manage the business cycle, and whatever the prolonged fallout of the Brexit vote brings,” she says.

“We see a string of deficit and debt downgrades for years to come as reform policies are blocked by the Senate.

“The latest net debt to GDP projection is for a ‘peak’ of 19.2% of GDP by mid-2018. Whilst not disastrous, and we are not suggesting that Australia will lose its AAA/stable rating, the tail risks are growing a little fatter, which is AUD and bond negative over the medium-term.”

Hardly a palatable outcome, but one that Australians — be it households or businesses — have learnt to deal with in the years following the global financial crisis.

It’s all we’ve known for close to a decade, and despite this, the economy is still doing alright.

Polling stations will open from 8am AEST on Saturday, July 2.

Now listen to this week’s Devils and Details podcast, we’re joined by Michael McCarthy, chief markets strategist at CMC Markets, to discuss the economic backdrop to the decision facing voters at the polls.

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