Australia will fix its politics in 2016

The new team of Malcolm Turnbull and Scott Morrison will postpone budget reform until they secure an electoral mandate.

This could be the year that Australian politics return to stability, with longer-serving prime ministers and effective treasurers – if the incumbents, Malcolm Turnbull and Scott Morrison, can produce an electoral mandate supporting sustainable budget and tax reform.

Australia’s political landscape began to sour in 2007, when a tradition of powerful prime ministers with long tenures gave way to the Keystone Cops administrations of Kevin Rudd, Julia Gillard and Tony Abbott.

Despite the country’s social stability and the benefits of the resources boom, recent prime ministers have come, gone, returned, and gone again in a parade of intraparty regicide. Treasurers also used to serve long periods and many were powerful politicians who went on to the top job, but the recent versions have proven hapless. The Senate, once a stable bastion of the Liberal and Labor parties, has become a circus in which fringe parties (the Australian Motoring Enthusiast Party, anyone?) have held legislation hostage.

The resources boom indirectly created this state of affairs. Silly money leads to frivolous outcomes. The boom has also created problems for the “lucky country”. Beginning with the Rudd administration in 2007, Labor governments increased spending. Australia seemed to have escaped the worst of the global financial crisis and was reaping huge revenues by selling natural resources to Asia. But the terms of trade shifted two years ago.

Ousted: Tony Abbott

Tony Abbott led his Liberals to victory in 2013 but he and his treasurer, Joe Hockey, demonstrated a tin ear when it came to governing. They raised alarms over the deteriorating budget, as prices for coal and other exports declined, exacerbated by the falling value of the Australian dollar, and looked to slash Labor’s spending programmes. But they never laid the political ground, their proposals were viewed as stingy and Hockey’s gaffes and arrogance ensured his budget was dead on arrival in the fractious Senate.

Abbott was defenestrated by fellow Liberal and former Goldman Sachs banker Malcolm Turnbull in 2015. Scott Morrison, Turnbull’s treasurer, was better known for taking a hard line against boat people and immigration. But they have taken a more conciliatory line toward budget and tax reform.

Australians generally seem to acknowledge the budget needs fixing. When John Howard, the last of the great prime ministers, left office in 2007, the commonwealth (federal) government registered a budget surplus of 3.8% of GDP. Under Labor, surpluses turned to deficits, and as of December 2015, the budget recorded a net debt of 14.8% to GDP, according to the government’s mid-year economic and fiscal outlook (December is midway through the government’s fiscal year).

“We’re looking at deficits out as far as you can see,” said Gareth Aird, economist at Commonwealth Bank of Australia in Sydney.

Turnbull has said tax reform to put the budget on a more sustainable path will be his priority. Morrison’s job will be to fashion a plan. But economists don’t expect Morrison’s budget, to be presented in May, will do anything but tread water.

“I don’t expect there will be any groundbreaking policy announcements,” said Shane Oliver, economist at AMP Capital. “They’ll just hold the line on the budget.”

Instead, Turnbull and his team are expected to lay the political groundwork for an election, which must be called sometime in 2016. The strategy is to prepare the electorate for tax reforms. A victory by the Turnbull/Morrison team would provide a mandate to get their programme through the Senate (the Liberals and their allies have a firmer hold of the lower house, and a commanding one if they can make common cause with Labor’s members).

What might that look like? Probably a determination to hold spending and reform the tax code, according to Justin Fabo, economist at ANZ.

The personal income tax is roundly believed to be unfair; inflation in wages have inadvertently forced many Australians into higher tax brackets, but in real terms they are being taxed more. The government will want to deepen or broaden the goods and services tax (GST), moving the focus on revenues from income to consumption. It may also seek to reduce some taxes on the lowest income rungs, and adjust corporate taxes away from income towards land holdings, an indirect way to ease the burden on non-mining sectors.

The tone overall is one of compromise and avoiding the my-way-or-the-highway attitude of Abbott and Hockey. Their political approach had been to bludgeon parliament with a budget heavy on spending cuts. Turnbull and Morrison, while representing the same party, have used more conciliatory language and recognise they need a package that can get through the legislature.

“They’ve got to sell it and win the election,” Fabo said of Turnbull’s administration. “This could be a make-or-break year for the budget.”

And a make-or-break year for Australian politics. If Morrison can draft a tax plan with electoral possibility, and Turnbull can communicate it to voters, the Liberals can return to power with the first proper mandate since 2007. That bodes well for taming Australia’s budgetary excesses before they tip the country into levels of indebtedness typical among other developed countries. Declining economic fortunes have a way of focusing minds; if Turnbull can find the right compromise, instead of consigning Australia to more political strife, he may restore its tradition of stable and effective government.

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