After a very long election and a somewhat messy campaign, the Liberal-National Coalition has been re-elected. The challenging environment that the Coalition is likely to work under has implications for the budget. The more immediate effect has allowed the Rating Agencies to review Australia’s AAA sovereign rating. Standard and Poors have already downgraded our rating to “negative outlook” from stable.
In theory it should mean foreigners demand a higher yield on Federal debt, which then flows down through to state debt, banks, corporates and possibly to household mortgage. In reality, this effect may be less pronounced – particularly given that the RBA can still offset “higher” interest rates via another interest rate cut. Rather a ratings downgrade would affect the national psyche signaling that Australia is unable to control public spending.
The amazing election results are likely to make taxation reform incredibly difficult over the next term of parliament. It is expected that the proposed cuts to company taxation will be difficult to pass. It is quite possible to see a slight decrease in company tax for enterprises with a turnover of between A$5 million and $10 million but not much to major companies. The new parliament will make changes to negative gearing close to impossible.
There has also been a backlash on the proposed superannuation changes, particularly on the non-concessional contributions limit of $500,000 over a lifetime calculated from 2007, imposing a 15% earning tax on Transition to Retirement accounts and the $1.6 million tax-free limit on savings. It seems that there will be challenges to getting it through and may involve consultation with the industry and certain parties. It is possible that final legislation may not pass until the Autumn sitting in 2017. Prior to any passage of legislation, the Budget superannuation proposals may be amended and/or the Government give up some ground (as noted in the exemptions announced by treasurer Scott Morrison during the election campaign).
The Coalition has been re-elected but with a tougher Senate to deal with. This is likely to make serious economic reform much more difficult to achieve.