Stale mate

Australian economy can cope with political turmoil

Australia's election has produced no clear winner, but government finances are the obvious loser. Fragmented politics make it even harder to rein in the country's budget deficit and broaden the tax base. Still, solid economic growth means Australia can weather a bit of uncertainty.

When Prime Minister Malcolm Turnbull called an election for both houses of parliament in early May, he was gambling on winning more seats. The campaign was dominated by debates about health care, yet offered few ideas about reining in Canberra's deficit.

With votes still being counted, neither the ruling coalition or the opposition Labour party were close to a majority. Whichever party forms the government will therefore have to rely on independents and smaller parties, which are mostly opposed to cutting spending.

In its May budget, which promised tax cuts for small businesses and a reduction in the corporate tax over 10 years, Turnbull's government forecast a deficit of less than 0.5 per cent of GDP by 2018-19, down from just over two per cent in the current fiscal year. This now seems like wishful thinking. Political gridlock could also pose a threat to the country's prized triple-A credit rating, HSBC notes.

That's a concern at a time when Australia is still coming down from a commodities boom. The government reported in May 2015 that it had reduced its forecast of tax collections by around A$20 billion from a year earlier as a result of the drop in iron ore prices. Employment has slowed and wage growth has halved to two per cent.

However, Australia's economy is still growing at 3.1 per cent as the weaker dollar boosts demand for services such as tourism and education. Besides, the country has coped with political instability for a while: Turnbull is the fourth prime minister in three years. With solid growth and government debt that is still very low by the standards of most developed countries, Australia can afford to wait a little longer while its politicians bicker.