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Watch this space in 2017

By Ken Wolff

As with most political issues, the following few questions are inter-related: Turnbull’s future may well depend on the economy, on whether or not a new conservative party forms and whether there is a Trump-inspired trade or currency war between China and the US; our economy may well depend on what Trump does in relation to China, let alone whether Morrison displays any understanding of economics; and so on.

Will the Australian economy improve or continue to stagnate?

In December we had the news that the Australian economy had contracted by 0.5% in the September quarter. Most of the pundits do not expect that to be repeated in the December quarter, which means we would avoid a recession (which requires two consecutive quarters of contraction).

On the other hand, commodity prices are still weak, although better than they were, and if a US/China trade war erupts may weaken again. Every reduction in commodity prices flows through a large segment of our economy, affecting the supporting businesses and often, through reductions in the workforce, local businesses, and the impact then multiplies ultimately affecting government revenue. The Christmas season may help us avoid a ‘technical recession’ (that magical six months) but will we see another quarter or two of contraction during 2017?

This year will also see the end of car manufacturing in Australia. That has implications across a number of industries and, as some commentators have noted, it has been car manufacturing that has driven much of the technological innovation in the manufacturing sector. Turnbull’s ‘innovative and agile’ economy may become a little more wobbly as a result.

The end of car manufacturing will lead to increased unemployment, not only in the car industry but in the companies that previously relied on providing parts to that industry. Couple that with the lack of wages growth (the lowest since records have been kept) and the government will be losing more in income tax revenue and paying more in unemployment benefit, making it that much more difficult to achieve its stated aim of bringing the budget back to surplus.

The economy did not go well in 2016 and the prospect for 2017 isn’t all that good. Even in his MYEFO in December, Morrison lowered the estimated rate of economic growth for both financial year 2016‒17 and 2017‒18. The new forecast rate of growth isn’t even enough to absorb new entrants into the workforce (usually accepted as about 3%) and that is without considering that the economic growth forecasts for the past few years have proven optimistic. Certainly don’t expect a boom year but how bad it may be we will have to wait and see.

Will Scott Morrison ever understand the budget?

Ever since the Abbott/Turnbull government was elected, and returned last year, the government’s budget deficit has continued to grow. Low commodity prices, over which the government has no control, and slow wages growth, which government policies have actually promoted, have not helped.

Morrison, however, continues to focus on government spending rather than revenue raising. Although he has backed away somewhat from his earlier statement that the government had a spending problem not a revenue problem, his actions have remained focused on reducing spending. (I won’t get into the MMT argument here.)

The government has ignored the opportunity to borrow money at historically low interest rates to fund infrastructure. Although it is now talking more about infrastructure, it appears it may be at a time when interest rates could be on the rise again — US interest rates are certainly likely to rise during 2017 which may force some other countries to raise theirs in order to maintain their currency.

Our Reserve Bank still has capacity to reduce interest rates (although such reductions have done nothing to stimulate the economy so far). If it does reduce interest rates, and the US increases rates, the Australian dollar is likely to drop in value. The government will claim that helps exporters but it will increase the price of imports which may not help our ‘terms of trade’ and will also potentially lower our living standards by making imported consumer goods more expensive at a time when wages are barely growing — not something that would enhance the government’s electoral appeal.

Turnbull’s ‘innovative and agile’ economy and the promise of company tax cuts — which he continues to espouse despite it being unlikely to pass the Senate — are not issues that inspire the average voter. If any benefits are to flow to the economy from such ‘policies’, they will be well beyond the next election, so Turnbull and Morrison can’t look there for short term budget improvements but they seem to have no other plans to help the economy and by implication the average voter.

Will Morrison and Turnbull finally concede that they also need to raise revenue in the next budget? That will be one to watch although I expect that, if so, they will do their best to obscure the fact.

Will there be a new conservative party?

Cory Bernardi is creating a nation-wide conservative movement but not yet formally a new conservative party. It will be interesting to watch where that goes in 2017 and whether it turns into a fully-fledged political party.

The Liberal party will no doubt do its best to stop it happening as it would further split the conservative vote, although that may not be an issue until the next federal election. If such a party comes into being during 2017, it could have serious implications for the government because it has only a one seat majority in the House of Representatives. Even if only one or two Liberal or National members in the House were attracted to the new party that would create a situation where not only does the government have to negotiate with crossbenchers in the Senate but also in the House to have legislation passed. Although the conservatives already seem to wield considerable influence in the Liberal party room, if they held the balance of power in the House, that could actually increase their influence. That may even be a consideration in the formation of such a party: if they wish to create Australia in their conservative image, having a couple of members in the current House could help them achieve that, or force Turnbull to another election earlier than he would wish.

The electoral implications are that the conservative vote could be split between the Liberals, One Nation, the Nationals and the new party, leaving open the possibility that Labor would lead on first preference votes in more House of Representative seats and have an improved chance of winning them. And it is likely that a proportion of the preferences for a new conservative party would flow to One Nation (and vice versa) before they flowed to the Liberals, so it would be very interesting.

The timing of the creation of such a party could be determined by the election timetable. The earliest a federal election can be called, other than another double dissolution, is August 2018 but such a party may like to test its electoral appeal at a state election. WA has an election in March which now seems too soon to establish the party and create an organisation geared for an election. SA goes in March 2018 and the earliest Queensland and Tasmania can go to an election is April 2018 and May 2018 respectively: so to be ready to contest one of those the new party would have to be created no later than the latter half of this year.

Will Turnbull remain prime minister?

Personally I think he will in 2017 but 2018 may be a different story — unless he voluntarily decides to toss in the towel, deciding it is just too difficult to govern his fractious coalition and cope with the constant negotiation with the Senate crossbenchers (and potentially House cross benchers) to have legislation passed.

As indicated above the earliest an election can be called is August 2018. I doubt he would dare have another double dissolution before then as that would not go down well with the electorate (but if he loses members in the House to a new conservative party he may be forced to). But if the economy continues to stagnate, or underperform as a result of a US/China trade war, that will reflect on the government, as economic performance always does even if the government has little real control over many aspects of the economy, and he may well foresee that he cannot win the next election — although he could leave an election as late as possible (May 2019) in hope that things will improve. Much will depend on his own vanity and desire to be prime minister or whether he sees a short stint as having achieved his ambition.

Another key factor will be the possible creation of a new conservative party. For Turnbull that could be both a blessing and a curse. A ‘curse’ for the reasons described above but a ‘blessing’ if it freed him to express more of his liberal philosophy rather than the conservative agenda. A Malcolm Turnbull who again expressed liberal views would probably reignite his support in the electorate but then both he and the Liberal party would need to decide what to do about it. While a more liberal Turnbull may attract votes, it may be just as difficult to form government if a new conservative party also attracts votes: in fact, a more liberal Turnbull may draw some votes from Labor and the Greens while some of the Liberal base goes to the new conservative party — that would really redefine the political landscape in Australia. It could also lead to a minority government and I doubt Turnbull would want to be in that situation.

Turnbull will have much to ponder particularly in the latter half of the year unless there is an unlikely improvement in the economy and unless the Liberal party is able to forestall the formation of a new conservative party or even the growth of conservatism in its own ranks. Will Turnbull want to continue to lead unless those things come to pass? Will the conservatives in the party room decide to move against him for a genuinely committed conservative leader rather than one who panders to them only to keep the job? After all, the result of the 2016 election means Turnbull does not lead from a position of strength.

Abbott has spoken against the rise of a new party and will some in the Liberal party see Tony Abbott as the one who can provide a bulwark against defections to a new conservative party or even its creation? Although perhaps not intended, the pressure created by threats of a new conservative party may well enhance the chance of an Abbott return to counter it.

Will Trump really threaten the world as we know it?

While Trump may cause problems for the US with his apparently contradictory promises to halve the company tax rate, spend billions on infrastructure and improve the US budget bottom line, their impact on Australia will play out indirectly through the international financial system. Of more direct consequence to Australia could be his trade and foreign policies, particularly relating to China.

Trump may wish to be more friendly with Putin and Russia but he will have to remember that China and Russia are still close, if not as close as once they were. He also sees North Korea as a threat but will have little scope to do anything about it without Chinese support although he thinks that using trade as a lever may also force China to act. He may think he is a good negotiator but he and his appointees will run up against expert negotiators and some, like the Chinese, are certainly willing to play the ‘long game’, something which Trump and his ilk seem unable to do.

Australia may continue sitting on the fence and use ‘diplomatic speak’ to suggest that differences should be resolved diplomatically but that may become more difficult under a Trump presidency. Will Australia be forced to side with either the US or China on some key issue? That will be a difficult position for Australia given that they are two of our biggest trading partners.

On trade, Trump is keen to scrap US involvement in the TPP which will effectively be its demise. Turnbull has consistently insisted that the TPP is essential to Australia’s future, so what will its demise mean for that future? It will be another piece of Turnbull’s economic plan that fails to materialise — which in the case of the TPP may not be a bad thing.

The main concern is a potential trade war between China and the US. If the US becomes more protectionist and imposes tariffs on Chinese imports, that may reduce Chinese production which in turn will reduce demand for Australian resources, with all the economic consequences that implies. It could also mean that China sends more cheap goods to Australia that formerly went to the US and that could further undermine what manufacturing we have left unless we also declare that they are ‘dumping’ goods in Australia and impose punitive tariffs which will essentially be biting the hand that feeds us. If this scenario unfolds, Australia will be in a difficult place economically and in how to respond to the challenges it throws up.

In turn, it may also mean that China pays more attention than it already does to developing nations in Africa and the Pacific and that will have foreign policy implications for Australia. We have been cutting our foreign aid budget but if China redirects its effort, we may be forced to do more in that area or accept further growth of Chinese influence in the region — which way will we go?

Conclusion

The above are just a few of the questions that could arise during 2017.

Others include:

  • Will the housing bubble burst and the construction boom come to an end?
  • What will be the effect if we lose our AAA credit rating, not just for government but for our banks?
  • How will Australia deal with Brexit and the need to negotiate separate trade deals with the EU and the UK?
  • How will we address problems meeting our climate change commitments under the Paris agreement?

And of course there are the perennials such as how we handle refugees and Australian Muslims which will be influenced by the rise of the conservative forces.

It may prove to be an interesting year both here in Australia and internationally.

What do you think?

What are your answers to the questions?

What other questions will Australia face in 2017?

This article was originally published on The Political Sword.

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8 comments

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  1. Ross

    Well, put it this way Ken.

    As we enter a new year we find the coalition government flagship a battered leaky electoral wreck, settling ever lower in the water, her timbers rotten, the mainmast broken, sails in tatters, her pumps disabled, taking on water in ever increasing amounts. The crew mutinous and close to outright mutiny. Her captain The Lord High Admiral Malcolm of House Wentworth is powerless to save himself or his sinking ship. The navigator Jobson Growth has been lost, tossed overboard in the night. The ship’s doctor also lost, falling on her cutlass after a bout of serial rortingitis. The small squad of National Party marines aboard are out in a barbwire canoe having some success towing the ship to starboard, but to no avail, their commandant left stranded on a coal atoll.
    Lost and adrift in a sea of limitless incompetence, battered by the storms of plunging polls, the outlook is bleak.
    What now for the Coalition flagship? Will the mutinous crew of scurvy Liberal bilge rats force the Lord High Admiral to walk his own plank and visit Davy Jones’ Locker a second time?
    Who will be appointed the new captain, can he (or she?) repair the ship seek out and bring to a swift end the sleek 69 gun Labor frigate that mauled them so badly in the recent election battle?
    Will that cabal of greedy Cayman Island slavers and fat bottomed coal barons continue to fund the sinking coalition ship of state or cut it adrift to face the labor pirate fleets electoral onslaught, outgunned, penniless and alone?

    So Heave-Ho me hearties, winter is coming, the Game of Tones continues.

  2. iggy648

    I’m wondering what Warren Mosler’s theories say about Centrelink extracting $4.6 billion of people’s spending power out of the economy over 4 years. Seems to me this will be damaging to small businesses around the country as seniors, unemployed and single parents cut back on spending,either because Centrelink has taken money from them, or they’re afraid Centrelink will take money from them.

  3. Max Gross

    Turnbull is a dandelion in a monsoon. Despite his inflated sense of self-importance, I predict Turnbull will retire from the field to spend more time with his family. The rabble are in charge.

  4. Ken Wolff

    thanks for the comments

    Ross: well said as usual.

    iggy648: Yes, it’s difficult to understand the government’s approach. It seems to have no idea that taking money from a stagnant economy only makes the situation worse.

    Max Gross: A Turnbull retirement is certainly on the cards. He has achieved his ambition to be PM and now that it has become more difficult he may well decide that his own vanity has been fulfilled and he can return to a life of luxury without the pressures. If he had won comfortably in 2016 it would be a different story.

  5. Andreas Bimba

    It is possible that the Sydney and Melbourne housing bubble will continue to grow even as the purchase of a dwelling becomes unaffordable to all but the most wealthy. If the negative gearing concession continues, money from the wealthy elite along with overseas money, predominantly from China, can continue to trickle in at a sufficient rate indefinitely to ensure price growth and this effectively means we are transitioning from majority home ownership to a majority of locals being tenants to rich local and foreign landlords.

    Our AAA credit rating is irrelevant as the federal government is the issuer of Australian dollars and does not need to borrow to fund deficits. The very act of deficit spending creates new money and any interest expense on government bonds can be paid with newly created money.

    Our agricultural exports to the UK are likely to increase whilst we are likely to import more manufactured goods from them post Brexit.

    Our progress with tackling global warming will remain mediocre under this government but the states and individuals will drive some progress in spite of this.

    Our economy is heading towards the sewer as no new areas of economic activity or employment are likely under this government. They foolishly believe their own lies that the raft of new free trade agreements will produce growth when in fact the decline in manufacturing will be far larger than any gains in other areas such as bulk agricultural exports especially in terms of jobs. The Conservatives also foolishly believe that cuts to government spending and tax cuts for the wealthy will stimulate investment and growth when in fact the opposite will occur. The proposed massive expenditures in defence production are likely to be mismanaged and lead to very few new jobs for the sums involved. Infrastructure spending remains concentrated in a few major road projects with only moderate benefit.

    The deliberate expulsion of the Australian automotive manufacturing industry was a very serious error by Abbott and Hockey as Australia throughout its history has never been a more cost effective and high quality manufacturer as it is currently. The recent arrival of highly competitive car manufacturers like Thailand and China and even Germany that exploits an undervalued Euro, however necessitates a moderate tariff or equivalent ongoing subsidy, as otherwise it becomes more profitable for multinational car companies to import rather than to manufacture locally. The abandonment of manufacturing will make it much harder to participate in new industries such as clean energy and other areas of the sustainable economy, it will now be more difficult to harness the limitless potential of science and technology and this will cost us all dearly.

  6. crypt0

    Whatever the issue may be, I would expect this LieNP “government” to get it wrong.
    The only thing they did that was even mildly beneficial was abbott’s Green Army, since demolished by turnbull.
    So on the form, I would expect them to go on trashing the Australian economy, reputation and standard of living for as long as the little aussie voter sees fit to re-elect this rabble.
    For them to do otherwise would be the biggest form reversal since Fine Cotton.

  7. 245179

    ” Max Gross: A Turnbull retirement is certainly on the cards. He has achieved his ambition to be PM and now that it has become more difficult he may well decide that his own vanity has been fulfilled and he can return to a life of luxury without the pressures. If he had won comfortably in 2016 it would be a different story.”

    completely agree…( the guy is a dead man walking now, he’ll go before he’s shoved, helps his vanity thing )

  8. jimhaz

    [Cory Bernardi is creating a nation-wide conservative movement but not yet formally a new conservative party. It will be interesting to watch where that goes in 2017 and whether it turns into a fully-fledged political party.]

    He might just be happy to see this “I’m creating another party” pretense played out every so often in the media.

    I note that Bernardi’s Conservative Leadership Foundation has book list for sale – all of which are Bernardi’s.

    http://www.clf.org.au/shop#!/Books/c/21962426/offset=0&sort=normal

    Surely I member of parliament should not be using his position to enhance his private income interests!

    I think he should be called out for conflict of interest.

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