Has Australia's Prime Minister Really Got What It Takes to Fix the Economy?

(Bloomberg) -- Conservatives hailed Australia’s Prime Minister Scott Morrison a hero after he won a surprise third term for his government. Now the hard work begins to revive a stalling economy.

As parliament resumes Tuesday for the first time since the election, Morrison will look to pass sweeping income-tax cuts that anchored the small-target platform he rode to victory on May 18. He’s also pledged to cut red tape and take a fresh look at industrial relations, including cracking down on law-breaking union officials.

But concerns are growing that he’ll need to do much more to turn the economy around -- and that his current policy agenda has insufficient firepower. Australia is on track to record its weakest fiscal year since the last recession in 1991, dragged down by record household debt, stagnant wages, under-employment and a falling property market.

“The coalition didn’t win the election with a bold vision for change, so there isn’t pressure from the electorate to deliver one,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “Australia’s track record of 28 years without a recession is often seen as an example of resilience, but complacency is a danger. The headwinds of heightened geopolitical risks offshore, alongside slower global growth, cannot be ignored.”

Fiscal Weakness

Concerned by economic weakness, the central bank reduced the cash rate to a record-low 1.25% last month. It’s signaling further cuts are likely and pressing the government to loosen its purse strings to help support the economy.

Markets expect the Reserve Bank of Australia will take rates to 1% on Tuesday, while 21 of 32 economists in a Bloomberg survey expect a cut.

While Morrison is seeking to legislate A$158 billion ($111 billion) in income-tax relief -- the biggest tax cuts in more than 10 years -- most wouldn’t take effect until the middle of the next decade. And after steering the budget back to a forecast surplus after a decade of deficits, the political imperative of sticking with that path means the prime minister is unlikely to fund stimulus measures through taking on more debt.

Beyond the tax cuts and additional infrastructure spending, critics say measures to boost growth and productivity look thin.

“You can spin the economy for a while, but in the end the data gets you,” said John Hewson, a former coalition leader and now an economist at the Australian National University. “Morrison knows you’ve got to have broad-based reform to boost productivity but it doesn’t look like he’s going to do that. Instead he wants to concentrate on the old chestnuts -- industrial relations and tackling red tape.”

Turbulent Future

Asked at a Bloomberg event in Sydney last week whether Australia’s 28 recession-free years were down to good luck rather than good management, Morrison said with a laugh: “When things go badly, it’s never bad luck.” He defended his government’s economic agenda and said the nation is prepared for a potentially more turbulent and challenging future.

In his favor, Morrison has stamped his authority over the Liberal-National coalition by delivering the election victory, while the main opposition Labor party is looking demoralized as it contemplates at least another three years in opposition.

The government now has 77 seats in the 151-member lower house -- a slim majority, yet an improvement on its minority position before the election.

While six independent and minor party lawmakers still collectively hold the balance of power in the Senate, the government now only needs to win the support of four of them to pass legislation. By the end of the last parliament, it had to court eight of the 10 so-called crossbenchers.

Still, Ell and Hewson say a more manageable parliament means little without a clear vision and strong policy agenda.

Ian Chubb, who served as Australia’s chief scientist for five years until 2016, is equally pessimistic and cites the government winding back tax incentives for research and development that could uncover new growth drivers. The election showed voters didn’t want a “contest of ideas” and were prepared to elect a government campaigning on “a few cliches.”

“This government has a lot to do, and they have the opportunity to build some long-term strategies and not rely on visceral, reactive band-aiding,” Chubb said. “I used to be pretty positive about Australia but I’m now a guy who’s glass is half-empty because I don’t see the consistent, coherent, strategic leadership in this country that we need.”

To contact the reporter on this story: Jason Scott in Canberra at jscott14@bloomberg.net

To contact the editors responsible for this story: Ruth Pollard at rpollard2@bloomberg.net, Edward Johnson

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