Australia: Significant probability of another three years of fiscal policy paralysis - TDS

Research Team at TDS, attach a significant probability to Australia experiencing another three years of fiscal policy paralysis, implying that the RBA remains the only public authority with tools to manage the business cycle, and whatever the prolonged fallout of the Brexit vote brings.

Key Quotes

“We see a string of deficit and debt downgrades for years to come as reform policies are blocked by the Senate. The latest net debt to GDP projection is for a ‘peak’ of 19.2% of GDP by mid-2018. Whilst not disastrous, and we are not suggesting that Australia will lose its AAA/stable rating, the tail risks growing a little fatter, which is AUD and bond negative over the medium-term.

This deficit and debt situation is likely to be exacerbated on a majority Labor party win given its policy platform of big borrowing and spending for health, education and other forms of government consumption. While we only attach a small probability to this outcome, it is the scenario that potentially generates the most negative market sentiment for the Monday open. We will provide further analysis on Sunday of the outcome of the election.”