The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Tuesday, September 7, 2010

Market reaction to Australia's new 'minority' government

So markets now have the benefit of the election uncertainty being removed. A new government has been formed. According to ANZ, the Australian dollar sold off, government interest rates momentarily rose, and the equities market temporarily tapered. But these were, for the time being, minor moves, and it was hard to decompose the market's reaction to the new government given that the RBA released a monetary policy statement within an hour of government being formed. Global capital markets will probably take time to digest exactly what the unprecedented ALP-Greens alliance--cemented by three once-conservative country independents--means for the speed with which the fiscal deficit and government debt issuance is reduced, and the risks of new policy projects that are not completely costed or represent new spending (such as the $9.9 billion rural package announced today by the ALP, at least $800m of which is non-budgeted expenditure). In the meantime we are left with the views of the major bank economists, a couple of which I have enclosed for your interest below.


"The AUD has sold off following the announcement, falling from around USD91.45 to USD91.17 at the time of writing. Australian equities sold off initially, led by the miners, but have since retraced to close the day broadly flat. Australian government bond futures initially sold off but then rallied although it is difficult to disentangle the impact of today’s RBA decision from these market moves.

For financial markets the key concern appears to surround Labor’s proposed mining tax; while Julia Gillard said earlier today that they would not deviate from the compromise reached with the big miners, the Greens have been pushing for an increase in the rate of tax. This may continue to weigh on the AUD in particular in the short term. However we do not expect today’s election result to have a long-lasting impact on local markets. The broader global environment remains the key driver for now."


"But for financial markets and investors a major issue is that good Government is delivered with a focus on trimming the budget deficit, increasing spending on much-needed infrastructure and ensuring that the Australia’s record-breaking expansion continues. The risk with the new minority Government is that measures will have to be watered down before all members of the new government support them. The current structure of the GST, with all its exclusions and exemptions, shows what can happen when deals need to be done to get measures through parliament...

Both Labor and Liberal have committed to return the Budget to surplus. Financial markets will hold the new Government to that commitment. But the new government has given a commitment to spending almost $10 billion on regional Australia, so there will be new scrutiny on the goal of achieving a budget surplus.

Given the agreements that have been put in place with the Greens and the independents, a mini Budget or Economic Statement may need to be handed down in the next few months. Certainly a Mid Year budget review is generally handed down around November, so that may be brought forward to give greater certainty about the budget position.

The Australian newspaper today reported on “secret minutes” of a meeting between Federal bureaucrats and the three independent members of parliament. The revelations are clearly of concern, especially for financial markets and investors in trying to understand the true state of the federal budget and understanding the impact of the mining tax on both the mining sector and economy as a whole.

The Australian asserts:

“That Treasury Secretary Ken Henry told the independents that the recommendations of his tax review were “yet to receive final consideration”, when Labor sources suggests that the government will not pursue them in the next term.” (Wayne Swan has now committed to a review of the tax proposals.)

That the claims of a black hole in Coalition costings related to an adjustment of the “conservative bias allowance” – a provision that is effectively an error term of buffer that is allowed for in estimating budget programs.

The Australian also cites research by a ‘global resources intelligence firm Intierra’ that “estimates the mineral resources rent tax will raise about $2.5 billion in its first two years compared with the $10.5 billion government forecast.” The Intierra report suggests that just 50 companies will be affected by the mining tax.

The article also asserts that the public service officials referred to “indicators of under-investment in public infrastructure, given the other pressures on fiscal priorities for governments.”

Clearly the issue of the true Budget position must be resolved quickly in the life of the new government while firmer estimates must be obtained of the economic and budgetary impact of the mineral resources rent tax. In determining the most accurate estimates of the mining tax take, Federal Treasury should be tasked to consult widely from experts in private enterprise, especially from top accounting firms."