Abbott surplus at risk in Aust budget impasse

Australian PM Tony Abbott at the B20 Summit in Sydney. To pass laws, Abbott has to win the support of six of the eight lawmakers sitting in the upper house. Photo / AP

Prime Minister Tony Abbott's bid to put Australia back on a path to surplus is under threat from senators opposing A$40 billion ($37.6 billion) in savings.

The Liberal-National government, which had wagered on a more compliant upper house when the balance of power switched on July 1 to a group of eight centre-right lawmakers, has instead seen its spending cuts stymied. Having ruled out an election to break the impasse or a mini-budget to find alternatives, it's having to negotiate with parties emboldened by opinion polls showing the government has lost popularity since its May budget.

Consumer confidence slumped after the government's proposed cutbacks were announced, compounding weaker mining investment that's acting as a constraint on economic growth. Now, business sentiment may be weighed by the wrangling and uncertainty over whether the government's forecast return to surplus will be politically achievable.

"The extent of disagreement this time round is a lot larger than in the past," said Stephen Walters, JPMorgan Chase's Sydney-based chief economist in Australia. "The problem is you've had a negative reaction in sentiment to the tough budget passed down, but may end up without any of the actual savings. That's quite negative for the economy."

To pass laws, Abbott has to win the support of six of the eight lawmakers now sitting in the upper house and representing parties ranging from the socially conservative Family First to the Australian Motoring Enthusiast Party. Forming the biggest voting bloc among the minority parties are the three senators representing the Palmer United Party.

Palmer's PUPs

Led by mining magnate Clive Palmer, the three PUPs on July 17 backed Abbott's "blood oath" to dismantle the nation's price on carbon. That came a week after they rejected the repeal as it didn't contain amendments that would force energy companies to pass on savings to consumers.

The three PUPs showed again on July 18 that they were willing to go against the wishes of the government by voting to support Abbott's repeal of a 30 per cent tax on iron-ore and coal company profits while keeping associated spending measures that he wanted axed.

By refusing to abolish those measures, including handouts to parents of school children and lower-income earners, the Senate blocked A$17.2 billion in savings, according to the government. The government refused the amendments, meaning both the mining tax and the spending measures remain.

Budget savings

In all, A$40 billion in budget savings are being blocked in the Senate, according to the government. Other measures that either some or all of the Labor, Greens and PUP senators have indicated they'll oppose include freezing payment rates for family tax benefits, reintroducing indexation for the fuel excise and bringing in co-payments for doctors' visits.

One option the government has open to it to break the gridlock is calling for a double dissolution election. Treasurer Joe Hockey couldn't envisage such an outcome, or delivering a "mini-budget" with alternate spending cuts should the present proposals continue to be blocked in the Senate, he said in a July 18 interview.

"We always have a rolling analysis of the budget and look at where money can be spent more wisely and savings can be made," he said. "We've got to carefully, methodically work through all the issues. This is not uncommon."

House gridlock

With parliament not sitting again until August 26, the impasse in the Senate has created questions over Abbott's ability to bring the budget back toward surplus. That's also bringing uncertainty in the business community, according to Citigroup economists Paul Brennan and Josh Williamson.

"The new Senate could threaten business hopes of the government fully implementing its policy agenda," Brennan and Williamson wrote in a July 16 report. "While it is impossible to know how PUP will vote on any individual bill, it does create serious uncertainty for the government."

Consumer confidence in May fell to its lowest level since August 2011, prior to the central bank's most recent easing cycle, and has remained subdued since. The Reserve Bank of Australia flagged the effect of planned fiscal consolidation as a drag on the economic outlook in minutes of its July meeting.

Along with pledging to pass laws to repeal the carbon-price mechanism and mining profits tax created under the previous Labor government, Abbott won power in the September election vowing to reduce the overall tax burden. The government had now created "budget chaos" by refusing to negotiate effectively with the Senate, Shadow Finance Minister Tony Burke said in a July 17 statement.

'Situation worse'

"The government's all-or-nothing approach means it is choosing to make the budget situation worse," Burke said.

Abbott's problems in selling his budget message is reflected in the polls. The Labor party leads the coalition government on the two-party preferred measure 54 per cent to 46 per cent, according to a Nielsen poll of 1,400 voters conducted July 17-19 and published in The Age on Monday.

Hockey called on opposition parties to either agree on policies or offer alternative savings proposals.

"We're not going to give up on our budgetary goal of getting the budget back into strong surpluses in order to pay down the debt," he said in the interview.

- Bloomberg