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Australian Weekly Report

CMAX Advisory closely follows political developments internationally and analyses implications for businesses operating in Australia.

We develop a weekly report of the most important political and economic news in Australia, utilising our understanding of complex political issues and processes to inform companies of relevant developments and forecast likely outcomes.

This week's top story

28 October 2019

Drought becomes major government worry

Drought continues to dominate the political cycle and is starting to cause tensions within the governing Liberal-National Coalition.

The opposition Labor Party has been using parliament to question what it describes as the government’s “chaotic” response to the drought and has repeatedly called on it to adopt a bipartisan approach to dealing with the crisis. For its part, the government has been highlighting cash payments it is making to farmers and claiming the drought is its number one priority.

However, its priority in parliament has been on defending its budget surplus and its economic credentials. Outside parliament it has sought to take the credit for any drought announcements, much to the annoyance of its junior coalition partner the National Party, which represents rural constituencies.

While Labor is likely to keep painting the government’s response to the drought as ineffective, the danger for the Coalition is not that Labor will take seats in rural areas, but that National Party MPs could lose their seats to independents or the right-wing One Nation, which has been vocal on the need for drought assistance. Former National Party leader Barnaby Joyce has warned the government’s drought response could cost it the next election.

In response, the National Party is pushing for a plan that includes an extra A$1.3 billion in government funding for drought-affected communities. They want local governments in areas hit by drought to receive A$10 million in funding. There are more than 120 councils eligible for such funding.

With no end to the drought in sight, the government is under increasing pressure to deliver a comprehensive response and is expected to unveil assistance measures before the release of the mid-year budget update in December. The difficulty will be in how it manages to deliver a comprehensive package of financial relief while protecting the budget surplus it has committed to delivering. That may mean moving spending from other areas of the economy.

Other news

Things are looking up, says Treasury boss

The head of Australia’s Treasury department says the country’s economic outlook is positive and the risks it faces are temporary.

In his opening statement before Senate Estimates – where government ministers and senior bureaucrats face questions from senators – Treasury Secretary Steven Kennedy said temporary factors contributed to the economy growing at 1.9 per cent over the year, its slowest rate since the global financial crisis.

In an upbeat assessment of the economy, Dr Kennedy said a recovery in the housing market, along with low interest rates and tax cuts should boost consumer confidence and spending.

Household consumption is the largest component of the economy and grew by 1.4 per cent through the year to the June quarter and has so far proven immune to tax cuts and lower interest rates. In fact, the Reserve Bank of Australia has even acknowledged that the low rates may be unnerving consumers, who understand that they are a sign of a weak economy.

That view was backed up by the head of one of the nation’s major banks, who said that even if the economy was not technically in recession, many consumers felt like it was and were adjusting their behavior accordingly. ANZ chief executive Shayne Elliott said his bank’s data showed borrowers are using savings from record low interest rates to reduce housing debt, at the expense of spending.

In his address, Dr Kennedy said this preference for paying down debt was not a problem as eventually consumers would start spending again when their debts were cleared. However, with Australian household debt at record highs, that day may be some time off.

Dr Kennedy – who headed the infrastructure department before moving to Treasury – also poured water on calls for a boost to infrastructure spending to stimulate economic activity. He said getting the timing right on large projects was difficult because of the long lead times involved and a better return could be found in spending on maintenance for current infrastructure.

Former Pacific leader criticises Australia

A former Pacific Island leader has launched an attack on both Australian and Chinese attitudes to the region, saying their focus is on money, rather than saving lives at risk from climate change.

Enele Sopoaga, the former prime minister of Tuvalu, said Australia’s A$500 million commitment under its Pacific step-up for climate change mitigation projects was inadequate compared to the damage caused by global warming.

Mr Sopoaga hosted the Pacific Islands Forum in August, where island nations were angered by Australia’s refusal to sign up to a leaders’ communique urging a ban on new coal mines and new coal-fired power stations.

Speaking at the national conference of the Australian Council for International Development, the peak body for foreign aid groups, Mr Sopoaga said Australian Prime Minister Scott Morrison’s support of the coal industry meant prioritising “making money” over “saving lives”. “I was stunned by the un-Pacific tenor and manner of the Australian Prime Minister to water down the wording of the communique,” Mr Sopoaga told the conference.

The former Tulavu leader also took aim at China’s efforts to expand its influence in the Pacific, dismissing it as “money diplomacy”.

Defence sustainment costs blow out

The federal opposition says sustainment costs for the Australian Defence Force have blown out by A$570 million and is blaming acquisition delays for the overrun.

Shadow Minister Assisting for Defence, Pat Conroy, says the Defence Department’s 2018-19 annual report shows that sustainment costs were 10 per cent higher than originally budgeted in May 2018 and totalled A$6.588 billion.

Mr Conroy blamed the government for the overrun, saying it is “clearly linked to the Morrison government’s inability to acquire capabilities on time and to sustain them on budget”. He said acquisition delays mean the ADF is forced to keep using older equipment, which is more expensive to sustain.

The Defence annual report also highlighted that the Navy’s 21 “minor combatant” vessels, which include the Armidale and Cape Class patrol boats, spent nearly 500 fewer days at sea than planned due to what it describes as “emerging defects across platforms and extensions to planned maintenance periods”.

The Defence Department refuted the A$570 million overrun, saying A$367 million of the increase came from a combination of government approvals since the May 2018 budget for new projects and movements in the exchange rate. It says actual expenditure exceeded the budget by only A$203 million, with only A$72 million coming from a range of net variations across the budget.

Debate over medical devices ramps up again

The debate over private health insurance premiums is heating up ahead of Health Minister Greg Hunt’s pending decision on premium increases.

Private Healthcare Australia fired the opening salvo in the latest round of “who is responsible for premium increases”, laying the blame at the feet of the medical devices industry. PHA chairman John Hill told Nine Publishing that the health minister’s goal of limiting premium increases to an average 3 per cent would be “extremely challenging” because the cost of devices had risen by 8.6 per cent.

In response, the Medical Technology Association of Australia said the private health insurance industry was blaming “everyone but themselves for their continued failure to address financial sustainability challenges”. It pointed to an Australian Prudential Regulation Authority (APRA) report from May that said the sector was not prepared to “deal with growing risks, including declining affordability, a shrinking and ageing membership base, and changes in government policy”.

New inquiry into faster rail financing

Federal parliament has begun a new inquiry into financing options for faster rail to connect major cities across Australia. The House of Representatives Standing Committee on Infrastructure, Transport and Cities is accepting submissions to the inquiry until 6 December 2019.

The committee’s chair, Mr John Alexander, says the establishment of the National Faster Rail Agency (NFRA) makes it a good time to examine financing options to deliver fast rail connections between major capital cities and their regional centres.

The NFRA will work with state and territory governments on opportunities to develop better rail infrastructure, including on the Geelong to Melbourne fast rail.

It will also examine five faster rail business cases funded in the 2019-20 federal budget for: Sydney to Wollongong, Sydney to Parkes, Melbourne to Albury-Wodonga, Melbourne to Traralgon, and Brisbane to the Gold Coast.

“Delivering a viable option for people to live in regional cities and still have ready access to big cities will have positive social, economic and population outcomes, but it will be hard to progress without a sustainable financing mechanism,” Mr Alexander said.

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