20/08/2010 - 14:35

Markets fear a hung parliament

20/08/2010 - 14:35

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A senior economist has expressed concern at the possibility of a hung parliament and the impact it may have on foreign investment.

Markets fear a hung parliament

A senior economist has expressed concern at the possibility of a hung parliament and the impact it may have on foreign investment.

Today's newspoll suggest a hung parliament not out of the question, and if it is anything like the recent British election, it could drag on for days as the horsetrading runs its course and the uncertainty plays havoc on the markets.

Commonwealth Securities chief economist Craig James says that no matter which party wins, investors want a clear result.

"A hung parliament or a minority government could cause foreign investors to trim their exposure to Australia, putting downward pressure on the sharemarket and the Australian dollar," Mr James said.

But a close, but clear election outcome - with one party winning a three or four seat majority - could prove a major positive.

"It would mean that the government would have to work hard on its performance as one or two adverse by-elections results could prove the difference between remaining in power or moving into opposition," he said.

In the aftermath of the British election, the pound fell 2.25 per cent in the two days after the announcement of a hung parliament, according to an election analysis by ANZ.

While this was against the backdrop of the European debt crisis, the bank says the Aussie dollar would probably weaken more as its volatility tends to be greater than the pound.

"If there is a clear election result, we expect an initial Australian dollar boost should the coalition win as offshore markets welcome the cancellation of Labor's mining tax proposals," it says.

Conversely, a Labor victory would have minimal impact on the dollar.

Both major parties have promised to get the budget back into surplus in three years.

Labor is forecasting a $3.5 billion surplus in 2012/13 and $4.5 billion in 2013/14.

The coalition, meanwhile, has refused to put its election promises through Treasury and Finance for official costing, instead choosing private accounting firm WHK Howarth.

It is predicting a larger surplus of $6.2 billion in 2012/13 and $7.3 billion, "if these costings are to be believed," according to ANZ.

"Given that the coalition has not used official channels for costing, it is difficult to assess the validity of their figures and underlying assumptions," the bank's analysis says.

"There would therefore seem greater scope for surprise on future budget outcomes under the coalition."

Under Mr Abbott's action plan for the first 90-days of a coalition government, it would issue an economic statement in one month of power.

Beyond the budget balance, the key differences on economic policy surround company tax rates, parental leave, mining taxation arrangements and broadband.

Labor is committed to a mining tax - the 30 per cent minerals resource rent tax - that would provide the revenue for such things as a cut in the corporate tax rate.

Mr James said: "If Labor is returned with major loses in Western Australia and Queensland, it may seek to make changes to the tax.

"Indeed changes are possible given that smaller miners are looking for concessions."

The coalition is opposed to the mining tax, but has still promised a marginally greater cut in the corporate tax rate, although it will place a levy on major companies to pay for its more generous paid parental scheme.

Both parties have made sharply different broadband proposals, but at least both are committed to improving the service.

But whoever wins, it will not have a material impact on economic growth and inflation forecasts in the short to medium term.

"The Reserve bank will still be setting interest rates," Mr James said.

"The public service will still be the same - unlike in the US where an election leads to wholesale changes - and the Aussie dollar, bank bill and government bond rates will be set by the market."

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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