Australia’s Senate Rejects Raising Debt Ceiling to A$500 Billion

Australia’s upper house Senate proposed capping the nation’s debt ceiling at A$400 billion ($374 billion), frustrating government efforts to increase it to half a trillion dollars.

The Liberal-National coalition government says the current A$300 billion limit will be breached next month, and today sought Senate approval for an increase to A$500 billion. The opposition Labor party and the Greens amended the bill and sent it back to the lower house, where the government says it will reject it.

“If Labor prevents an increase in the debt limit, there is no choice but to have massive cuts to government expenditure,” Treasurer Joe Hockey said in an Australian Broadcasting Corp. interview earlier today. “The government is running on borrowed money.”

Signs of a slowdown are emerging in the 12th-largest economy, with the Reserve Bank of Australia last week forecasting below-trend growth and rising unemployment in 2014 as resource investment drops and the currency strengthens. While the coalition and Labor are likely to avert a U.S.-style government shutdown before a Dec. 12 deadline, the dispute highlights the government’s precarious budget position, Nomura Holdings Inc. interest-rate strategist Martin Whetton said.

U.S. Comparisons

“It’s not a good look for Australia,” said Sydney-based Whetton. “We’ve seen with the U.S. example how disruptive these sorts of political disputes over debt can be. The bigger picture is that budget revenue expectations are poor for the government over the next four years because of high spending and an economy growing sub-trend.”

The bond market signaled no concern about the debate. Benchmark 10-year Australian yields dropped eight basis points to 4.19 percent at 2:05 p.m. in Sydney, heading for their biggest decline since Oct. 23.

Labor says the proposed 67 percent rise in the debt ceiling is unnecessary and is designed to avoid pushing a further increase through parliament around 2016, when the next election is due.

“We see the treasurer of Australia threatening to shut down the government because he can’t get his way,” Shadow Treasurer Chris Bowen told reporters in Canberra today. “This government was elected to reduce the debt. That’s what they told the Australian people they’d do.”

Labor has also indicated it will seek to block Prime Minister Tony Abbott’s attempt to repeal a carbon-price mechanism and mining profits tax before Christmas.

Senate Gridlock

While the coalition has a majority in the lower house, it doesn’t control the Senate. The balance of power there is currently held by the Greens, which have also said they will oppose the increase to A$500 billion. The makeup of the upper house will change July 1 when Senators elected in the Sept. 7 ballot take their seats.

Treasury said in its pre-election outlook released Aug. 13 that the federal deficit will widen to A$30.1 billion for the fiscal year ending June 30, and the budget is no longer projected to return to balance in 2015-16. The coalition will release updated projections before Christmas.

The 67 percent increase in the ceiling is needed to provide certainty to investors, Hockey said today. Foreigners held 69 percent of Australia’s outstanding debt in the second quarter, down from a record 76 percent a year earlier, government data show. Australia’s 10-year government bond yield rose 36 basis points this quarter to 4.17 percent and touched 4.3 percent yesterday, the most since March 2012.

Debt Limit

“If I want to offer stability and certainty and predictability to the budget position and to the financial markets about the Australian debt position, I get us a debt limit that we never want to reach,” Hockey said. “You’ve got longer-dated debt. You’ve got refinancing debt. As interest rates rise the cost of us financing our debt increases.”

Australia needs to raise the ceiling to A$500 billion to create A$40 billion to A$60 billion of “room,” implying A$440 billion to A$460 billion of debt at its peak in 2016, according to Nomura’s Whetton.

“Markets will shrug this off in Australia as they understand that a debt deal of A$400 billion at least will be reached and that will cover a decent period of time,” Whetton said. “The end game is a political one.”