Monday, March 26, 2018

If governments can't undo what governments have done...

...what's the point of elections?

If company tax cuts become law, and then Labor undoes the law, will it have exposed investors to sovereign risk?

Arguably. But no more so than the Coalition exposed investors to sovereign risk when it undid Labor’s carbon price in 2014.

Sovereign risk is an overused term for the risk that a sovereign (a government) will change the rules of a game after it has started.

It has traditionally been used to describe the risk that a less developed country will default on its borrowings. The risk that Australia will default is low, which is why it has the highest possible credit rating.

Over time the term has been extended to refer to other risks. The risk that one government will approve the Adani coal mine in Queensland, and then another will revoke the approval has come to be seen as a sovereign risk, as has the risk that Australia will entice countries to come here with one tax rate and then change it. And it’s here that the idea gets troublesome.

If new governments couldn’t undo what old governments had done, there would be little point in elections. Which is why it has been held that they can. The centuries old doctrine of parliamentary sovereignty was summed this way by the British constitutional lawyer AV Dicey in the late 19th century: “Parliament has the right to make or unmake any law whatever”.

And if Labor announced ahead of time that it was going to block company tax cuts not due to come in until 2019 there wouldn’t even be the possibility of sovereign risk. No-one would have invested in anything on the basis of conditions that was introduced and then taken away.

If the scheduled company tax cut for companies with turnovers of more than $50 million passes the Senate one day this week and the next day Labor promises to revoke it, companies won’t have even had time to plan on the basis that it will be delivered.

It’s different for the cut for businesses with turnovers of up to $50 million which was legislated in 2017 and will come into force in July this year. A commitment by Labor to revoke any or part of that tax cut after the next election, after it has been delivered, would constitute a sort of sovereign risk, but no more so than other unexpected changes following elections. The reversal of the carbon price was one. Businesses had planned on the basis that the carbon price was there. Then it wasn’t. They got on with their lives. Our AAA rating remained intact.

In The Age and Sydney Morning Herald