Ideological conflict within Australia's ruling Liberal Party, culminating in Malcolm Turnbull's removal and the election of Scott Morrison as prime minister, will severely undermine the party's re-election bid ahead of the 2019 election.

• The conservative faction of Australia's ruling Liberal Party succeeded in removing Malcolm Turnbull as leader and so prime minister on 24 August, but failed to have its preferred candidate Peter Dutton assume the leadership.
• To promote party cohesion, newly elected Prime Minister Scott Morrison selected a cabinet with both conservatives and moderates. However, the internal splits will have damaged the Liberal Party's popular support, and the government will struggle to win the 2019 election, expected in the first half of the year.
• Morrison has indicated that the new government's priorities will include providing urgent drought relief and reducing energy prices. The opposition Labor Party has outlined an active policy agenda regarding energy prices, implying that regulatory burdens in the energy sector are likely to rise over the next year, regardless of which party is elected. Cuts in company taxes, abandoned by Turnbull last week, are very unlikely to be revived.
• Turnbull will almost certainly resign his parliamentary seat of Wentworth within the next three months, triggering a by-election. Wentworth is a swing seat and, should the Liberals lose it, the party would also lose its slim majority in the House of Representatives, leaving it potentially unable to pass legislation independently in even the lower house before the 2019 election.

Members of parliament of Australia's governing Liberal Party on 24 August voted by 45 to 40 to select Scott Morrison as new party leader and prime minister to replace Malcolm Turnbull, ahead of rival candidate Peter Dutton. Former foreign minister Julie Bishop also contested the ballot, but was eliminated in the first round of voting.

Turnbull's position had become severely weakened recently, with the conservative faction of the Liberal Party reportedly preparing a challenge to his leadership, citing dissatisfaction over energy policy. Turnbull pre-emptively held a leadership ballot on 21 August, contested by Turnbull and Home Affairs Minister Peter Dutton, which Turnbull won by 45 votes to 38. However, Turnbull's leadership was further weakened the following day after three senior cabinet ministers publicly called for his resignation, and he subsequently chose not to contest the second leadership ballot. Turnbull's departure makes newly selected Prime Minister Scott Morrison Australia's sixth prime minister in eight years.

The Liberal Party's internal disunity is damaging its public support. In the latest opinion poll, the opposition Labor Party currently leads based on two-party preference by 56% to 44%, whereas the prior poll before the leadership change had Labor ahead by 51% to 49%. Turnbull consistently polled above Labor Party leader Bill Shorten as preferred prime minister, but polls now show Shorten is preferred over Morrison by 33% to 30%. Support for the Liberal-National coalition government is at its lowest level since 2007, according to Newspoll.

There was no obvious justification for removing Turnbull - the government was polling almost evenly with Labor before his removal, and there were few distinctions between the factions over current policy, excluding the intense disagreement over energy policy. The challenge was likely to have been organized by conservatives to regain control over the Liberal Party's social policy, as conservatives were severely opposed to Turnbull's progressive views, which facilitated the legalization of same-sex marriage in late 2017. Personal motives also are likely to have been important, as former conservative prime minister Tony Abbott - whom Turnbull successfully challenged for the leadership in a similar fashion in September 2015 - was heavily involved in organizing moves against him, according to several Liberal Party members.

Outlook and implications

Formerly Australian Treasurer under Turnbull, Scott Morrison is a center-right figure and enjoys good professional relations with moderates and conservatives across the Liberal Party. Morrison has named a cabinet that retains many key personnel from both sides of the party. Crucially, former challenger Peter Dutton will remain as minister for home affairs. Dutton or other senior conservative figures are now very unlikely to organize another leadership challenge for at least 12 months. A general election almost certainly will be called in the first half of 2019, and major policy changes are highly unlikely within the next six months, as Morrison is unlikely to shift policy direction without an electoral mandate.

Instead, over the next three months, the government is likely to focus on providing financial relief to farmers, who are currently experiencing severe drought. Drought-relief measures should receive bi-partisan support.

Ahead of the 2019 election, the government is likely to outline a new strategy to address high energy prices. On 20 August, Turnbull had already abandoned his National Energy Guarantee legislation - laws designed to reduce emissions and electricity prices - in an attempt to appease conservatives. It is unclear how Morrison will approach energy policy, but given its political sensitivity, the government is likely to increase regulation. If elected, Labor has indicated it would introduce new regulation imposing a capped default electricity price which all retailers must offer. If either party wins, the regulatory burden and contract alteration risks are likely to increase in the energy sector over the next 12 months.

On 22 August, Turnbull announced that the government would abandon its company tax-cut legislation, which would have reduced the tax rate gradually from 30% to 25% for companies with a turnover of more than AUD50 million (USD36 million). Prime Minister Morrison is very unlikely to revive this legislation within the next year, as such cuts have become publicly unpopular after the Financial Services Royal Commission found frequent examples of malpractice among the major banks - findings which the public associates with larger companies.

A crucial indicator for government stability would be a parliamentary by-election in Turnbull's Wentworth constituency, which would be triggered if Turnbull resigned his seat, which he is almost certain to do within the next three months. Wentworth is a swing seat with a progressively minded electorate and a severe swing against the government would indicate its likely defeat in the general election. A second key indicator of government stability will be the behavior of the conservative faction. Further signs of disunity, such as veiled criticism or lukewarm public support for the government's new policy initiatives, would threaten further decline in the government's popularity, and strengthen the chance of a Labor victory.

Blog written by Alex Barnes, senior analyst, Asia Pacific, IHS Markit

Posted 31 August 2018 by Alex Barnes, Senior Analyst, Country Risk Asia Pacific, IHS Markit