By Rob Taylor

CANBERRA, Australia -- Prime Minister Malcolm Turnbull reaffirmed his preference to drop Britain's monarch as Australia's head of state, adding to tensions around his leadership ahead of an expected budget revision by the conservative government.

In a major speech marking the 25th anniversary of a republican movement he helped found, Mr. Turnbull said he supported a two-stage national vote to end constitutional ties to Britain's monarchy, but not until the popular reign of Queen Elizabeth II eventually came to an end.

"The cause of the Australian Republican Movement is a cause for Australia," said Mr. Turnbull, a former Goldman Sachs banker who in 1999 led a failed push for a republic through a referendum.

"We look neither down nor up. We look to each other with respect and admiration, and we say we are united and we are Australian," he said in the speech late Saturday. "And so our head of state should be one of us."

The 1999 referendum, which made Mr. Turnbull a household name before his entry into politics, sought constitutional change in favor of an Australian republic with a homegrown head of state. The push failed, with almost 55% of Australians rejecting it.

Support for a switch has faded further since, a poll by the Australian National University showed last year, as voters focus on concerns about the economy and unemployment over republicanism, seen by many as a fringe issue.

Mr. Turnbull, a social moderate who supports same-sex marriage, led a coup last year to oust Tony Abbott, a staunch monarchist, as conservative leader, promising he could steer the country through challenges including aweak domestic economy, softness in China and plummeting commodity prices.

But he continues to lead a rebellious Liberal-National coalition in which a faction of lawmakers remain hostile to his progressive social views. In the run-up to Mr. Turnbull's speech, one unnamed politician told national radio that reopening talk of a republic "just pisses off our [conservative] base."

Adding to tensions, the government on Monday will release a midyear budget update than may trigger the first downgrade of the country's triple-A sovereign credit rating in 30 years. Treasurer Scott Morrison is expected by most market analysts to trim the current fiscal year's growth projection to 2.25% -- from 2.5% seen in May -- to reflect tepid wage growth, while pushing ahead with a 48 billion-Australian-dollar (US$35.1 billion) plan to cut corporate taxes over a decade.

Instead of improvement, the economy under Mr. Turnbull shrank by 0.5% in the September quarter for the first time since March 2011, the worst performance since the global financial crisis. Unemployment crept up to 5.7% in November, adding to speculation that the country's unbroken 25 years of economic expansion could be about to end.

Major global credit ratings firms including Standard & Poor's and Moody's put the government on notice that Australia risked a sovereign credit downgrade if the Mid-Year Economic and Fiscal Outlook, or MYEFO, didn't chart a significant improvement in the budget's bottom line.

"The MYEFO may not be enough to trigger a rating downgrade immediately, but I think whether it's in the week ahead or after the May budget, a downgrade is just a matter of time," said Shane Oliver, chief economist at AMP Capital.

The biggest casualty of a downgrade may be Mr. Turnbull's authority, already weakened by cliffhanger elections in July that left his government with a one-seat majority in the lowerhouse. His conservatives also are unable to pass laws in the upper house without backing from an unpredictable fringe.

An Essential poll last week showed just 34% of surveyed voters approved of Mr. Turnbull's performance, the lowest level since he ousted Mr. Abbott in September 2015.

Mr. Turnbull's political opponents and the media have begun to speculate that without a turnaround, the prime minister could face another of the leadership shake-ups that have delivered five prime ministers in six years.

"This idea of the republic, I think, may be him trying to regain momentum going into Christmas break," said Jill Sheppard, a political analyst at the Australian National University. "But with an imminent budget downgrade, the timing could not be much worse."

Write to Rob Taylor at rob.taylor@wsj.com

(END) Dow Jones Newswires

December 17, 2016 23:27 ET (04:27 GMT)

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