Australia’s new Government – what does it mean for investors?

• Faster climate action with a 43% cut to emissions below 2005 levels by 2030 versus the Coalition’s 26-28% cut. This could be increased under pressure from Greens and “teals”.

• This includes investing $20bn in electricity infrastructure and boosting renewables to 82% of electricity by 2030.

• An extra $2.5bn per annum in aged care funding.

• An extra $750m on Medicare.

• Raise the childcare subsidy to 90% for the first child in care.

• Create 20,000 more university places & free TAFE places.

• Support for manufacturing with a $15bn National Reconstruction Fund and Federal procurement programs.

• Housing support policies with: a $10bn Housing Australia Fund to build 30,000 social homes over five years; a Help to Buy scheme with the Government to take up to 40% equity in up to 10,000 first home buyer home purchases a year; support for the Coalitions 50,000 low deposit purchase scheme with an additional 10,000 places in regions; support for the Coalition’s super concessions for downsizers over the age of 55; and the establishment of a National Housing Supply and Affordability Council to help boost supply.

• Encourage the Fair Work Commission to raise the Minimum Wage by 5.1%. This would normally flow through to 2.6m workers on awards and raise concerns about a wage price spiral, but PM Anthony Albanese has suggested it would only cover those on the minimum wage which is 180,000.

• Make gender pay equity an objective in the Fair Work Act.

• The ALP proposed no tax hikes apart from measures to tax multinationals more. But it’s not committing to the 23.9% Coalition cap on the tax to GDP share and wants to shift the focus to the “quality” of spending, suggesting a somewhat higher tax and spending share of GDP over the long term.

• Implement the Uluru Statement from the Heart in full.

Impact on the budget and overall fiscal policy

Like the Coalition the ALP is largely looking to repair the budget by growing the economy rather than austerity. The new Government’s pre-election costings suggest extra spending of $18.9bn over the next four years offset by $11.5bn in saving to be from taxes on multinationals, a crackdown on tax avoidance and a cut in public sector spending. This will add an extra $1.9bn pa to the deficit. The table below compares the Coalition Government’s budget deficit projections for the next four years with the deficit under Labor’s policies. The ALP is also talking of $52bn in “off budget” funds (eg, the Housing Australia Fund) which will add to gross debt. The addition to the deficit is only 0.1% of GDP pa though and it should also be noted that if the improvement in the budget numbers since March due to higher commodity prices and lower unemployment continues then the deficit numbers could be much lower. Prior to the election the new Treasurer said he would give a statement updating the outlook in June and a new budget in October.

Budget deficit projections

Source: Federal Treasury Pre-Election Economic and Fiscal Outlook, ALP, AMP

Assessment and challenges

At a fiscal policy level, the differences versus the Coalition are trivial. The new Government looks inclined to allow a higher spending and tax share of GDP but note that the spending share is already projected at record levels under the Coalition. However, Labor faces big challenges in an era of higher inflation & interest rates and in relation to housing affordability.

The pivot in the economy to higher inflation poses a big challenge to the complacency around the budget deficit, much as the changed environment made life tough for the Whitlam Government in the 1970s. The days of low inflation and low bond yields allowing big budget deficits and high debt are likely behind us. This argues for a faster reduction in government borrowing (whether its “on” or “off budget”) to take pressure off inflation and interest rates and for more policies to boost productivity. And while new Treasurer Jim Chalmers has indicated a preparedness to undertake “budget repair” via a spending audit, this may not be enough if the fast-growing health and social services areas are protected. This in turn could see a return to some of the proposed 2019 tax hikes.

And without productivity enhancing reforms it’s doubtful that the 1.5%pa productivity growth assumption underpinning the March Budget can be achieved, which would mean waning growth in living standards and higher inflation. It also makes it harder for the Government to encourage higher wages without risking a wage price/spiral. Labor policies to boost childcare and use of lower cost sustainable energy will likely help in this regard but in the absence of significant tax, industrial relations, education and competition reforms it’s doubtful they will be enough.

As with the Coalition’s policies the new Government’s housing policies are more focussed on boosting demand – notably the expansion of low deposit schemes and the Help to Buy Scheme – which will result in higher than otherwise home prices. However, the construction of 30,000 social homes combined with the National Housing Supply and Affordability Council if appropriately focussed on boosting supply have the potential to help improve housing affordability. Its marginal though. The main impact on home prices will likely from come rising interest rates (which would have occurred whoever won the election) which we see driving prices down by 10-15% over the next 18 months and may prove to be a headwind for prices thereafter.

Shares, the $A, elections & political parties historically

Since the 1980s there has been a tendency for Australian shares to rise after elections, as uncertainty is removed.

Australian equity market around election days 

Source: Reuters, AMP

The next table shows that 3 months after the last 14 elections the share market saw an average gain of 4.5%.