The Australian Federal Election
The Australian federal election campaign is effectively underway, even though Prime Minister delayed the official announcement due to the anticipated devastation from Cyclone Alfred. Since January, the Government has been making numerous spending promises, with the Coalition often matching them. With the election deadline set for May 17, political activity is expected to intensify, especially with the budget announcement in two weeks. While election-year budgets tend to be heavily politicized, this one comes against a backdrop of economic challenges facing Australia.
Polls Indicate a Tight Race
Polling data suggests a close contest, with Labor trailing in two-party preferred polling averages, though the gap appears to be narrowing. Both major parties may struggle to secure a 76-seat majority, increasing the likelihood of a hung parliament and a minority government. The ALP, currently holding 78 seats, could easily lose three, while the LNP faces a significant challenge in gaining the 22 seats needed for victory.
Elections, Economy, and Markets in the Short Term
Election campaigns often lead to temporary economic hesitation, with businesses and households postponing spending. However, historical data since 1980 shows election years averaging 3.3% GDP growth annually, slightly above the long-term average of 3.1%.
Stock markets also tend to move sideways before elections, reflecting uncertainty, followed by a potential relief rally once results are known. Historically, elections leading to a change in government have had mixed impacts on the share market. For example, shares surged after the 1983 Labor victory but declined following Labor's 2007 and 2022 wins. Conversely, after Coalition wins in 1996 and 2013, markets remained flat or declined. Broadly, global market trends have had a greater influence on Australian shares than election outcomes.
Market Trends Before and After Elections
Since 1983, Australian shares have typically remained stable or risen in the three months following elections, with 10 out of 15 elections witnessing gains, averaging a 4.2% increase. Similarly, the Australian dollar has shown a pattern of drifting sideways or declining before and after elections, albeit with high variability.
Performance Under Coalition and Labor Governments
Historically, share markets have performed better under Coalition governments, delivering an average annual return of 12.9% compared to 9.7% under Labor. However, this disparity is partly due to economic downturns during Labor-led administrations, such as the Whitlam and Rudd/Gillard governments, which coincided with global financial crises. The reformist Hawke/Keating government notably defied expectations, achieving a 17.2% annual return.
In the property market, capital city housing prices have risen 7.7% per year under Coalition governments and 4.3% per year under Labor. Despite these differences, housing policies across both parties have remained largely similar.
Key Challenges for the Next Government
Boosting Productivity and Living Standards – The rising cost of living is the top concern for voters, with real household disposable income per person declining by 10%. Wages have increased by 11% over the last three years, but this has lagged behind a 15% rise in prices. Higher taxes and interest payments have further constrained real incomes. Addressing productivity through tax reform, deregulation, competition policy, and education improvements is essential.
Improving Housing Affordability – Housing affordability has deteriorated for decades, affecting both productivity and economic equity.
Restoring Fiscal Discipline – The Labor government has benefited from a $200 billion revenue windfall due to strong employment, high commodity prices, and bracket creep. However, much of this has been spent, fueling higher inflation and interest rates. Structural spending pressures in areas like NDIS, healthcare, aged care, defense, and public debt servicing are pushing the budget back into deficit. Sustainable fiscal policies are needed to avoid excessive reliance on taxing younger generations.
Navigating Global Uncertainty, Particularly the U.S. Under Trump – Potential policy volatility from the U.S., including trade tariffs, economic recession risks, and increased defense spending demands, poses significant challenges. Strengthening Australia's economy should be a priority to mitigate external shocks.
Economic Policy Differences Between Labor and the Coalition
Labor favors bigger government, higher taxation to balance the budget, industry policy through programs like "Future Made in Australia," and increased regulation. The government has already pledged an additional $35 billion in spending over the next four years, covering Medicare, public schools, infrastructure, and nationalizing the Whyalla steelworks. Additional budget commitments are likely, including another $300 per household in electricity bill relief, costing $3.5 billion.
The Coalition has matched much of this spending but emphasizes smaller government, lower taxes, and reduced regulation. Key policies include cutting 36,000 public sector jobs to save $6 billion and advocating for nuclear energy over renewables. However, detailed policy plans remain sparse.
Both parties are increasingly relying on off-budget financing to fund commitments, such as Labor’s student debt reduction and the Coalition’s nuclear energy plans. While these measures bypass immediate budget deficits, they contribute to public debt, undermining fiscal transparency.
On housing, both parties prioritize increasing supply. Labor’s Housing Accord aims to construct 1.2 million new homes, while the Coalition proposes a $5 billion investment in housing infrastructure and a 25% cut in permanent migration. However, the Coalition’s plan to allow first-time buyers to access $50,000 from their superannuation could inflate housing prices, benefiting Baby Boomers and Gen X more than younger buyers.
Conclusion
Given the relatively modest differences in economic policies between Labor and the Coalition, a change in government is unlikely to have a significant impact on investment markets. Instead, external factors—such as U.S. economic policy and global market trends—are likely to play a larger role in shaping Australia's economic future. However, if neither party secures a majority, reliance on minor parties and independents could further delay necessary economic reforms, particularly if a minority Labor government shifts toward less business-friendly policies.
Rick Maggi, Financial Advisor Perth, Westmount Financial