Australia Politics June 2016


July's election outcome is uncertain, however business confidence remains robust

In the run-up to the 2 July double-dissolution election, parties are fine tuning their economic policies and ramping up the campaign rhetoric. The major parties—the incumbent Liberal-National coalition and the opposition Labor Party—are clearly divided around economic policies, with the center-right Liberal-National Coalition in favor of lower taxes and pro-business measures and the Labor Party opting for increased spending on middle class welfare, schools and infrastructure. Polls do not yet point to a clear winner and thus it remains to be seen what Australia’s future political and economic landscape will look like.

Incumbent Prime Minister Malcolm Turnbull, who is leading the Liberal-National coalition, has an investment banking and business oriented background and enjoys the support of Australia’s business community. Turnbull’s government has laid out plans to decrease the corporate tax from 30% to 25% over the next 10 years by progressively raising the threshold for corporate taxation. The Liberal-National economic plan was laid out in the 2016/2017 budget, which analysts saw as pro-growth compared to earlier Coalition budgets, and envisions the country returning to a fiscal surplus by 2021. Although economic growth in Australia picked up under the Coalition’s watch in the first quarter of 2016, polls suggest that this has not resonated with voters.

On the other side of the political divide is the Labor Party, which has made investment in education and infrastructure the main pillar of its campaign. The Labor Party is promising increased funding and support for tertiary education, childcare and healthcare. They have also proposed an official investigation into the conduct of Australian banks. In terms of taxation, the Labor Party has rejected the government’s corporate tax cut plan for larger businesses, however, it has stated that it does support tax breaks for smaller businesses. Like the Coalition, the Labor Party has proposed plans to return to a budgetary surplus by 2021, however, they envisage to run larger deficits until then.

Turnbull had called the election amid popular support for his party, but that has since waned. The Labor Party is now ahead in national polls, yet it is falling behind in crucial swing seats, in which neither party holds a commanding lead, suggesting that the Liberal-National Coalition could have the advantage, however it is possible that they will not emerge with an outright majority. Should this be the case, either a deadlocked parliament or another election could follow, which could drag on business confidence and investment. Indeed, business confidence has deteriorated in recent months, although, as Alan Oster, Chief Economist at National Australia Bank, points out, businesses may be responding more to external factors as opposed to political uncertainty.

“The election does not appear to have had much impact on business confidence so far, which is very much in line with historical experience. Confidence readings are very much driven by what businesses see happening to their own business activity and forward orders. […] In the last few months, confidence has eroded a touch, but that was not broad based. Indeed, it was heavily affected by confidence levels in manufacturing and transport—where higher oil prices are important. Equally, it appeared to be driven by weaker confidence in Western Australia—where the slowdown in the mining sector is most pronounced. Generally, with high levels of non-mining activity continuing (equating to non-mining GDP of around 4%), we would expect business confidence to move higher. That said, unexpected political events always pose some short term risks to confidence going forward.”

Australia enjoys solid economic fundamentals that will shield the economy from any adverse impact stemming from the election. The Central Bank has also offered some support to the economy during this transitionary period by cutting the cash rate to a historical low at its May policy meeting.

The Reserve Bank of Australia (RBA) sees the economy growing between 2.5% and 3.5% for both 2016 and 2017. FocusEconomics Consensus Forecast panelists see the economy expanding 2.6% in 2016, which is unchanged from last month’s forecast. For 2017, the panel expects economic growth to accelerate to 2.8%.

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