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Australia Politics May 2019

Australia: Healthy public finances and lower taxes ahead, as Australians defy opinion polls and reelect center-right government

Australia’s parliamentary election on 18 May delivered a surprise victory to the ruling center-right Liberal–National coalition, led by Prime Minister Scott Morrison. The stock market consequently surged to an 11-year high on 20 May, while the AUD climbed on the same day, as the prospect of political continuity, waning political uncertainty and market-friendly policies boosted investor sentiment. The result follows a period of softening economic growth, especially due to weak consumer spending and a correction in the real estate market, although the election result should help strengthen investor sentiment ahead and could kickstart fixed investment too.

The coalition’s pro-market stance and its prudent fiscal policy should continue to underpin investor confidence going forward, which should reverberate positively on the country’s fiscal profile in turn. Its pledge to lower taxes for low- and middle-income earners and to give more tax benefits to small businesses should improve growth prospects. Furthermore, investment in the mining sector will benefit from the government’s support of the coal industry and waning political uncertainty, and as the danger posed by Labor’s stricter environmental rules has dissipated. Lastly, the real estate and banking sectors can also breathe a sigh of relief, as Labor’s proposed tough banking reform and less favorable tax scheme for property investors are set aside.

Preliminary results revealed that the ruling coalition secured an absolute majority in the Lower House of Parliament, which will allow Morrison to form a government without needing to turn to independents for support. Although ballots are still being counted in the Senate, the situation will likely remain unchanged in this Chamber, where the coalition will most likely still have to count on the vote of minor parties to pass the budget. The coalition’s support of major coal mine projects, in contrast to Labor’s vague stance and its proposals to tighten environmental rules, secured the government the backing of resource-rich states such as northeastern Queensland and likely led to the surprise victory.

Overall, the economic impact of the election should be positive yet limited. As the pro-business continuity option prevailed, investment could receive an additional boost in the short-term. Moreover, higher public infrastructure spending and increased disposable incomes for middle- and low-income earners should also support the economy, which is now 27 years without a recession, while the government’s cautious handling of public finances and its surplus budget target for 2020 will continue to underpin the country’s fiscal soundness. That said, GDP growth will decelerate this year as falling residential construction limits fixed investment and soft wage hikes and a bulky household debt restrain private consumption. Meanwhile, potential weakness in China’s economy and a possible escalation in global trade disputes are the key risks to growth in Australia.

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