Australia: Tax cuts and higher spending promised in early surplus budget as Labor party narrowly leads the polls
April 15, 2019
On 18 May, Australia will hold Federal elections after Prime Minister Scott Morrison, of the ruling center-right Liberal–National Coalition (Coalition), triggered the vote on 11 April. Polls show that the Coalition is currently trailing the center-left Australian Labor Party (ALP), headed by Bill Shorten, although the ALP’s electoral advantage has narrowed in recent weeks. Irrespective, given that both political groups lie near the center of the political spectrum, the election should not have a pronounced impact on the economy, even though political noise and uncertainty could weigh on sentiment in the near-term. Both unveiled plans to cut taxes to woo voters in the run-up to the vote, boding well for consumption going forward; however, the Labor party’s pledge to also outspend the Coalition could lead to some additional short-lived fiscal stimulus if it does clinch the election.
The ALP outlined their main policy objectives in response to the government’s 2019 budget, offering the electorate lower taxes for low- and middle-income earners; a pledge to outspend the Coalition on education and health; an unspecified increase in the minimum wage; and stricter environmental regulations. These proposals would provide a stronger short-term boost to consumer spending, but could also hurt the business environment and possibly translate into a fiscal deficit. Moreover, its calls to hike the minimum wage would put more money in the back pocket of low-income earners, but it could also affect job creation at a time when wage growth is gradually picking up following a prolonged period of subdued pay gains. The ALP’s proposal to scrap a favorable tax scheme for property investors would also likely further negatively affect the real estate market, which has suffered from notable price corrections since 2017 following a prolonged property boom.
The government unveiled its economic agenda in its pre-election budget released on 2 April. Most notably, these include tax cuts to low- and middle-income earners (tax breaks for high-income earners will only take effect in the future); more tax benefits for small businesses; increased spending on infrastructure and health; and a surplus budget for 2020. The Coalition’s package of measures would sustain growth in the short-term at the cost of a somewhat higher fiscal deficit in 2019, and would improve the business environment. Both Moody’s and S&P Global Ratings confirmed Australia’s AAA credit ratings after the government unveiled the Budget, highlighting the country’s solid fiscal position and the substantial fiscal consolidation carried out by the government.
Overall, the economic impact of the election should be quite limited. The economy could receive a boost in the short-term if the opposition Australian Labor Party does come out on top, but possibly at the cost of losing some investment attractiveness and rising costs for firms. Looking ahead, although both parties promise minor stimulus through tax breaks, growth is set to moderate in 2019 after having already softened notably since H2 2018. Despite some positive signs coming from the real estate market, a bulky household debt and falling house prices are still expected to restrain private consumption, while shrinking residential construction will weigh on fixed investment. That said, healthy export growth—chiefly thanks to LNG capacity coming online—and a solid labor market will buttress growth in Australia, which is now a remarkable 27 years without a recession.