Albanese Landslide Offers Rare Chance to Fix Australia’s Economy

Article content

The government sought to soothe those concerns with additional tax cuts and rebates in a pre-election budget in March, measures that analysts say provided only a short-term sugar hit to the economy. 

Article content

“Significant economic reforms doesn’t seem to be a part of their agenda,” Diana Mousina, deputy chief economist at AMP Ltd. “And the budget position does make them a little bit constrained.”

Article content

On taxes, the last major reform, a 10% goods and services tax, was implemented by a center-right government a generation ago in July 2000. Since then, there have been attempts at change, including a mining tax in July 2012 implemented by Labor. However, that was repealed two years later after a massive campaign against it by resource companies followed by a change of government.

Article content

Since the mining tax, both sides have shied away from attempting further reform. While more thoughtful members of the ruling Labor party and opposition Liberal-National Coalition acknowledge the current mix isn’t sustainable, there have been no major attempts to tackle it because it’s so easy to mount a political campaign against it.

Article content

Article content

At the heart of the problem is how Australia raises revenue. It relies much more heavily on individuals’ income tax than other developed world countries. A frequent suggestion, including from groups like the OECD, is that Australia should increase the revenue it generates from indirect taxes like the goods and services tax, and cut income taxes to boost incentives.

Article content

Australia is struggling to keep budget pressures under control. The government has a massive welfare program including free health care and disability services, and is providing cost-of-living relief to consumers, like energy bill subsidies and rental support. 

Article content

“We anticipate Australian yields to rise across the curve but more so at the long end,” said Prashant Newnaha, a senior Asia-Pacific rate strategist at TD Securities. “Labor’s resounding victory reinforces bigger government and larger deficits are here to stay.”

Article content

Government spending has surged since the pandemic to record highs, and is forecast to reach about 26-27% of annual gross domestic product over the three years to June 2028. That compares with a long-term benchmark of 22.5%. In contrast, total revenue is forecast at around 25% of GDP in the period, leading to structural deficits. 

Article content

Article content

What Bloomberg Economics Says

Article content

“Australia’s election outcome has the potential to deliver a boost to confidence,” while “policy continuity could bolster the prospective upswing in non-mining business investment, and drive a pickup in the housing market.”

Article content

James McIntyre, economist

Article content

For the full report, click here

Article content

For now, economists, including those at Goldman Sachs Group Inc., say they’re leaving their forecasts for the fiscal impulse, GDP growth and interest rates unchanged. They expect the central bank to cut its key rate later this month to 3.85%, with a further two cuts likely by December, according to a Bloomberg survey. 

Article content

Falling rates may give the government some fiscal flexibility for wider reform, said Eliza Owen, chief economist at property consultancy Cotality. 

Article content

“It’s early days, but the election-night address from the prime minister indicated a departure from culture wars and identity politics, and a focus on the fundamental concerns for households, such as housing, education, health care and child care,” Owen added. 

Article content