Labor's Return: Implications for Markets and Policy
Despite the “cost of living crisis,” Labor has secured a landslide victory—its biggest seat margin over the opposition since 1977. This outcome defied early-year polls showing the Coalition gaining ground. However, global political dynamics, notably chaos from President Trump, appear to have tilted sentiment toward centrist incumbents—first in Canada, now in Australia. Domestically, Labor ran a more disciplined and coherent campaign, offering clear policy contrasts to a muddled Coalition platform, encouraging voters to stay with the familiar.
Market and Policy Implications
With Labor’s return largely anticipated by recent polling (though not the scale), the result isn’t expected to move markets significantly. The budget trajectory and policy outlook remain mostly unchanged, keeping shares, the Australian dollar, and bond yields steady—short-term movements remain more sensitive to global factors like Trump’s trade agenda. However, increased fiscal spending may nudge interest rates slightly higher than otherwise.
Key Policy Continuity
Labor’s economic agenda holds no major surprises:
Housing: First home buyers benefit from a 5% deposit threshold and the new Help to Buy Scheme. Supply-side efforts include building 1.2 million homes over five years—though demand-side effects may dominate near-term, lifting prices.
Taxation: Modest, already-legislated tax cuts and a $1,000 annual deduction will slightly lift household incomes.
Energy: Rebate extensions and subsidies for batteries support a renewable electricity target of 82% by 2030—positive for clean energy investors, albeit with transition risks.
Migration: Forecasted to slow to 260,000 in 2025–26, and 225,000 annually thereafter, easing housing demand while sustaining growth.
Budget: Despite a $35bn fiscal easing announced in March, recent data suggests the 2024–25 deficit could undercut the $28bn projection due to revenue strength. However, structural deficits will persist through the decade.
Historical Context: Elections and Equity Markets
Since 1983, Australian shares have risen three months post-election in 10 out of 15 cases, averaging a 4.2% gain—thanks to reduced uncertainty. While Coalition governments have historically posted better equity returns, the reformist Hawke/Keating era delivered the strongest post-WWII gains, signaling the potential rewards of bold economic management.
Challenges Facing Labor
Both major parties ran lackluster campaigns filled with short-term promises and limited long-term vision. Labor now faces four core economic challenges:
Boosting Productivity: Real household incomes have stagnated—wages up 15% since 2020, prices up 20%. Productivity growth (output per hour worked) must rise to support real wage gains. This demands comprehensive reforms: tax (e.g., GST and land tax shifts), deregulation, education, health efficiency, and restrained public spending. Encouragingly, the Treasurer appears to recognize this imperative.
Improving Housing Affordability: Long-term deterioration continues. The solution lies in aggressively expanding supply and improving regional connectivity for urban commuting.
Restoring Budget Discipline: A $350bn revenue windfall masks unsustainable spending across NDIS, healthcare, defence, and interest payments. Deficits are returning despite strong revenues, making restraint and structural reform critical.
Fortifying Against Global Shocks: Trump’s disruption of global trade highlights the need for economic resilience—again circling back to productivity and reform.
A downgrade of Australia’s AAA credit rating remains unlikely for now, but risks persist, especially if revenues falter. The growing use of off-budget funding clouds fiscal transparency—reviving a Hawke/Keating-style commitment to spending caps and budget honesty could restore credibility.
Outlook: Stability or Missed Opportunity?
The electorate appears to have endorsed centrist continuity. Yet, with an expanded mandate, Labor could pursue more ambitious reforms—perhaps spurred by an external shock, as in the 1980s. Conversely, pressure from Greens in the Senate could steer the government down a riskier, less market-friendly path, though the Prime Minister is likely wary of such a pivot.
More to come.
Rick Maggi, Financial Advisor Perth, Westmount Financial