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The 2025 Australian Federal election – implications for investors

While anticipation of devastation from Cyclone Alfred saw the PM ditch plans to call an election for 12th April, we are effectively in an election campaign with the Government announcing numerous spending promises since January and the Coalition often matching them. And with the election due by 17 May, this will ramp up with the now to be held budget in two weeks. Budgets are often tedious affairs loaded with politics but are more so when they are just ahead of elections. Policy uncertainty going into the election is low, but this belies the challenges facing Australia.

Polls point to a close outcome

Labor has been trailing in two party preferred polling averages although the gap may be narrowing. Current polling suggests both parties may struggle to get a 76-seat majority raising the prospect of a hung parliament and minority government. The ALP has 78 seats and could easily lose three, whereas the LNP gaining the 22 seats needed to win is a big ask.


Source: Polls as indicated, AMP

Elections, the economy and markets in the short term

There is anecdotal evidence that election campaigns cause households and businesses to put some spending on hold. However, hard evidence is mixed with election years since 1980 seeing average economic growth of 3.3% pa, greater than the 3.1% pa average over the whole period.

In terms of the share market, there is some evidence of it tracking sideways ahead of elections, possibly reflecting uncertainty and then a relief rally once it’s over. The next chart shows Australian shares around elections since 1983. This is shown as an average for all elections (but excluding the 1987 and 2007 elections given the 1987 share crash and the GFC), and the periods around the 1983, 2007 and 2022 elections, which saw a change to Labor, and 1996 and 2013, which saw a change to the Coalition.


Elections which saw a change of government are highlighted. Source: Reuters, Bloomberg, AMP

However, elections resulting in a change of government have seen a mixed picture. Shares rose sharply after the 1983 Labor win but fell after their 2007 and 2022 wins. After the 1996 and 2013 Coalition wins shares were flat to down. So based on history it’s not obvious that a victory by any one party is best for shares & historically moves in global shares played a bigger role than the election. The next table shows that 10 out of the 15 elections since 1983 saw shares up 3 months later with an average 4.2% gain.

On average, over elections since 1983 the Australian dollar has drifted sideways to down before and after elections, but it’s very messy.

Shares and property under Coalition and ALP governments

Over the post-WW2 period shares have returned (capital growth plus dividends) 12.9% pa under Coalition governments and 9.7% pa under Labor. Labor governments led by Whitlam and Rudd/Gillard had the misfortune of severe global bear markets. And the reformist Hawke/Keating government defied perceptions that conservative governments are better for shares with shares returning 17.2% pa.

Looking at the Australian residential property market, using CoreLogic data since 1980, capital city property prices have risen 7.7% pa under Coalition governments and 4.3% pa under Labor. That said, policies with respect to housing have not been particularly different under both sides of politics.

Once in government, political parties are usually forced to adopt at least half sensible policies if they wish to ensure rising living standards and arguably there has been broad consensus in recent decades regarding key macro-economic fundamentals – eg, low inflation and mostly free markets.

Challenges for the next government

Boost productivity to boost living standards – the ‘cost of living’ is voters’ key concern. It’s reflected in a 10% fall in real household disposable income per person - which reflects wages (+11% over the last 3 years) not keeping up with prices (+15%) and a surge in tax and interest payments – and a broader stagnation in real incomes over the last decade. The key is to boost poor productivity, which is the main driver of decent real wage growth. This requires tax reform, deregulation, competition reform, improving education, etc.


Source: ABS, AMP

A good place to start would be to cap public spending as a share of GDP as it’s been exploding and crowding out somewhat more productive private sector activity.


Source: ABS, AMP

Improve housing affordability – this is voters’ number two concern. It’s been deteriorating for decades, impacting productivity and equity.

Get the budget under control – the Labor Government has been lucky with a nearly $200 billion revenue windfall on the back of a strong jobs market, high commodity prices and bracket creep enabling modest surpluses. But much of this has been spent contributing to the surge in public spending leading to higher than otherwise inflation and interest rates. Structural spending pressures around the NDIS, health, aged care, defence and public debt interest are now taking the budget back into deficit when public debt is already high. They need to be checked and/or offset by savings elsewhere. So tough decisions will be needed as we can’t just keep relying on an ever-higher tax burden on Millennials and Gen Z to pay for things.

Survive Trump – his erratic policy making risks: US and global recession; direct tariffs on our exports; less demand for our exports; increased geopolitical threats; pressure for Australia to deregulate and cut taxes; and big pressure to ramp up defence spending from 2% to 3% of GDP. This means making the economy as strong as it can be - so driving a bigger pie should be the key focus.

Economic policy differences

The ALP is offering a continuation of bigger government, a higher tax share to eventually balance the budget, industry policy like “Future Made in Australia” and more regulation. Since the start of the year the Government has promised an extra $35 billion in spending over the next four years (on Medicare, urgent care clinics, roads, the NBN, public schools, the Whyalla steelworks nationalisation, etc). More is likely in the Budget with another round of $300 per household electricity bill relief costing $3.5 billion (without which average electricity bills could rise 25%). And this is before allowing for extra disaster spending flowing from the damage cause by ex-Cyclone Alfred (note the 2022 East Coast floods cost the budget around $7 billion).

The Coalition has committed to matching much of this. But it also promises smaller government, an up to 36,000 cutback in public workers saving $6 billion, lower taxes and less regulation. But - beyond committing to nuclear energy over wind, solar and batteries - its policy details are so far lacking.

Both sides of politics also seem committed to big use of off-budget funding e.g. with Labor’s promise to wipe 20% off student debt and the Coalition looking to use it for its nuclear power stations. But this is just a sleight of hand as while it doesn’t show up in the budget deficit it adds to public debt. Hardly consistent with “Budget Honesty”. The Coalition’s nuclear policy is also a huge return to public ownership of the power industry which is contrary to its small government philosophy.

While the Coalition is getting closer neither side is really committing to a reform agenda to put the economy on a stronger path (which is maybe too much to expect in an election) but both sides should at least be leveling with the public in terms of the need for spending restraint and reforms. Much like Hawke/Keating did a generation ago.

On housing, both sides are now rightly more focussed on boosting supply. The Labor Government is focussed on trying to build 1.2 million new homes under the Housing Accord. The Coalition promises to invest $5 billion in housing infrastructure and cut permanent migration by 25% but its policy to allow first home buyers to access $50,000 of their super will just boost home prices – great for Baby Boomers and Gen X but not much else.

Concluding comment

The relatively modest difference in economic policies between the Coalition and Labor suggests minimal impact on investment markets if there is a change of government. Trump bumps will likely continue to dominate. The main risk for investment markets may come if neither side win enough seats to govern, forcing a reliance on minor parties or independents, further delaying productivity reforms and in the case of a minority Labor government forcing it down a less business friendly path.

 

Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs.

 

12 Comments
Stephen
March 14, 2025

"The main risk for investment markets may come if neither side win enough seats to govern, forcing a reliance on minor parties or independents, further delaying productivity reforms and in the case of a minority Labor government forcing it down a less business friendly path."

Really? Let's look at the facts.

The Government already negotiates in the Senate to pass legislation. Often the Government has negotiated with or agreed to amendments from the centrist Senators (Pocock, Lambie) to pass legislation. This will continue. Neither Labor or the LNP will have a majority in the next Senate.

However, who governs will be determined in the House of Representatives. Most of the Independents likely to be elected in that House are Teals, who are to the "right" of Labor on economic issues. It follows that if the Teal Independents hold the balance of power in the case of a minority Labor Government that Government would be more business friendly than a majority Labor Government. If they hold the balance of power in the case of a LNP minority Government they would shift governance to the centre.

Secondly, the Teal Independents have spoken of the need for a full review of all taxation settings, longer term policies to address climate change, measures to address the housing shortage, and other issues the major parties have failed to address.

If the Teal Independents hold the balance of power in either a minority Labor or LNP Government we will see much more measured centrist long term thinking and policies than if a majority Labor or LNP Government held power alone.

Trevor
March 14, 2025

I understand the Teals have a policy to eliminate/ reduce bracket creep. Why didn’t the LNP think of that one I wonder.

However I’m not sure if they’ve said what spending they’d cut or what new taxes they’d raise to make up the shortfall.

Former Treasury policy maker
March 15, 2025

The LNP didn't think of it because it's not good politics. Apart from perhaps when it first gets introduced, but thereafter it simply means that delivering tax cuts becomes much harder. It's automatically done every year! When that happens, though, no one notices so there are no votes in it.

Which means the LNP has thought of it, but because they're an existing party, not a group of newbies trying to make a name for themselves, they've dismissed it.

I also happen to think that it's bad policy. Is it any wonder the American budget deficit is so hard to rein in when the fiscal benefits of bracket creep are automatically taken out? Trump wants to give tax cuts, but can't do it without finding some other form of revenue to pay for them. (That's one of the reasons for his dumb and dumber view of tariffs as a godsend.) No, it's far better to intentionally craft specific tax bracket changes from time to time when the budget position can afford to give them than to have some pre-determined formula that becomes a fiscal millstone around the government's neck.

Trevor
March 15, 2025

Good politics for the Teals though!
They can run on a lower taxes platform.

Isn’t the LNP supposed to be the lower tax alternative?

Another nail in the LNP coffin.

Disgruntled
March 15, 2025

We need to move away from income taxes and look to other ways of raising revenue.

Bakker
March 16, 2025

Totally disagree, you have only to look at the shambolic Gillard led minority Gov. to see the impact on a minority led administration.
,Also both parties have conditioned the electorate to an expectation of “handouts and cash splashing” without addressing productivity ..Add to that a very difficult but crucial discussion with voter land on defence spending.
So the last thing you would want is a government having to pander to all sorts of minority pressures while being pulled in many different directions catering for all but achieving nothing.
No one is saying that Labor or The Coalition are perfect, however the voters will need to really think through how they want this country to be governed particularly when allocating their preference vote.

Stephen
March 16, 2025

Bakker, you write of the influence of minority interests in the case of a minority government.

Just consider the influence of various groups such as the gambling lobby, banking, property development and the minerals sector on Labor and LNP majority governments.

That’s what I’d call minority interest group pressure. The major parties have been pandering to these for years to Australia’s great detriment.

Pete K
March 16, 2025

Strongly agree with you Stephen. I'm supporting a Teal independent in our regional (currently safe Liberal) WA seat. Her policy settings are very close to what you've said, and these have been formed by community consultation.
The Teals (and to some extent Labor) are succeeding because the Libs have moved too far to the right. Even a sniff of Trump-like policies is too much for me. Yes, I'd like to see government spending reined in a bit, but I'd prefer what we currently have to an Elon Musk in charge of "government efficiency" and the inevitable massive cost blow-out and inevitable delays of Nukes.
The current federal government has a stronger team, more experience and dare I say the finesse to better deal with the current global turmoil. Would anyone like to guess "How good is America?" if Scomo replaces Kevin Rudd as US Ambassador?

Dave Roberts
March 14, 2025

The main driver of productivity is business investment. Businesses seem to have been on a productivity strike for the last decade.

Richard W
March 18, 2025

Business investment to reduce the influence of union labour is the key to productivity but it costs jobs, enables business to get tax concessions and the Left then hammer them and unions protest. Our labour productivity is pathetic. Just look at and building or construction site.

John Wilson
March 14, 2025

Shane, thank you for this paper. Productivity gains are key to everyone's welfare and standard of living. How to achieve?
The gains in late 1980s to early 2000s were driven by globalisation of trade - produce what we do well, import what we don't do well, removal of tariffs etc, and control of government expenditure to take advantage of greater efficiency in the private sector. There have been some adverse results of that increased trade: simplification of our economy, loss of self-reliance (such as our Covid reliance on overseas medical supplies) and short-sighted subservience to overseas hegemons.
What I would like to see are
- a thorough review of taxes including
* removal of bracket creep by indexing tax brackets and eliminating the nonsense of
fraudulent election claims of "tax reduction".
* capital gains tax using Keating's indexation rather than Costello's ridiculous discount
* GST on everything including food rather than Howard's nonsense with the Demorats
* tax on everything, including government handouts and pensions, with compensation for low
income earners.
- Reintroduction of Costello's cap on government revenue
- Introduction of 4 year terms of government to allow 2 years of actual government between the year of
delivery of promises and year of electioneering.
- Reduction of over-government and red tape. An incredible example is the increased cost and time to
build a house - driven largely by bureacrat arse-covering.
- Serious reconsideration of our excessive focus on woke issues. While we should protect minorities, I think we are paying excessive attention to ethnic, females, LGB etc. We need to consider them, but focus on the community as a whole. Australia is renowned for giving a fair go - that was shown up in the 1967 referendum voting 90% in favour of recognising aboriginals but the 2023 Voice referendum only voting 40% in favour of giving aboriginals a special place.

Doug Hill
March 13, 2025

A neat summary that shows the need for brave leadership!

 

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