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What Does The Election Result Mean For The Economy?

What Does The Election Result Mean For The Economy?

After more than a week of uncertainty the Australian Federal election has finally been declared in favour of the Coalition. It is set to be a turbulent few years for the Coalition, with a difficult Senate and according to economist Dr Andrew Charlton “the new government is inheriting some of their most challenging external conditions of any government in nearly two decades”. Dr Charlton is referring to the low rate of global growth (currently at 2.4%), which is as low as any time since the global financial crisis (GFC), and the fact that “Australians are already experiencing the lowest wages growth since records began, diabolically low company profits, a budget deficit that seems to be becoming a permanent feature of our national debate.” Economic reform is badly needed with the total Australian Government debt currently over $459 billion and growing fast. An uncertain and unpredictable Senate could be coming at a time when political bickering and idleness can least be afforded.

Economic Reform Is Needed

Economic reform is needed to help Australia grow. There are several areas which the Government will need to address in order to help build economic confidence.

Tax Reform

Australian tax-payers face one of the highest marginal tax rates in the world – we are in the top 10. Governments only seem to be increasing this rate. The top marginal tax rate is now at 50.5%, for those who do not have private health insurance and are hit with the deficit levy. The number of Australians facing this steep tax rate is only set to increase due to inflation and its net result of pushing tax payers up into the next tax bracket. The Government’s ‘Rethink’ discussion paper forecasts that in the years preceding 2024-25 the number of Australian taxpayers in the top two tax brackets will jump from 27% to 43%. The economic risk with a high tax policy is that it alters the responsiveness of the economy by reducing the incentive to work. It is not logical or fair to say to Australians that the harder you work and the more successful you are the more we will take. Reform is needed in this area to help stimulate growth in the economy and buoy consumer spending.

Company Tax Cuts

The Coalition has proposed a company tax cut. Of course this is applauded by big business as they stand to benefit, but everyday Australians are left wondering how it is fair the companies get a cut and they don’t. The statistics are that 4 in 5 Australians are employed in the private sector. The government argues that the country as a whole can benefit from large companies receiving a tax cut; this hinges on maintaining business confidence by incentivising companies to continue to invest and create jobs. Other countries such as Switzerland (with a company tax rate of 8.5%), Singapore (17%) and the UK (20%) have implemented similar strategies with the purpose of encouraging investment, leading to more jobs and overall more prosperity. For this reason, James Pearson, chief executive of the Australian Chamber of Commerce and Industry, has recommended the senate pass the Coalitions tax cut proposals. He states that is would “encourage investment and create jobs” and “should be legislated as soon as the next government returns to parliament”.

Under the Coalitions plans, it would see the definition of “small business” changed from those with a yearly turnover of less than $2 million to those with less than $10 million. These business would then get a 1% cut to 27.5% this year, with more cuts planned over the next 10 years to reach a low of 25%. Labor supports tax cuts for business with a turnover of under $2 million but not the redefinition to under $10 million. The Greens do not support any of the Government’s plans. It is likely that the outcome of this will be decided by the minor parties in the upper house. With support possibly from the Nick Xenophon Team the reduction to 27.5% tax rate may pass. This is a start to lowering company tax, but the concern is it may not be enough to stimulate the economy and may see businesses divesting in Australia.

Australian Building & Construction Commission (ABCC)

A productive construction industry is imperative to the success of Australia. In terms of GDP, the building and construction industry is the second largest sector sitting at 8.8% and is the country’s 3rd largest employer. There have been numerous royal commissions into this industry and all have concluded that union activity is rife with corruption. The most recent royal commission concluded it contains “systemic corruption and unlawful conduct, including corrupt payments, physical and verbal violence, threats, intimidation, abuse of right of entry permits, secondary boycotts, breaches of fiduciary duty”.

With the Coalition win, it hopes to gain the votes it needs to re-establish the Australian Building and Construction Commission (ABCC). It’s anticipated the ABCC will improve productivity by focusing on the culture of the industry. If it is more productive then everybody wins as the upshot is lower construction costs for the consumer. The aim of the ABCC is to develop a healthier more productive industry, ensuring all parties (unions, employers and other industry bodies) comply with the law.

Australia’s Credit Rating

One of the leading concerns for the market is Australia’s AAA credit rating. It seems it is at risk if the new government and senate make budget reforms difficult. IPA Senior Fellow Dr Mikayla Novak notes that, “the credit ratings agencies have put Australia on notice, saying any budget blowout resulting from political negotiations with the cross benchers will risk us losing our AAA rating”. A direct consequence of this would be that the interest rates paid by the Government may increase by at least 0.25% which in real money terms would cost the tax payer at least $1 billion extra a year. This is close to a 10% increase in current repayments.

Australia GDP Graph

We are currently borrowing $88,000 a minute and this is not sustainable. Moving forward the Government needs to implement more fiscally responsible policies and initiatives which stimulate the economy. What we are currently doing is a disservice to our children. It is intergenerational theft; what we borrow today must be repaid in the future.

Conclusion

Economic reform is required for Australia to continue to prosper. If the economy continues to grow over the next 3 years, it will be the longest any country has gone without going into recession. The last time Australia had a recession was in the early 1990s. It seems however with the tight election result and the likelihood of a difficult Senate, it is the wrong time for political infighting. It is imperative that the political parties work together to implement real change in fiscal policy. Without economic reform it seems that our AAA rating may be lost, Government interest rates will increase, income tax rates will continue to rise and business may divest in Australia. This does not provide a positive outlook for economic growth.

Should you wish to discuss the election result will impact your investment and/or superannuation portfolio please contact Certified Financial Planner Elliot Watson on 0409 931 984.

The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.

Post Series: 2016 Election
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