Australia | Oct 15 2007
By Greg Peel
While the all-people polls indicate the election result is already a given, CommSec warns that winning elections is all about winning seats, and knocking off the Coalition’s 24-seat majority will be no mean feat. Indeed, it will require a 16-seat victory in order to win government. When the Labor party lost government in 1996 it held a 17-seat majority. When the coalition lost government in 1983 it held a 23-seat majority.
As the election campaign begins in earnest, analysts are pointing out the electorate has begun to wake up to anyway – the government does not control the global economy. Nor does it control domestic monetary policy, a point that may well be driven home hard by the RBA in November if the September quarter CPI prompts another rise in interest rates. That alone could sink the Coalition, if it’s not already sunk.
The government controls domestic fiscal policy, and that’s all. Indeed, CommSec suggests the economy will actually take a backseat role for voters after 17 years of economic growth, and the low inflation and low unemployment environment which now exists. On the fiscal side of things, both parties are committed to running budget surpluses, so there’s little to differentiate there. Wherever there are perceived positives, Labor is backing government policies. Labor differs only in policy areas where clearly many Australian voters are unhappy – particularly in industrial relations and the environment, housing affordability, employment training and broadband.
Given a lack of significant differentiation, commentators are not expecting any noticeable reaction from financial markets to a change of government. There is certainly not going to be any change in the rest of the world’s perception on the Australian economy, so no great impact for the Australian dollar or bonds. As for stock markets, history suggests no one much really cares.
CommSec notes in four of the last five elections the stock market was stronger three weeks after the poll date. The other occasion was actually the last change of government in 1996, when the market was down 3.2% three weeks after the poll, but that was put down to extraneous global influences. The previous time the market was down three weeks after a poll (1%) was again on the change of government in 1983. But if you’re looking for a pattern here, the changes of government in 1972 and 1975 were met with stock market increases of 2.2% and 3.8%. The Whitlam era was probably the last time the two major parties could be undeniably differentiated, yet the stock market still did not seem to react as if this was important.
Nor has there been any specific pattern in the movement of the Aussie dollar after an election, noting that it wasn’t floated until after the ’83 change of government.
Which brings us back to fiscal initiatives, and we don’t yet know just what sort of cheque books might be opened between now and election day. Although we have learnt about one little initiative this afternoon.
Like a tiger backed into a corner, the Coalition has lashed out. Today it announced $34 billion dollars of income tax cuts over three years, through both the reduction of tax rates and the increase of tax thresholds. Treasurer Costello suggested the budget would still remain in surplus by 1% of GDP after the cuts, and that 65,000 new jobs would be created.
Interestingly, TD Securities’ Stephen Koukouklas, in his election assessment this morning, suggested if there were one thing that could have a noticeable impact on markets as a result of election promises it would be tax cuts. Tax cuts are inflationary, providing more money in the pocket to be spent on more “things”, thus pushing the price of “things” up. This can thus force the RBA’s hand, as was the case following the last tax cuts in the 2006 budget.
But Kevin Rudd has the same kitty from which to draw, and we’re yet to learn of Labor’s tax policy. Supply side economics may tend to be the preserve of conservative parties, but this usually means lowering the tax on the rich as an incentive. Howard wants to lower the tax for everyone, particularly to benefit the lower and middle income earners, so Keynes wouldn’t be too upset either. Labor could quite easily do the same.
When it’s all said and done, Australia has had about a year to figure out Labor is looking a good chance for victory. Indeed the only “shock” poll result would be a Coalition victory, and the stock market and Aussie hardly seem too fussed. The jury is still out on Work Choices, meaning this particular point of difference between parties (and potential election turner) is still not all that cut and dried either. Are workers better or worse off? Are businesses better or worse off? Either way, Labor will not dismantle Work Choices on day one.
The global economy is driving Australia. Whoever is driving the government has little control over the rest of the world.