Polls point to a close outcome

Labor has been trailing in two party preferred polling averages although the gap appears to 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. 

Elections, the economy and markets in the short term 

There is anecdotal evidence that election campaigns cause some spending to be put on hold. However, hard evidence is mixed, with election years since 1980 seeing average economic growth of 3.3% per annum, above the 3.1% per annum average over the whole period.  

In terms of the Australian sharemarket, there is some evidence of it tracking sideways ahead of elections, 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 global financial crisis, or GFC), and the periods around the elections, which saw a change of government.

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 and historically moves in global shares played a bigger role. 

The next table shows that 10 out of the 15 elections since 1983 saw shares up three months later with an average 4.2% gain.

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 and historically moves in global shares played a bigger role. 

The next table shows that 10 out of the 15 elections since 1983 saw shares up three months later with an average 4.2% gain.

Australian shares before and after elections

Based on All Ords price index. Source: Bloomberg, AMP

Shares under Coalition & ALP governments

Over the post-WW2 period, shares have returned 12.9% per annum under Coalition governments and 9.7% per annum 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% per annum.

Once in government, political parties are usually forced to adopt at least half sensible policies to ensure rising living standards. 

Challenges for the next government 

• Boost productivity to boost living standards – the ‘cost of living’ is voters’ key concern in AMP’s opinion. 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. AMP believes the key is to boost poor productivity, which is the main driver of real wage growth. This requires tax reform, deregulation, competition reform, improving education, etc.

Source: ABS, AMP

In AMP’s opinion, a good place to start would be to cap public spending as a share of GDP as it’s been exploding and crowding out private sector activity. 

Source: ABS, AMP

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

• Get the budget under control – the Labor Government has been lucky with a nearly $200 billion revenue windfall over the last two years thanks to a strong jobs market, high commodity prices and bracket creep enabling modest surpluses. But much of this has been spent, with a 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. In AMP’s view, Australia 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; more 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. 

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). And this was before another round of electricity bill relief and extra disaster spending flowing from ex-Cyclone Alfred.  

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 in AMP’s opinion.

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. In AMP’s opinion, that’s hardly consistent with ‘Budget Honesty’.

Although 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 levelling with the public in terms of the need for spending restraint and reforms. 

Conclusion

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 wins 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.