What Labor’s Win Means for Australia

For just the fourth time since WWII, Australia voted for the Labor Party to take over the government. However, Australians don’t anticipate much from Prime Minister Anthony Albanese’s young administration. That’s by design.

Albanese and Labor followed a standard playbook for an opposition party win. They basically said they wouldn’t make any sweeping changes from the incumbent Liberals but promised to govern more competently than now-former Prime Minister Scott Morrison’s administration. In past elections, labor learned the hard way not to run on sweeping change.

A Narrow Victory for Labor

Still, the 2022 election was an extremely narrow victory for Labor. The sum of its number one votes was about 32.5%, the lowest for a winning party in more than 100 years. It’s clear from this election that the Australian public has turned away from the two traditional major parties to a greater extent than at any time in the country’s experience as a democracy.

Labor barely achieved a majority, which requires at least 76 seats in the 151-member house of representatives. They earned 77.

The other significant development of this election was the large increase in the size of the cross-bench. Four Green MPs and 12 other minor or independent MPs will be in the new Parliament. The government won’t need their votes to pass legislation through the House of Representatives, but it is nonetheless likely to want to establish cooperative relationships with most of them.

Labor will likely need the support of the Greens and other minor parties or independent senators to pass legislation through the Upper House. The Greens will have 12 senators, one short of the number that would have given them a “balance of power” in the Senate in their own right, but they will still wield a major influence on the fate of legislation whenever the coalition decides to oppose it.

Labor’s Mandates

Despite the low expectations for Labor’s first term, it does have limited mandates to work on policy changes. The new government will pursue more ambitious carbon emissions reduction targets and investments in transmission infrastructure.

Labor will also push for increased spending on pay increases for workers in aged care. It’ll establish an off-budget social housing fund that will build around 20,000 new social housing dwellings and 10,000 so-called affordable housing dwellings for people on modest incomes in expensive areas.

It has a mandate for more spending to increase the availability and reduce the cost of childcare for a larger proportion of the population.

Australians should also expect more spending on broadband from Labor and the creation of additional technical and further education programs (TAFE) and free university places.

The only tax measure it has a mandate for is a crackdown on multinational corporations for their interest deductions and intellectual property royalty payments, which many multinationals use to shift profits made in Australia to low-tax jurisdictions in other parts of the world.

It’s fair to say that Labor will support bigger increases in the minimum wage at Fair Work Commission hearings. Ultimately that’s a matter for the Fair Work Commission and not the government, but Fair Work does consider the submissions made to it by governments.

Labor’s Lack of Mandates

Labor doesn’t have a mandate for anything that would improve Australia’s woeful labor productivity growth record. Over the past 10 years things haven’t looked good in this department, and Labor’s contributions at the margin — things like their childcare policy — may make a small, positive impact on productivity. Still, it’s not going to make significant inroads into the problem.

Nor does the government have any substantial mandate for sweeping “budget repair.” In fact, Labor’s pre-election costings indicated that its policies would increase the budget deficit by some $7 billion over four years. Budget repair isn’t an urgent issue if interest rates remain low, but it will become more pressing as interest rates continue to rise.

If Australia ever wants to be in a position where it can use fiscal policy as forcefully in response to the next shock, as it did in response to the global financial crisis of 2007 to 2009, and more recently to COVID, then the budget needs to be in better shape than it is or likely to be on current forecasts.

Labor also will have to come to terms with the consequences of the ongoing long-term or structural slowdown in the Chinese economy, which is Australia’s principal trading partner.  China has enjoyed annual growth rates of more than 10% per annum for three decades up to the onset of the global financial crisis, but its growth rate has slowed to about 5% over the past decade. It will likely drop further to 3% to 4% per annum over the next few years. Not to mention that the relationship between the two countries is currently icy. India and Indonesia, two massive regional players, also require attention.

Inheriting a Relatively Strong Economy

That said, the incoming government does inherit an economy with quite a considerable head of steam despite inflation fears. The Australian central bank’s most recent statement on monetary policy forecasts that household spending will rise by 5% or more in real terms this year.

That’s a big increase by historical standards and inconsistent with the idea that most households are “struggling” with increases in groceries and petrol costs (although those on low incomes undoubtedly are). In aggregate, households have racked up an additional $275 billion in bank deposits since February 2020. Those deposits are not evenly distributed across all Australian households, but it suggests that many households have considerable resources on which they can draw to maintain spending despite having to shell out more on fuel and groceries.

To be sure, Labor faces enormous political challenges, but the headwinds for its first term are favorable. It’s almost guaranteed that it will win a second term. History is on its side: no first-term government at the federal level has failed to win a second term since 1931.

But voters will expect action in a second term, and Labor could lay the groundwork now for a more ambitious second-term mandate by commissioning inquiries into the more contentious challenges that the nation faces over the medium term. If given well-crafted terms of reference and run by competent people, the government could use their findings and recommendations to put together a broader and deeper agenda for the election due in 2025.

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Read Saul Eslake’s earlier GLG article, Australia Economic Outlook 2022.

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About Saul Eslake

Saul Eslake is one of Australia’s most prominent and experienced business economists with over 30 years’ experience in the Australian financial markets. He currently runs his own independent economics advisory and consulting business in Tasmania (Corinna Economic Advisory Pty Ltd). Since April 2016, Saul has also had a ‘‘fractional appointment’’ as a Vice-Chancellor’s Fellow at the University of Tasmania. Saul previously was Chief Economist at ANZ Banking Group and also at Bank of America Merrill Lynch, one of the world’s largest investment banks.

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This article is adapted from an April 3, 2022, GLG Roundtable, “Australia’s 2022 Federal Election: Post-Election Economic & Policy Outlook.” If you would like access to this teleconference or would like to speak with Saul Eslake or any of our more than 700,000 experts, contact us.