Albanese landslide offers rare chance to fix Australia’s economy, experts say

SYDNEY – Prime Minister Anthony Albanese shocked Australia by securing a

historic win in the election

on May 3.

Now the question is whether he will use that mandate to push through tough measures to overhaul the nation’s economy.

For years, previous administrations have shied away from tackling politically difficult issues such as removing tax incentives for investment property and cutting red tape to improve housing supply.

After winning a majority in Parliament with the strongest mandate since World War II, Mr Albanese’s centre-left government now has the best chance in years to take the hard steps economists have called for to ignite growth.

The need to act is becoming more urgent as key pillars that drove Australia’s expansion in the past few decades start to unravel, including China’s massive demand for minerals.

S&P Global Ratings warned in April that Australia’s prized AAA sovereign rating is at risk if election campaign pledges result in larger structural deficits, debt and interest costs.

“The strong result means they are almost certain to get a third term and can have more confidence implementing reform policies that may be less popular initially but will produce longer-term benefits,” said Dr Jonathan Kearns, previously a senior official at the Reserve Bank of Australia and now chief economist at money manager Challenger. 

“They know where to start,” he said, citing a number of past reviews of the tax system and productivity performance that are still “lying on the shelf”.

Whether Mr Albanese will take action, however, is unclear. For now, officials are focused on more immediate threats, such as housing costs and economic turmoil triggered by US President Donald Trump’s global trade war.

The Australian dollar held at a five-month high following Labor’s landslide win on May 3. Money markets are still pricing an interest rate cut in about two weeks’ time and see at least three more quarter-point reductions after that.

In an interview with Australian Broadcasting Corp on May 4, Treasurer Jim Chalmers said the government remains “ambitious” but warned that any major reform agenda will be tempered by the fact that “nobody will control the Senate”, or the Upper House of Parliament.

There, Labor will need the support of the opposition or minor parties to pass legislation.

“We know the global environment is uncertain, and we know that the second term has been given to us by the Australian people because they want stability in uncertain times,” Dr Chalmers said.

Mr Albanese’s government had struggled during its first term with headwinds such as sticky inflation, high interest rates and a housing crunch that has fuelled record prices.

Economic output per person declined for seven consecutive quarters through 2023 and much of 2024, a sign of falling living standards.

The government sought to soothe those concerns with additional tax cuts and rebates in a pre-election budget in March, measures that analysts say provided only a short-term sugar hit to the economy. 

“Significant economic reforms doesn’t seem to be a part of their agenda,” Ms Diana Mousina, deputy chief economist at AMP. “And the budget position does make them a little bit constrained.”

On taxes, the last major reform, a 10 per cent goods and services tax, was implemented by a centre-right government a generation ago in July 2000.

Since then, there have been attempts at change, including a mining tax in July 2012 implemented by Labor.

However, that was repealed two years later after a massive campaign against it by resource companies followed by a change of government.

Since the mining tax, both sides have shied away from attempting further reform. While more thoughtful members of the ruling Labor party and opposition Liberal-National Coalition acknowledge that the current mix is not sustainable, there have been no major attempts to tackle it because it is so easy to mount a political campaign against it.

At the heart of the problem is how Australia raises revenue. It relies much more heavily on individuals’ income tax than other developed world countries.

A frequent suggestion, including from groups like the Organisation for Economic Cooperation and Development, is that Australia should increase the revenue it generates from indirect taxes like the GST, and cut income taxes to boost incentives.

Australia is struggling to keep budget pressures under control. The government has a massive welfare programme including free healthcare and disability services, and is providing cost-of-living relief to consumers, like energy bill subsidies and rental support. 

“We anticipate Australian yields to rise across the curve but more so at the long end,” said Mr Prashant Newnaha, a senior Asia-Pacific rate strategist at TD Securities.

“Labor’s resounding victory reinforces bigger government and larger deficits are here to stay.”

Government spending has surged since the Covid-19 pandemic to record highs, and is forecast to reach about 26 per cent to 27 per cent of annual gross domestic product over the three years to June 2028.

This compares with a long-term benchmark of 22.5 per cent. In contrast, total revenue is forecast at around 25 per cent of GDP in the period, leading to structural deficits. 

Bloomberg Economics analyst James McIntyre said: “Australia’s election outcome has the potential to deliver a boost to confidence, (while) policy continuity could bolster the prospective upswing in non-mining business investment, and drive a pickup in the housing market.”

For now, economists, including those at Goldman Sachs Group, say they are leaving their forecasts for the fiscal impulse, GDP growth and interest rates unchanged.

They expect the central bank to cut its key rate later in May to 3.85 per cent, with a further two cuts likely by December, according to a Bloomberg survey. 

Falling rates may give the government some fiscal flexibility for wider reform, said Ms Eliza Owen, chief economist at property consultancy Cotality. 

“It’s early days, but the election night address from the Prime Minister indicated a departure from culture wars and identity politics, and a focus on the fundamental concerns for households, such as housing, education, healthcare and childcare,” Ms Owen added. BLOOMBERG