The relief on the faces of many financial planners across the country was evident from the early evening on election night, when it became apparent that the widespread predictions of a Labor victory at the federal election were wrong. Those advisers with clients who have structured their financial plans around refundable franking credits probably wore the biggest grins as their clients would not be disadvantaged by the changes proposed by the unsuccessful opposition.
Proposed changes to capital gains tax and negative gearing will not come to pass, and there will be no reduction in the annual non-concessional contributions cap, which the Labor Party had proposed would be reduced from $100,000 to $75,000.
Palpable Relief Justified?
It would seem that many business and financial groups across Australia have breathed a sigh of relief over the election result and the share market enjoyed a $33 billion dollar jump in what the Murdoch papers have dubbed a “ScoMo surge” (would they call it anything else?). Meanwhile, it was left to more sober heads at the ABC, to point out what the Morgan Stanley strategy team analysis found when it looked at the stock market reactions to elections over the last 25 years. They found uncertainty and insecurity in the months leading up to polling day generally drags the ASX 200 down - however, on average, there is a significant relief rally immediately after. They went on to quote Escala Partners chief investment officer Giselle Roux, who said "while the market got terribly excited, particularly about the banks, that will calm down...Nothing has changed and it (market performance) will come down to fundamentals."
Regardless of any partisan reporting however, there can be little doubt there will be more stability in the economy, in the short term at least, because the uncertainty around Labor’s proposals will no longer have to be factored into proceedings.
Rosy Times Ahead?
Looking further ahead, there seem to be mixed messages regarding the future direction of the wider economy. Business groups, who had been buoyed by the possibility that the coalition’s tax cuts would increase consumer spending sooner rather than later, have taken on water with the news that some of the tax relief promised in the lead up to the election might be delayed. The $530 that was legislated in 2018 was to be supplemented with another $550, as slated in April’s budget, but the timing of the election has made this tax promise difficult to deliver. It will be "very unlikely" that Parliament can convene before June 30 in order to legislate the new income tax cuts for millions of workers that were “due” to take effect on July 1.
In positive news for the property market and lenders, APRA proposed removing the guidance that banks use an interest rate floor of 7 per cent, saying it would allow banks to set their own minimum assessment rates. Chairman Wayne Byres said “the changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards."
In other news, the reserve bank has flagged a potential cut to interest rates, saying without one, “unemployment across the country was unlikely to fall much further, inflation would remain low and workers would fail to enjoy sizeable wage increases.” This would also help out the struggling housing market, but as Stephen Bartholomeusz, writing in Fairfax reminds us, “Central banks don’t cut their policy rates when times are good, they lower them because they are concerned their economies are faltering.
As always, it remains to be seen, but let’s hope the coalition’s election win and the relief it has brought many, does not turn out to be a Pyrrhic victory as far as the Australian economy is concerned.