What to expect from Australian economy as new government takes charge?

Highlights

• Many economic adversities have shaped up during the Coalition’s political run, fuelling heavy criticism for the party.
• Labor’s planned policy setup and reforms are expected to increase government spending, expanding the already concerning deficit level.
• Treasurer Jim Chalmers would face the challenge of boosting economic growth at a time of high inflation and low wage growth.

The newly elected Labor government is expected to traverse through a series of pressing challenges left untreated by the previous ruling party. Though the Coalition cannot be solely blamed for the current economic scenario, many economic adversities have shaped up during its tenure. Inflationary pressures, painfully slow wages growth and a tightening labour market are some of the concerning factors facing the new government.

On the brighter side of things, the unemployment rate is at an all-time low of 3.9%, increasing the prospects of wage hikes in the future. While there is not enough labour force available to fill the vacant positions, demand for labour is soaring. However, this relatively comforting factor falls flat compared to the other issues plaguing the economy.

On a broader scale, the national debt is also piling up in an overstimulated economy. The election results arrived just a few days after the central bank announced its first interest rate hike. Thus, the present government has come into power at a transitory phase, which requires more proactive measures from the ruling government.

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Spending likely to remain high

The Labor party has introduced a generous set of reforms targeted at the vulnerable sections of society. The ongoing inflation is a key factor affecting households in the present context, making it one of the major areas of policy reforms. Some of the reforms promised by Labor include a reduction in taxes, construction of more houses and attention to childcare and aged care.

However, these policy reforms could increase government spending in the coming months. For an economy with a high level of debt, higher spending could bring further turmoil to the ruling party. Though most of the inflationary pressures have risen out of global factors, the previous government was criticised for its handling of rising living costs. Now, it would be interesting to see how the new government will handle the increasing cost-of-living pressures.

Some of the proposed measures by the Anthony Albanese led party include a commitment to support an increase in minimum wages by 5.1%, which is the same pace at which inflation is rising. However, Albanese later clarified that the policy would only be introduced for those living on minimum wages. According to Labor, these measures could further widen the budget deficit and add AU$7.4 billion to the deficit over the next four years. However, they believe that these measures will also increase productive capacity.

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Heavy responsibility on new Treasurer’s shoulders

Jim Chalmers will be taking over the position of Treasurer, with the large responsibility of reviving the economy on his shoulders. Treasurer Chalmers has stated that he has been observing the trickiest economic conditions since World War 2. Apart from domestic issues, another economic adversity that must be addressed is the worsening trade relation with China.

Experts believe that Chalmers’ experience as the advisor to Wayne Swan, who served as Treasurer during the 2007-2013 Labor government, might be helpful in his upcoming run. This is because the economic climate during the 2007-2013 period was also marked by a change in monetary policy, much like the present scenario.

The new Treasurer would be dealing with an economy that is gradually slowing down and, at the same time, has a monetary stimulus beyond the required limit. Thus, the role of the Treasurer now involves re-aligning the relationship between wages and inflation as well as the relationship between economic growth and inflation. At the same time, boosting domestic wages in a highly volatile environment is a daunting task.

A further surge in wages could increase the pre-existing stimulus, giving rise to higher inflation. However, Labor has associated itself with protecting the interests of the workforce. Thus, the party might have to pay special attention to its promises of promoting wages. The overall picture will become clearer once various factors affecting the domestic economy become clearer.

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