What directors can expect from Labor's next term in power

The incoming Labor government will be pushing for greater productivity from Australia’s economy during its next term in power.

As it unfolded, many observers judged the campaign for Australia’s 48th Parliament a fairly lacklustre affair. Yet if the campaign was bland, the result was anything but. Voters not only delivered a resounding Labor victory on 3 May, but also served up — for the first time since Federation — the loss of the opposition leader’s own seat. Moreover, the result delivered a swing to the government against the backdrop of an extended cost-of-living squeeze that, over the previous year, had seen voters eject incumbent administrations from office across much of the developed world.

Granted, and as highlighted in last month’s column, this economic narrative had already started to shift before election day. After a cumulative 425bp of monetary policy tightening, Australia’s central bank delivered its first rate cut since November 2020 in February this year. The release of the March quarter inflation results on the eve of the election showed headline inflation remaining comfortably within the central bank’s target band for a third consecutive quarter. The underlying rate of inflation dipped below three per cent for the first time in more than three years, paving the way for further RBA rate cuts.

Global upheaval

Meanwhile, the shifts in Australia’s external environment have been far bigger than the changes in domestic economic conditions. The second Trump administration in the US has set about transforming the global economic system in a way reminiscent of the 1971 Nixon shock and effective dismantling of the old Bretton Woods system by the US. Trump 2.0’s efforts in this direction produced the market-shaking announcements of “Liberation Day”. At the time of writing, evidence of the resultant disruption to global trade flows had started to appear in the data.

First quarter US GDP reported a surge in imports as businesses sought to get ahead of incoming tariffs. Chinese export orders slumped in April, and there were reports of sharply lower US port activity and falling cargo bookings across late April into early May. Official forecasters had also started to deliver their initial “guesstimates” as to the likely consequences of higher tariffs and the attendant policy uncertainty. In its April 2025 forecast update, for example, the World Trade Organization (WTO) estimated that the shift to protectionism would subtract almost three percentage points from world merchandise trade growth this year, projecting trade in goods to shrink 0.2 per cent in 2025. The WTO is also forecasting major shifts in the pattern of cross-border goods flows.

Similarly, the International Monetary Fund (IMF) April 2025 World Economic Outlook slashed its forecast for global real GDP growth this year by half a percentage point to 2.8 per cent. The IMF trimmed its growth forecasts for most individual economies, with the list of downward revisions including cuts of 1.7 percentage points for Mexico, 0.9 percentage points for the US, 0.6 percentage points for Canada and China, and 0.5 points for Australia, Japan and the UK.

Trade rethink

This volatile international economic environment strengthens the case for shoring up Australia’s national economic resilience in response, even if such considerations received little time during the recent campaign. There are several familiar policy discussions likely to rank high on any to-do list in this context.

Start with trade. For much of the current century, Australia has reaped substantial financial rewards from a big economic bet on specialisation, in the form of the resource trade with China. That bet involved accepting a high level of market and product concentration risk in our export portfolio. This has prompted recurrent but largely fruitless calls for offsetting diversification strategies.

As the trading environment continues to evolve, those pre-existing vulnerabilities have been augmented by the need for a diversification approach that also encompasses geo-economic considerations in an increasingly geopolitically fraught world. The Future Made in Australia (FMIA)  initiative looks set to be at the heart of the current government’s policy response to this challenge. The federal election result has delivered a renewed mandate for the government’s approach to industrial policy.

Back to the red zone

The same shifting external environment, plus the resulting policy response, also have fiscal implications. The bulk of the election campaign viewed fiscal policy through the prism of the cost-of-living debate. However, the bigger questions relate to the medium-term outlook for the budget and how Australia raises revenue.

Budget 2025 confirmed fiscal accounts were moving back into the red. The underlying cash balance was projected to remain in deficit through to 2035–36 alongside an increase in off-balance sheet spending. This implied a cumulative gap between the headline and underlying cash deficit of more than $100b over the estimates period.

The geopolitical environment is putting pressure on defence spending, while the geo-economic environment suggests that the FMIA initiative will cost rather more than expected. There are also ongoing spending pressures from childcare, aged care, medical benefits, NDIS and interest payments. Consequently, Canberra must figure out how to better balance receipts and payments — and also how to upgrade a tax system that looks increasingly unfit for purpose.

Fundamentally, a resilient economy requires a growing economy, which requires reigniting Australia’s slumbering productivity growth.

The fact that politicians and businesses, not to mention economists, have been making the case for productivity-enhancing reform for years suggests that this is much easier declared than delivered.

The incoming government has signalled it is aware of the task ahead. The day after the election, Treasurer Jim Chalmers said, “The best way to think about the difference between our first term and the second term… [is that the]… first term was primarily inflation without forgetting productivity, the second term will be primarily productivity without forgetting inflation.”

This article first appeared under the headline 'The Economist: Getting a second chance' in the June 2025 issue of Company Director magazine.