The economics of the election

After what felt at the time like a pretty dull campaign, the Federal election result itself delivered considerably more excitement. Australian voters rewarded the Albanese government with a resounding victory, while also ushering two opposition party leaders out of parliament. There are multiple theories as to what happened and why. These range from the respective quality of the campaigns through the social salience of WFH and on to the electoral impact of nuclear power and beyond. So it is worth making two broad points about the economics of the election.

First, the overwhelming consensus beforehand was that this was set to be a cost-of-living election. Given the rather thorough beating that angry electorates had inflicted on incumbent governments across 2024, the assumption was that this could only make life harder for the incumbent here, too. So, why didn’t it? One possibility is that it did but was outweighed by other factors. Another is that voters decided that the cost-of-living offerings from Labor were superior to the corresponding packages put forward by their opponents. And a third possibility is that the ongoing decline in inflation plus the arrival of the RBA’s first rate cut since 2020  in February and the possibility of more rate cuts to come meant voters decided there was a decent chance for an economic soft landing. As a result, they were prepared to accept that the worst was probably over.

Second, the international economic backdrop to the election was dominated by market turmoil and surging policy uncertainty unleashed by Trump 2.0’s Liberation Day. At times of high uncertainty, it seems plausible that voters will tend to be more attached than usual to the relative sense of security offered by the status quo. People only want so much change at once.

More importantly, the Labor government’s win, plus the comfortable nature of that victory now sets the direction for economic policy over the next three years. It seems likely to do so, mainly by reinforcing the existing trajectory of policy in at least five key areas:

• The government’s approach to energy and climate policy has just received a strong and renewed electoral mandate. That locks in for at least another three years the existing commitment to reducing emissions by 43 per cent below 2005 levels by 2030 (and net zero by 2050), along with the policy path that is intended to deliver this, including the supporting 2030 target for an 82 per cent share for renewables in electricity generation and other policy mechanisms such as the Safeguard Mechanism and the New Vehicle Efficiency Standards. Of course, that also means the same challenges confronting that strategy pre-election will likewise remain in place (for example, the Productivity Commission reckons Australia’s National Electricity Market is facing ‘imminent reliability and system security challenges.’)
• There is a similarly strong mandate for the government’s ambitious Future Made in Australia (FMIA) agenda, including its billions of dollars in production incentives. The government will now extend these to green aluminium and green iron and they will also now involve the creation of a new Critical Minerals Strategic Reserve. FMIA will now continue to be one of the main ways in which Australia will seek to upgrade its economic model to manage the new global economic environment.
• Emphasis on the importance of the Care Economy will likewise continue, bolstered by a series of new election commitments across Medicare, the PBS, primary health care clinics, childcare centres and beyond. Some of that focus is an inevitable consequence of the growing demands of the electorate, plus the implications of an ageing population, and it will also have important consequences for fiscal management and for the government’s plans to devote greater attention to lifting productivity growth in its second term.
• The Competition Policy agenda will remain in place, with the government set to go ahead with its plan to curtail non-compete clauses and wind back ‘no-poach’ agreements.
• Finally, the government has added to its previous commitments on housing (including the promise to build 1.2 million new homes by 30 June 2029) by making additional promises on both the demand and supply side. With housing unaffordability having set new records at the end of last year, and with building approvals, commencements and completions all currently running below the kind of rates required to meet those commitments, this is another area where current policy settings will be under considerable scrutiny.

All this would seem to imply a considerable amount of policy continuity over the next three years. On the other hand, the government will have to implement these policies against the backdrop of elevated levels of policy uncertainty, market volatility and a general rewiring of the international economic system that has resulted from the second Trump administration. In theory, that external environment should also imply an increased premium on boosting the resilience of the Australian economy…which is where continuity alone is likely to prove insufficient.

This last point is likely to provide the new government with a tricky dilemma. It can use the size of its victory to deliver more sweeping policy change that it set out in its campaign agenda which would risk alienating voters, or seek to retain trust by sticking strictly to its existing policy commitments, even if they prove inadequate in the face of the evolving global environment.

We discussed these and related issues in Thursday’s webinar this week, which offered a post-election economic assessment. Many thanks to those of you who were able join us. And for those interested, a recording of the session should be available.

What else happened on the Australian data front this week?

The ABS released updated Living Cost Indexes (LCIs) for the March quarter 2025. All five LCIs rose across the quarter, with the largest quarterly increases for the Pensioner and Beneficiary LCI and the Other government transfer recipient LCI (up 1.6 per cent) and the smallest for the Self-funded retiree LCI (up 0.6 per cent). The employee LCI rose 1.1 per cent over the quarter. On an annual basis, the largest year-on-year increase was for the Other government transfer recipient LCI (up 3.5 per cent) and the lowest was for the self-funded retiree LCI (up 2.4 per cent). The annual rate of increase in the Employee LCI was 3.4 per cent, down from four per cent in the December quarter 2024 and well below a 9.6 per cent peak in the June quarter 2023. Mortgage interest rate costs are the most significant contributor to growth in the employee LCI, and here annual growth has now slowed to 8.8 per cent from 14.7 per cent in the December quarter 2024 and a peak of 91.6 per cent in the June quarter 2023.

The ABS’ Monthly Household Spending Indicator fell 0.3 per cent month-on-month (current price, seasonally adjusted basis) in March 2025, but was up 3.5 per cent on the March 2024 result. Spending on goods edged up 0.1 per cent over the month to be up 2.3 per cent over the year, while spending on services declined by 0.7 per cent over the month, while still rising 5.1 per cent in annual terms. Discretionary spending was down 0.4 per cent in monthly terms and up three per cent on an annual basis, while non-discretionary spending was unchanged over the month but 4.4 per cent higher over the year. March this year brought a first monthly fall in total spending after five consecutive monthly increases. In part, the driver of this decline was a 1.3 per cent monthly drop in Queensland, due to the impact of ex-tropical cyclone Alfred, although there were also more modest falls in NSW and South Australia. The Bureau also reported that on a volume basis, household spending was flat in the March quarter 2025, compared to the previous quarter, but up 0.9 per cent over the year.

Last Friday, the ABS said that in March 2025 retail turnover rose 0.3 per cent over the month (seasonally adjusted) and 4.3 per cent over the year. That result was a little softer than the consensus forecast for a 0.4 per cent month-on-month gain. The ABS said food-related spending in supermarkets and grocery stores was the main driver of growth – particularly in Queensland where households stockpiled supplies in anticipation of ex-Tropical Cyclone Alfred. Total retail turnover in the state was down 0.4 per cent due to the impact of Alfred. In volume terms, retail turnover in the March quarter 2025 was flat over the quarter, but up 1.2 per cent on an annual basis. Again, that was softer than the market consensus, which had anticipated quarterly growth of 0.3 per cent. On a per capita basis, retail volumes fell 0.4 per cent over the quarter. According to the Bureau, that reflected subdued household spending in the opening months of this year, after sustained promotional activity had boosted discretionary spend through the end of 2024. It is also consistent with the idea that households starting this year on a cautious note.

The total number of dwellings approved in March 2025 was 15,220. That was down 8.8 per cent (seasonally adjusted) over the month but up 13.4 per cent over the year. There were 8,804 private sector houses approved, down 4.5 per cent over the month and 3.3 per cent lower in annual terms. The number of private sector dwellings excluding houses was 6,104. That was down 15.1 per cent month-on-month but up 47.1 per cent year-on-year. The ABS also said the value of total building approved rose 9.4 per cent over the month to $15.6 billion, while the value of total residential building fell 7.6 per cent to $9 billion.

ANZ-Indeed Australian Job Ads were up 0.5 per cent over the month in April 2025 but down 5.1 per cent relative to April 2024. The index has been relatively stable around the 115 mark since June 2024, a result which is consistent with the relative stability of the unemployment rate. The latter remained around four per cent over the same period.

The ANZ-Roy Morgan Consumer Confidence Index rose 4.1 points in the week ending 4 May. Four of the five subindices rose over the week (the only fall was recorded in the ‘time to buy a major household item’ subindex) with the gains led by ‘current financial conditions’ (which jumped 9.1 points) and ‘medium-term economic confidence’ (up 5.2 points). There were smaller gains for ‘future financial conditions’ (up 4.9 points) and short-term economic confidence (up 2.7 points). According to Roy Morgan, it completed the ‘vast majority’ of the interviews underpinning the confidence index before the result of the 3 May Federal election was known. Weekly inflation expectations fell 0.2 percentage points to 4.9 per cent in the aftermath of last week’s inflation report.

The ABS has published new international investment statistics which show foreign investment in Australia rose $326.9 billion to $4,970.6 billion last year, while Australian investment abroad rose $492.4 billion to $4,317.4 billion. The United States is still the largest foreign investor in Australia, with an investment stock of $1,355.5 billion (27 per cent of the total), followed by the United Kingdom ($839.1 billion or 17 per cent). Likewise, the United States (36 per cent of the total or $1,552.5 billion) and the United Kingdom (16 per cent or $698.5 billion) remain the two most popular destinations for Australian investment overseas. A quick reminder that foreign investment into Australia is regulated by the Treasury – an overview of the foreign investment framework is here. Treasury’s latter’s latest quarterly investment report on foreign investment is here.

According to the ABS, as of 30 June 2024 there were 2,662,998 actively trading businesses in Australia, up 2.8 per cent (73,125) on the previous year. The business entry rate in 2023-24 was 16.8 per cent, while the exit rate was 14 per cent.

An update from the ABS on barriers and incentives to labour force participation for the December quarter 2024.

Other things to note...

• In the AFR, Saul Eslake says Labor should use its second victory as a platform for reform.
• Labor’s own costings. Some commentary noting missing off-budget items.
• The e61 Institute says fiscal challenges are set to dominate the next term of government.
• The ABC with some early post-election voter demographics analysis.
• A look at the government’s plans for new taxes on superannuation.
• Australian office design in the post-COVID era.
• A Productivity Commission submission on the National Electricity Market (NEM) argues the NEM is undergoing a ‘fundamental transformation brought on by ageing thermal generation, rapid technological change and cost reductions in clean energy and storage, together with the need to meet net zero objectives’ that are creating ‘imminent reliability and system security challenges to navigate, as much of the system need to be replaced and transformed over the next decade.’
• The WSJ says the data needed to assess the true health of the Chinese economy is vanishing.
• Also from the WSJ, are tariffs akin to an asteroid heading for US businesses?
• Torsten Slok on how US firms are responding to higher tariffs.
• Estimating the global impact of the US trade war.
• Two ‘Big Reads’ from the FT, one on Europe’s first electricity grid crisis and one on how China is quietly diversifying from US Treasuries.
• On the future of the US dollar: Ken Rogoff argues this time really is different for the greenback and Paul Blustein on King Dollar: The past and future of the US dollar (book excerpt).
• Incoming, a global Euro?
• Briefings from the Economist magazine’s on the possibility of a blockade of Taiwan, the potential economic costs of a trade ‘quarantine’, and Taiwanese pessimism about the sustainability of the current status quo.
• A new OECD report on the adoption of AI in firms and implications for enabling policies.
• An IMF Working Paper investigating short-and medium-term economic impacts of natural disasters on Pacific Island nations.
• The McKinsey Global Institute argues national productivity growth is typically driven by a relatively small number of firms: Fewer than 100 productivity ‘standouts’ account for two-thirds of growth in a sample of 8,300 large firms in Germany, the United Kingdom and the United States.
• The Honest Broker reckons the world’s largest search engine doesn’t want you to search.
• The Odd Lots podcast talks to Brad Setser about recent dramatic moves in the Taiwanese dollar.
• The FT’s Unhedged podcast asks, will ‘real money’ investors pivot from the United States to Europe?