Likely changes under Labor

Implications of a potential change in government


Agribusiness
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We identify key potential impacts to the housing market, the consumer, energy and healthcare if Labor wins the federal election.

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Boh Burima

Boh Burima

Bookmakers have Labor installed as the clear favourite to win government at the next federal election. Labor’s policies are far from being enacted, but we identify key potential impacts to the housing market, the consumer, energy and healthcare. 

Should Labor win government their key policies could incrementally increase taxes on: 

  • Investments in residential property – changes to negative gearing would increase taxes on residential property investment. In the first phase, dwelling prices would fall, but rents would not. In the second phase reduced construction would reduce supply, putting upward pressure on rents. This may adjust the burden of housing affordability down from those who are trying to buy a dwelling to those (usually less fortunate) who are trying to rent; 
  • Investments in public companies – changes to dividend imputation would increase the tax on investment in public companies. A reduction in after-tax dividends relative to bond yields would notionally reduce the relative appeal of equities. This would incrementally increase the cost of equity capital and reduce the ability of listed companies to raise capital to invest; and 
  • Investments for longer durations – halving the CGT discount to 25pc would notionally lower the incentive for entities to invest for the long periods of time necessary to develop businesses and build infrastructure. 

The potential impacts of these changes are difficult to quantify. However we note that investment is the strongest source of growth in any economy as private sector investment generates employment and higher incomes. These changes could potentially impede both employment and income growth. The question is, why do it? 

Labor’s motive appears simply to offset planned increases in government spending so as to contain the budget deficit and national debt. The problem is this strategy neglects behavioural effects. Western economies have learned the hard way that the public sector is less productive than the private, which comes down to a difference in incentives. Public sector employees are incentivised to be risk averse, while the private sector is incentivised to take risks and be rewarded by higher income. It is this acceptance of risk that generates higher investment and an expansion of growth and employment. 

Impact to the housing market 

Our banks analyst flags proposed changes to negative gearing as a risk in exacerbating softness in the housing market. This may also place additional stress on households, and affect consumer confidence. This is the most dramatic impact we identify in this piece but we note the proposed changes are likely to prove unpopular with home owners across the board, and we therefore wouldn’t be surprised if Labor dropped the policy. 

Dividend franking and capital management 

Labor’s proposal to scrap cash refunds of surplus franking credits has triggered intense public debate. The proposal may also bring forward plans for corporates with large franking balances to buy back shares and/or pay special dividends. See the potential for short-term capital management initiatives from Woolworths, Wesfarmers, JB Hi-Fi and Flight Centre among others. 

Keeping context on the market 

Labor’s polices are far from being enacted and we note many proposals have been watered down since first being announced (franking, gas policy). They may alter the relative appeal of some asset classes (e.g. offshore vs domestic equities), and also affect sentiment, but ultimately we think that larger forces (rate normalisation, China) will be the dominant driver of Australian market fundamentals and returns. 

  • Boh Burima Financial Adviser  |  Authorised Representative: 000341081  Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410 
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