Australian Spotlight - May 2025

Two weeks after his election win, Prime Minister Anthony Albanese arrived in Rome in triumph. While Australian prime ministers are not ordained by God, he may have offered his thanks at the first mass of the new pope.

Three months ago, many expected the opposition conservative party to win power. However, not only did Albanese’s centre-left Australian Labor party retain government but they did it emphatically. The leader of the opposition, Peter Dutton, even lost his seat, while the two-party coalition that made up the opposition has now split (temporarily?).

The Labor party now has a clear mandate for its election policies and a potential multi-term platform to make some hard but needed economic reforms. Will they take the opportunity?

“We take up this task, with new hope, new confidence and new determination.” Anthony Albansese, declaring victory on election night.

A big win

In January 2023, the government was riding high. Opinion polls had its support at around 55% on a two-party preferred basis. However, by the end of 2023, Labour had been overtaken by the Liberal and National party Coalition. A mix of immigration controversies, rising costs for consumers, and the failed referendum on indigenous representation in the constitution, had brought Labor down. Albanese looked tired.

The opposition was able to largely maintain its lead throughout 2024 and into early 2025. In February, most pundits predicted a swing to the opposition in the upcoming election, with the most likely outcome a minority Coalition government.

Fast forward to election day on May 3, and not only did Labor not lose government but enjoyed a 2.7% swing, which saw the government increase their seats in the lower house from 77 to a likely 94 - well in excess of the required 75 majority. In the upper house, Labour picked up two seats and now only needs support from the Greens party to pass bills there. In contrast, the Liberal party has been decimated, losing many “safe seats” lower house seats.

“This is the most extraordinary election I have seen in my five decades. This is a turning point election for the country. Nobody predicted the scale of this election result. It has transformed Anthony Albanese into a prime minister of immense authority and long-standing significance.” Paul Kelly, The Australian Newspaper, political commentator and author.

Voting Results in the Australia House of Representatives

While there was a Trump factor in play, it was not as strong a force as it was in the Canadian election. Australia is not worried about becoming the 51st US state anytime soon and the US is only Australia’s 5th largest trading partner.

Instead, most commentators attribute Labor’s surprising win to a terrible election campaign by Peter Dutton and the opposition. The Coalition had rightly identified the cost of living as the main issue but lacked credibility with its nuclear power policy and general costings. Late in the election, Dutton clutched at culture war cliches, which only worsened his plight.

“It’s left the Liberal party in ruins. One of the questions of course is whether the Liberal party is actually capable of recovery. If it is, that recovery will take many years.” Paul Kelly.

The rise of independents and minor parties

The election also saw a continuation of the rise in votes for independents and minor parties. For the first time ever, independents and minor parties captured more of the primary vote than one of the two major parties (see chart below).

With Australia’s preferential voting system for the lower house, if a candidate does not secure a majority of the primary vote, preferences are tallied from the last-place candidate and distributed to the remaining candidates. This process continues until a candidate reaches a majority. Voters can specify their preference for each candidate on their ballot or they can let them automatically flow according to deals made between candidates.

In the election, the Labor party benefitted enormously from preferences flowing from the Greens and independents. It received a 20% bump from preferences on top of its 34.5% primary vote. The Coalition received only a 13% bump in preferences on top of its 31.8% primary vote.  

While Australia’s mandatory voting is well known, its preferential system for the lower house is probably more important in ensuring that the country’s politics stays in the centre.  

Labor’s election promises

Labor is now in a strong position to implement its election promises. Of these, the most pertinent to the economy are its housing policies and tax cuts.

Like many countries around the world, Australia has a housing affordability problem. And like most of those countries, it is predominantly a supply problem (see chart below).

The COVID-19 pandemic led to a structural break in supply, and  even now, many building companies have yet to fully recover. However, the supply problem pre-dates this.

Further, it is not just about a lack of bricks and mortar, there is also a supply constraint with land in the big cities, particularly in Sydney. With the old dream of a house and a backyard, Australia’s cities sprawl. Efforts over the last two decades to build up inner-city density have had success but so much more is needed.

Past policies focused on providing funds, fee discounts, and incentives to first-home buyers. Albanese’s election promises on housing still have some of that flavour. It is also imposing a two-year ban on purchases by foreign investors and temporary residents. But more importantly, it is also directly tackling the supply issue.

 Labor has promised to invest AUD 10 billion to build 100,000 new homes for first-home buyers. For context, 938,000 houses are expected to be built between now and 2029. The government is also providing AUD 1 billion to provide crisis housing. Last, it is fast-tracking the qualification of 6,000 trades people to help provide more workers for the building industry.

With tax cuts, Labor has promised to reduce the bottom 16% tax bracket to 15% in 2026-27 and to 14% in 2027-28. This will cost AUD 17.1 billion in foregone government revenue over the first-three years alone. While it will help families with the cost of living and will have a multiplier effect on demand, it is not a good outcome for Australia’s public debt level.

Australia’s public debt is still relatively low at 49% of GDP and is far from US or UK levels. However, the government needs to take warnings over fiscal deficits from the ratings agencies seriously if it wants to maintain its AAA sovereign credit rating.

“How the elected government funds its campaign pledges and rising spending will be crucial for maintaining the rating.” Anthony Walker and Martin Foo, S&P Ratings.     

Temptations and transformations

Of course, with great power comes great temptation. Albanese and the Labor party will want to leave their mark on Australia. There is no doubt that Albanese is a Labor party “true believer” and will be eyeing a legacy to put alongside those of past Labor prime ministers such as Chifley, Hawke, and Keating. Do not be surprised if Albanese looks to strengthen the position of trade unions in the economy. This may not necessarily be a bad change but it will be controversial. The power of the trade unions is not what it was, and pales in comparison to the union movement in Nordic countries or even Germany, but unions remain a key player in several industries.

Encouragingly, in his victory speech, Albanese said that increasing productivity growth would be a high priority for the new government. This has also been reiterated by Treasurer Jim Chalmers.

“The best way to think about the difference between our first term and the second term … the first term was primarily inflation without forgetting productivity, the second term will be primarily productivity without forgetting inflation.” Jim Chalmers.

In December, the government asked the Productivity Commission to investigate and provide suggestions for improving productivity using the framework of the government’s five-pillar productivity agenda. The five pillars include creating a more dynamic and resilient economy, harnessing digital technology, and cleaner energy and the green transition.

Like most advanced countries, except for the United States, productivity growth has slowed in Australia over the last decade (see chart below) - the pandemic productivity bubble excepted. The recent “per-capita recession” can be seen as a symptom of this.

As the RBA has repeatedly warned, an increase in productivity is needed for Australia’s long-term economic prosperity and to justify any medium-term wage increases. 

Other areas of reform that would help the economy would be a reform of the tax system. Former secretary of the Treasury, Ken Henry, famously provided a report in 2010 arguing that too much of the tax burden fell on workers and that the system disadvantaged younger generations. Key issues recommendations covered tax bracket creep (brackets are not indexed to inflation) and the preferential tax treatment of real estate (including negative gearing). Most of his recommendations were ignored. The government now has the political capital to tackle the difficult issue but it will need to be brave. It did rule out an end to negative gearing during the election campaign but there is still plenty of scope for other needed tax reforms.

“Australia's tax system is in a worse position than it was 15 years ago and young people are paying the price,” Ken Henry, from an interview with ABC news in 2024.

Final thoughts

With an emphatic win and the potential for multiple terms, Albanese and the Australian Labor party need to fulfil their promises to help housing supply. A strong focus on productivity reform would also be nice. Tax cuts are always an easy way to address the cost of living for voters but genuine tax reform would better serve the long-term interests of the country. Let’s hope Albanese will be bold enough.