Published in the Money Management Magazine, October 2010 by Peter Freeman
Australia’s new minority Labor government - in power due to the untested backing of the one Green member of the House of Representatives and the even more unpredictable support of three independents - will struggle to implement some of its key tax and other financial policies.
Among the Labor proposals that can't be regarded as certainties are the mineral resource rent tax, the promised lift in the superannuation guarantee contribution level from 9% of salary to 12%, and tax cuts for business.
While some sort of mining tax is likely to be in place by its scheduled July 2012 starting date, one independent, Tony Windsor, has challenged a claim by Treasurer Wayne Swan that its main elements are already settled.
If the tax ends up being modified there is a risk it could raise insufficient funds to pay for key government promises, including its share of the cost of lifting the compulsory superannuation contribution rate to 12%. If so, that super change may become problematic.
Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia, has acknowledged the current uncertainty.
"The only thing the independents have promised is not to object to supply," she told the Australian Financial Review after formation of the new Labor government. "Super is off the agenda. We have to get it back on.”
While Fiona Reynolds, head of the Australian Institute of Superannuation Trustees, was more optimistic, saying she expected the proposed super changes to go ahead, a minority government means none of Labor's policies can be guaranteed. Both bodies have welcomed the appointment of Bill Shorten who is the new Assistant Treasurer and Minister for Financial Services and Superannuation.
Already the new government has had to delay some promises, including its promise to grant a tax exemption on 50% of the first $1000 of interest income earned each year.
Originally due to take effect from next July its introduction has been pushed back to mid-2012 in order to generate $700 million in savings to help finance the promises made to win the support of the independents.
It is this sort of financial horse-trading that is likely to become the hallmark of the new Gillard government, especially given the need to deal not only with the independents in the House of Representatives but also the Greens senators who will hold the balance of power in the upper house from next July.
Greens leader Bob Brown is already talking of doing deals with the Coalition, including the possibility of backing its proposed very generous parental leave scheme.
Despite the policy uncertainty this generates, some experts argue that a minority government will have little impact on the overall investment climate.
“Investors should calm down, the country won't fall apart,” says Alex Dunnin director of research with Rainmaker Information. “Minority governments are no big deal. After all, we didn't really have a government for a number of weeks and investment life went on much as before.”
The Australian sharemarket, while remaining volatile after the August 21 election deadlock, actually recovered quite a bit of the ground it had lost since early May. Similarly the Australian dollar was strongly supported in the weeks following the election, rising back above US91c, £0.59 and €0.71 - all historically high levels.
In large part this financial resilience reflects Australia's enviable network of well-run regulatory bodies that not only helped our banks ride out the global financial crisis but which continue to deliver financial stability.
Even if the new minority Gillard government become politically gridlocked, the core functioning of t he Australian economy and its financial markets would be likely to continue largely unaffected.
Dale Gillham, head of education and advisory firm Wealth Within, says the main challenge for investors is not the existence of a minority government in Australia, but adjusting to the continuing global economic and investment uncertainty.
“Too many investors still run with the herd, which usually means doing the wrong thing at the wrong time. Success in the current environment depends on avoiding this mentality and instead keeping a level head as you look for good buying opportunities."
Need to know
What is likely, possible and unlikely - a personal finance checklist
What is likely
- $43 billion national broadband network with its continuing impact on Telstra shares.
- Some sort of mining tax, but not necessarily with all the features of the proposed mineral resource rent tax, affecting resource shares.
- 18 weeks of paid parental leave at the minimum wage from January 2011.
- A continuation of the $5000 baby bonus for stay-at-home mothers.
- Education tax rebate to include cost of school uniforms.
- Increase in family benefits for families with students aged 16-18.
- Implementation of most Cooper review proposals for superannuation, including those for self-managed super funds.
- New rules for financial advisers, including a ban on commissions from July 2012.
- Improvements to the age pension work bonus, with every dollar earned up to $250 a fortnight excluded from the income test.
What is possible
- A cut in the corporate tax rate to 29% from 2012-13 for small business and 2013-14 for big business, plus small business immediately able to write off $5000 of assets a year from July 2012.
- Superannuation changes, including gradually lifting compulsory super contributions from 9% to 12% of salary and a $500 annual government super contribution for low income earners from 2012-13.
- Half of the first $1000 of interest income to be tax free, but from July 2012, not July 2011
- Cash for clunkers $2000 rebate on pre-1995 cars that are scrapped.
- Other tax changes that may flow from the proposed Henry review tax summit to be held by mid-2011.
What is unlikely
- Coalition's paid parental leave scheme paying mother's current wage for 26 weeks up to a total payment of $75,000.
- 1.5% levy on big business to pay for parental leave
- Company tax rate cut to 28.5%.
- A higher $500 education tax rebate for primary students, $1000 for high schoolers.
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