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The New Coalition Government and Australia's Industries

federal-electionHaving unseated the incumbent government, the Coalition will look to follow up on its promises. IBISWorld forecasts the potential effects of the new government’s policies on key Australian industries.

On 7 September, the Liberal-National Coalition, led by Tony Abbott, defeated the Australian Labor Party with a sweeping victory in the House of Representatives. Despite this victory, the Coalition did not win a majority in the Senate. The Greens and Labor will hold significant combined power in the new Senate, which will change over in mid-2014. Without a clear Senate majority, passing key legislation could prove difficult for the new government, and the Coalition will need to negotiate with other parties in the Senate to pass legislation. Coalition negotiations will likely focus on several minor parties entering the Senate, which could include the Liberal Democratic Party, Australian Motoring Enthusiast Party and Palmer United Party.

The Coalition’s lack of majority in the Senate will be highlighted when it attempts to repeal the carbon tax, a key policy it took to the election. Labor and the Greens have previously stated they will use their respective Senate numbers to prevent the repeal and this could cause the Coalition to call for a double dissolution. The political uncertainty of a double dissolution would adversely affect business confidence and investment.

Economic overview

The Coalition is widely viewed as the more business-friendly of the major parties and will endeavour to pass legislation that preferences small businesses. Policies include a 1.5% cut in the corporate tax rate for small businesses and a rollback of some workplace reforms. By promoting investment and employment by small businesses, the new government is hoping to help the economy recover from a slump in business confidence and capital expenditure.

The controversial National Broadband Network (NBN), which will provide a major source of economic growth once built, is likely to be completed sooner under the Coalition’s fibre-to-the-node plan. This should allow more Australians to take advantage of the economic potential of the internet sooner, but the slower speeds of the Coalition’s NBN will reduce the long-term return of the network. Pledged new infrastructure projects will provide stimulus and help the economy transition from the mining investment boom.

The budget deficit was a focal point of the Coalition’s election campaign, and despite a number of expensive pledges, it is expected to run a tighter budget than the previous government. This will reduce some of the upward pressure on interest rates, helping struggling mortgage holders. Lower interest rates will also help keep the Australian dollar down, which will assist Australian companies to compete internationally.

Energy and resources

Energy policies were crucial points of difference between the major parties in the election campaign. Following its victory, the Coalition aims to make significant changes to energy policies enacted by the former Labor Government. The Abbott Government is also likely to review gas reservation, export policies and repeal the Minerals Resource Rent Tax (MRRT).

These changes come at a time when declining per capita electricity use in Australia is challenging the electricity supply division. The downward trend of energy consumption is due to a number of factors, including the rollout of home-installation solar PV systems at a household level limiting demand growth from consumers for centrally distributed  electricity. Additionally, the adoption of energy conservation and efficiency programs has been to the detriment of a number of energy generation industries, as has the decline of electricity-intensive industries over the past five years.

The Coalition campaigned on a platform of reversing many of the provisions of the Clean Energy Future Plan (CEFP) and reviewing the Renewable Energy Target (RET) in 2014. The RET and the CEFP have been two of the most crucial pieces of legislation affecting energy markets. Currently, the CEFP targets the top 500 emitters of carbon dioxide in Australia, which includes almost the entire fossil fuel electricity generation industry. The plan has increased operating costs for fossil fuel electricity generators, while competitors in the hydro-electricity generation industry have benefited from the tax. To assist with the transition, fossil fuel electricity generators were compensated with an assistance package of $5 billion. Under current arrangements, the addition of new renewable capacity to the generation mix is mandated under the RET. The RET benefits wind farm operators, as wind technology is the most price-competitive segment within the wind and other electricity generation industry.

The most important Abbott Government policy change to the energy sector is the proposed removal of the carbon tax and the shift to an emissions trading scheme linked to European carbon prices. However, Labor and the Greens will almost certainly oppose this proposal, making it difficult for the Coalition to pass it through the current Senate. To successfully pass the reform through the next Senate (after July 2014), the Coalition will need to negotiate with the incoming minor parties to gain a Senate majority. Any changes to the carbon tax would also need to be included in the Federal Budget. Based on these factors, IBISWorld forecasts that the carbon tax is unlikely to be repealed before January 2015.

Reductions to the RET are more feasible, and could be achieved by June 2014 and possibly effective in 2014-15. There is an established process for reviewing the RET target. The formal review process means changes to the target are more likely to garner the bipartisan support necessary to alter the legislation before the Senate changes. A review of the current RET will almost certainly stall investment into wind and other electricity generation as companies hold off investment due to political uncertainty. However, a reduction in the RET will benefit investment prospects in the fossil fuel electricity generation industry.

The failure of the MRRT to bring in significant tax income from mining companies has supported the Abbott Government’s proposal to repeal the legislation. The tax has generated significantly less revenue than expected, while being expensive to administer. The tax brought in approximately $200 million in 2012-13. In May 2012, budget forecasts stated that the tax would generate $3 billion in revenue. This was later downgraded to $2 billion.

Workplace relations

The Labor Party and the Coalition had starkly different workplace relations policies throughout the election campaign. Labor proposed a hands-on approach, aiming to actively create jobs, with an emphasis on the manufacturing sector. Providing subsidies to the automotive industry and regulating work for Australian businesses in large projects formed the core of Labor’s policies. The Coalition proposed reforms to workplace regulations that would encourage hiring and would reduce subsidies to uncompetitive industries.

The Coalition’s workplace relations reforms are likely to be aimed at a long-term overhaul of Australian work standards. While Labor’s policies would have had a more immediate effect on employment, the Coalition’s intended removal of regulatory restrictions on employment growth and business development will be cheaper and more sustainable in the long term than subsidies and regulation. If the Coalition successfully repeals the carbon tax, both direct and indirect costs for Australian firms will also drop, allowing businesses to compete more effectively internationally.

The Coalition is anticipated to create an economy-wide shift in workplace relations. The reinstatement of the Australian Building and Construction Commission, which is widely regarded as a union counterbalance, will reintroduce fines used to prevent misconduct of unions and union officials. The Commission will also aim to rewrite the National Construction Code to grant building approvals more easily. This move is anticipated to counteract the Construction, Forestry, Mining and Energy Union’s power. Other union-related policies include the lessening of ‘union-friendly’ workplace arrangements for government projects, such as public infrastructure construction. This would further weaken government ties with unions, especially as the Coalition proposes limitations on union negotiations for new projects. Right of entry laws are also likely to revert to old Coalition policies that restrict access to construction sites with non-union enterprise agreements.

The Abbott Government has proposed a new Paid Parental Leave Scheme from 1 July 2015. This scheme consists of 26 weeks of paid leave for the primary caregiver at a replacement wage or minimum wage (whichever is larger), to a maximum wage of $150,000 per annum. Secondary caregivers are eligible to take two of those weeks at the same wage rate. The aim of the scheme is to encourage primary caregivers to both enter and stay in the workforce. The length of the scheme will also reduce the need to work immediately following the birth of a child. This will increase the overall spending power of affected parents, and the sale of baby products is expected to rise as a result. However, there has been widespread opposition to the cost of the policy, and questioning of whether it is fair to pay primary caregivers different levels of income. The policy will be partially paid for by a 1.5% Paid Parental Leave levy on firms earning more than $5 million in taxable income, which means the effective tax rate for those companies will remain the same following the company tax cut. This may negatively affect firms that have to pay more tax relative to other companies.

Additionally, the Coalition intends to delay superannuation contribution increases by two years, with the first incremental rise from 9.25% to 9.5% planned for 1 July 2016. Incremental rises will be progressively implemented to reach 12% superannuation contribution by 2021-22. The superannuation increases are expected to eat into future wage increases or company profit, so delaying the increase will allow businesses more breathing room with cost structures and will ultimately mean higher earnings after tax for employees.

In light of these workplace relation reforms, IBISWorld forecasts average weekly earnings (as a measure of economy-wide income) will increase at an annualised 4.3% over the three years through 2016-17, marking an upward trajectory of income taken home during this governmental cycle.

Education  reforms

The Better Schools Plan, otherwise known as the Gonski reforms, was the key education policy debated during the election campaign. The plan was developed by the Labor Government in response to the Gonski review, which found that the overall standards of Australian schools have been gradually declining. Of particular concern was the widening gap between the highest and lowest performing students. Despite initially opposing changes to the school funding system, the Coalition has largely agreed to support the plan.

There was a key point of difference between the Labor and Coalition policies on education reform. Labor proposed that the Federal Government would provide 65% of the Better Schools Plan funding, while the participating states and territories would provide 35% of funding. Under Labor’s policy, the states and territory that refused to sign up to the reforms would not receive the extra Better Schools Plan funding and would be funded under the old system. Western Australia, Queensland and the Northern Territory did not sign up to the plan prior to the election. In contrast, the Coalition pledged to provide funding to jurisdictions regardless of whether they agreed to the plan, and stated that the non-participating states and territory will not be required to contribute funds of their own.

The Coalition proposed to honour the Gonski agreements for four years, instead of the six years planned by the Labor Party. In addition, the Coalition has committed just $2.8 billion to the reforms, instead of Labor’s $9.8 billion. At this stage, there has been no announcement on investment in education following the four-year period. The Labor Government’s plan to cut $2.8 billion from university funding to help pay for the Gonski reforms is expected to stay in place under the Coalition Government. These cuts are anticipated to constrain revenue growth in the short term while universities find ways to increase funding from the private sector.

So, despite a change in government, the plan is still expected to be implemented in 2014. Funding will be based on a benchmark amount per student, with a base amount of $9,271 per primary school student and $12,193 per high school student. Additional funding will be provided for students from low socioeconomic backgrounds, Indigenous students, students with limited English skills and students with a disability.

The Abbott Government made other education promises, including $70 million of assistance for independent public schools, $22 million to promote reading and writing in remote primary schools and a $10 million trial of online language learning for preschoolers. The Coalition aims to promote the long-term sustainability of education standards with a goal of 40% of year 12 students to be studying a foreign language in a decade. Principals of education institutions will be given the option to receive subsidised MBA-style executive education. Under the Coalition, government schools are forecast to grow by 3.8% annualised over the three years through 2016-17, while private schools are forecast to grow by 3.2% annualised.

Infrastructure investment

Both Labor and the Coalition pledged support for many substantial infrastructure projects across a nation highly dependent on road and rail transport. The largest item on the agenda is the flood- and accident-prone Bruce Highway in north Queensland. Significant road investment is expected under the Coalition, including $6.7 billion over 10 years for the Bruce Highway, $5.6 billion for the Pacific Highway and $1.5 billion for Sydney’s WestConnex project to link the M4 and M5 motorways, with an extra link to Sydney’s central business district to be created. Other funding includes $1 billion for the Gateway Motorway in Queensland, an unconfirmed amount for the F3/M2 link in New South Wales, $500 million for the South Road in South Australia and $400 million for the Midland Highway in Tasmania.

Both parties proposed investment in a high-speed rail network across Australia. Despite mutual agreement on the economic benefits of high-speed rail, public funding will be difficult to attract, with construction forecast to take several decades. In terms of rail projects, the Coalition has maintained that state and regional urban rail systems are not the responsibility of the Federal Government, but rather individual state governments. Overall, IBISWorld forecasts capital expenditure by the public sector to increase at an annualised 5.2% over the three years through 2016-17 under the Abbott Government.

Another fiercely debated topic of the 2013 Federal Election was the NBN. While download speeds, costs, technology and design were key differences between Labor’s and the Coalition’s planned broadband networks, both parties agreed that broadband speed and availability could be greatly improved across Australia. Following the election, the NBN rollout will continue under the Coalition Government. However, plans to further expand the NBN have been placed on hold until a 12-month review is conducted. Minister for Communications Malcolm Turnbull has already contacted major telecommunications companies to discuss future changes to the network. In addition, three separate reviews and forensic audits have been launched into NBN Co, casting doubt on the feasibility of Labor’s plans for the NBN.

Labor’s NBN has been in the works since 2011, with rollouts commencing in key metropolitan and rural areas. Full completion was scheduled for 2021. Under Labor’s plans, the NBN was estimated to cost $44.1 billion and would replace the existing copper network system through a series of fibre-to-the-premises upgrades. The scheme was anticipated to allow potential download speeds of 1 gigabit per second, with full utilisation of fibre to connect homes, businesses and rural properties to network cabinets. Labor’s NBN would have been distributed through universal pricing under a government-owned monopoly wholesale network.

In contrast, the Coalition vehemently promoted its own version of the NBN following a spate of rollout difficulties and connection issues suffered under Labor. Under the Coalition’s proposal, the NBN is estimated to cost just $29.5 billion and take two years less than it would have under Labor. Maximum speeds of 100 megabits per second are anticipated through utilisation of a fibre-to-the-node approach, connecting fibre to neighbourhood cabinets and using copper to connect homes and businesses. Under the Coalition, competition will be encouraged, with wholesale prices determined by the ACCC. Reviews into the banning of Huawei and NBN Co’s purchase of Telstra’s copper wire network are expected to significantly affect the development of Australia’s broadband overhaul.

Conclusion

Despite a sweeping victory in the House of Representatives, the Coalition will need minor party or independent support in the Senate to pass legislation. The Coalition will find it difficult to pass its first big-ticket legislative item, a repeal of the carbon tax, through the current Senate. It will also require minor party support to pass it through the new Senate after July 2014. If the House of Representatives and the Senate remain in deadlock, there could be a double dissolution election. This would adversely affect business confidence and investment because of political uncertainty.
A resounding election victory – regardless of the winner – benefits the economy, as there is less economic uncertainty about the future. After three years of minority government, the stability of the new government will be particularly beneficial to the economy. However, the Coalition Government’s policies will go even further to provide support for business and a long-term approach to economic sustainability. This will be because the Coalition’s key policies – the reversal of the carbon tax, workplace relation reforms and education reforms – are primarily aimed at addressing the long-term sustainability and competitiveness of Australia on the global stage.

Relevant reports:

B0601- Black Coal Mining in Australia

B0801 – Iron Ore Mining in Australia

D2611 – Fossil Fuel Electricity Generation in Australia

D2619 – Wind and Other Electricity Generation in Australia

E3101 – Road and Bridge Construction in Australia

OD4144 – Fibre Optic Cable Installation in Australia

P8025 – Private Schools in Australia

P8026 – Government Schools in Australia

 

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