• The policies of the new Government if implemented are likely to lead to smaller government, less regulation and over time improved productivity and economic growth.
• Expect a mini-budget around November that may contain more aggressive budget savings.
• The historical experience combined with the more business friendly approach of the Coalition suggests a positive share market response over time.
• The key uncertainty relates to the new Senate.

Pretty much as the opinion polls and betting agencies had foreshadowed, Australia now has a new Liberal/National Government. While it’s dangerous to ascribe too much in terms of their economic impact to elections in Australia as either side of politics are not radically different from each other in their core beliefs – there was perhaps more riding on this election than usual given the difficult period of minority government over the past three years and the more uncertain environment the Australian economy has now found itself in. This note looks at what is expected in terms of changes to policies and implications for the budget, the economy and the share market.

Policy change

Based on their election platform, key policy changes under the Coalition Government will include the following:

• the abolition of the mining tax;
• the abolition of the carbon tax/Emissions Trading Scheme and its replacement with a direct action plan where companies will be paid to reduce emissions;
• a 1.5% cut in the company tax rate, although companies with income above $5m per annum will see this offset by a levy to pay for a paid parental leave scheme;
• a refocussing of government spending towards infrastructure and away from hand-outs like the “Schoolkid’s Bonus”;
• a delayed increase in the superannuation contribution;
• a reduction in the size of the public service;
• reduced spending on the National Broadband Network;
• various other savings such as reduced foreign aid, removal of carbon tax compensation payments, cancelling the low-income super contribution, ending the instant asset write-off;
• undertaking inquiries into the labour market, taxation, productivity & competition, the financial sector and infrastructure funding and an audit of government which will potentially pave the way for smaller government, reduced regulation & reinvigorated economic reform; and
• a greater focus on returning the budget to surplus.

Taken together and assuming the policies are implemented, this should lead to smaller government, less regulation and over time improved productivity and growth in the economy.

Impact on the budget

Prior to the election, policy costings released by the Coalition indicated a cost to the budget over four years of just over $33bn, which is more than offset by budget savings of around $42bn. This results in net savings to the budget of just over $6bn on a cash basis over four years. Allowing for debt interest savings the total saving may be a bit more than this.

While the Coalition has not committed to the latest budget projections contained in the Pre-Election Economic and Fiscal Outlook (PEFO) they give a rough guide to the impact of the Coalition’s proposed savings to date. The table below shows the latest PEFO budget balance projections in the first row, with a return to surplus not occurring until 2016-17 under the previous Labor Government’s policies. The Coalition’s net savings (second row) help improve the budget balance over time but only marginally, by just 0.1 to 0.2% of GDP per annum and a surplus is still not achieved until 2016-17 (third row). In other words, on current policies the Coalition essentially has the same overall budget strategy as the previous Labor Government!

Source: Federal Treasury, Federal Coalition, AMP Capital

Now of course, under the new Government these projections are likely to change. In particular, the starting point for the budget projections may have deteriorated further and this may be accentuated by more conservative economic growth assumptions. As a result, there is a high risk the new Government will adopt more aggressive savings measures in order to meet its election commitments but at the same time ensure a return to surplus by 2016-17.

This is pretty much what the Howard Government did following its election in 1996. A mini-budget coinciding with the Mid Year Economic and Fiscal Outlook in November, and possibly after an audit of government spending has reported, may contain more aggressive budget savings.

Implications for financial markets

Putting aside the usual global influences it’s likely that over time the response in financial markets to the change of government will be positive, particularly for the share market. There are several reasons for this. Firstly, over the last 30 years Australian shares have generally risen after Federal elections. This is evident in the next chart which shows Australian share prices from one year before till six months after Federal elections since 1983. This is shown as an average for all elections (but excludes the 1987 and 2007 elections given the 1987 global share crash and the start of the global financial crisis in 2007). What is clear is that after elections shares tend to rise more often than they fall.

The next table shows that after 8 out of 11 elections since 1983 the share market was up 3 months later with an average gain of 5.4%, which is above the 1.8% average 3 monthly gain from shares over the whole period.

Secondly, over the post World War Two period the average annual return from Australian shares (capital growth plus dividends) under Coalition Governments has been 13.2% pa as opposed to 9.9% pa under Labor Governments.

Some might argue though that the Labor Governments led by Whitlam and Rudd/Gillard had the misfortune to be affected by the global stagflation of the 1970s and the GFC. The reformist Hawke/Keating period from 1983 to 1996 certainly defied conventional perceptions that conservative governments are always better for shares. However, it can be seen that Liberal/National governments have seen solid and reasonably stable average returns from shares and this may reflect a more business friendly policy approach.

Thirdly, we have now seen the end of a period of destabilising and uncertain minority government in Australia which has not been good for confidence.

Finally, Coalition policies with a focus on cutting taxes, refocussing government spending on productivity enhancing infrastructure, smaller government and less regulation promise to be business friendly, which should be positive for confidence and the economy. This is particularly so given that business confidence is running at sub-par levels.

Overall, this suggests a favourable reaction from investment markets.

What are the risks?

But, there are qualifications. First, the strong performance of Australian shares in August relative to global shares may have already partly factored in the change in Government.

Second, the favourable boost to confidence and longer term growth may be offset in the months ahead if the new Government chooses to go hard in terms of cutting spending.

Finally, and most importantly, the Senate may thwart the Government’s program. Whilst the Coalition clearly won control of the House of Representatives, the Senate won’t necessarily respect any claims that it has a “mandate”. The current Senate that sits until June next year is controlled by Labor and the Greens and is very unlikely to pass legislation to abolish the carbon and mining taxes. Vote counting for the new Senate that will sit from July is yet to be finalised, but it looks like the Coalition will need the support of a variety of independents and minor parties with varying views to get its program through. With most of the minor parties to the right of the Coalition, the new Government has some chance of success. But hopefully this won’t lead to a bunch of concessions and giveaways that are not in the national interest. Failure to reach agreement could mean a double dissolution election, although that is looking a bit less likely.

But on balance, the reaction from financial markets to the new Government is likely to be positive, with shares likely to be stronger than would otherwise have been the case, notwithstanding the usual gyrations driven by forces such as global developments. Share market sectors and companies likely to benefit include the miners (from the abolition of the mining & carbon taxes), heavy carbon emitters, engineering and contracting companies (from the infrastructure program), companies that provide salary packaging and car leases (as car FBT changes won’t proceed) and small businesses.

The $A may also be a beneficiary, although given the need for a lower $A to help the economy adjust as the mining sector slows this would only bring forth more RBA rate cuts which would offset any positive impact on the currency.

A boost to consumer confidence may also boost the recovering housing market. This was perhaps evident on the weekend with auction clearances surging in both Sydney and Melbourne, albeit helped by lower listings owing to the poll.

Concluding comments

A whole range of factors influence financial markets with elections playing a relatively minor role. In the short term these include the threat of US military intervention in Syria, the US Federal Reserve’s taper decision, US Congressional negotiations regarding the US Government’s debt ceiling and worries about the emerging world and the mining slowdown locally. However, given the unstable policy environment of the last few years in Australia partly associated with minority government, the relatively subdued levels of business and consumer confidence and the business friendly policies of the Coalition there is likely to be a favourable reaction to the change of Government evident over time.

Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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“We are not that surprised that our exposure to a price on carbon is so low. Australian Ethical avoids coal and uranium mining and other industries that are unnecessarily harmful to the environment. However, we know that, like all taxes, it would be hard to completely avoid all carbon-intensive companies.

“The smart players concluded long ago that a price on carbon was inevitable. However, our stock selection process has not changed in any way as the carbon legislation nears, so it is good to see that our approach of only investing in stocks that are positively impacting society is working well,” said Paul Smith, General Manager, Strategy & Communications at Australian Ethical. 

The four stocks in Australian Ethical’s portfolios are:

• DBNGP
• Energy Developments
• Envestra
• Snowy Hydro                     

Australian Ethical expects that over 250 companies will fall under the carbon legislation in the next financial year.

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PFA Vice President and member of the Sustainability Committee, Adam Murchie, said while there is a significant opportunity for property to play a part in reducing emissions, the Government needs to ensure the scheme does not favour replacement of buildings over upgrades. 

“Commercial and residential buildings contribute over one fifth of emissions in Australia. Given the inputs into property (steel, cement, aluminium, glass, gas, electricity, etc), building owners and occupiers are likely to experience cost increases should a carbon tax be introduced,” he said.

“As a carbon price will place a greater focus on energy usage and the total cost of occupancy, it could inadvertently accelerate building obsolescence where owners are unable to fund upgrades so that their buildings remain competitive.  It is likely that anything other than premium grade real estate will need support to remain competitive.”

Mr Murchie said the PFA firmly believes that a Carbon Incentivisation Scheme for real estate is required to ensure the continued feasibility of existing stock and to avoid having a major gulf between old and new stock across Australia.  

“The carbon scheme, although environmentally sound, is a very real threat to the competitiveness of existing real estate and theiroccupants if the cost of upgrading buildings is left unaddressed.  In particular, it is imperative to address the existing stock as retrofitting existing buildings, given their embodied energy and existing use of resources, is far more sustainable thanbuilding new premises.  If this is not addressed, the negative impact, particularly for secondary grade buildings that make up the majority of the stock, could certainly be a burden on the industry in five years time.  This will affect both property investment as well as business competitiveness and will hurt the smaller investors more than the larger institutional players.”

Mr Murchie added that a transition process needs to be developed now in partnership with the Government.  “The property industry is already a leader in sustainability, but it will need support to react appropriately to the changing economic environment that the Carbon Scheme, as proposed, may bring.  Without support, a potential outcome of the changes could be significantly higher rents for non-residential premises to offset the cost of building upgrades or the rise in outgoings.  With business profitability already at low levels, an added impost could send many businesses to the wall.”

“It’s the occupants of those buildings requiring upgrades who will be forced into higher rents to offset the cost of the carbon price.   This will reduce the competiveness of many businesses.  Alternatively, the outcome could be accelerated obsolescence for existing building stock, which may force values down and in turn, restrict capital investment across the sector.  I’m sure that it’s not the intention of the government to reduce the attractiveness of real estate investment, given its importance to the Australian economy.   A partnership on this issue could in fact achieve quite the opposite, especially as some of the greatest gains, at the lowestcost, are possible from the property sector.”          

Mr Murchie said technology has already been developed that can significantly reduce emissions.  If the government provides support programs that promote the upgrade to low emission technology, this would not only stimulate economic activity, but potentially lead to Australia having the greenest building stock in the world, in addition to a relatively easy and cost-effective way to reduce carbon emissions.” 

“The $10bn Clean Energy fund will support the deployment and commercialisation of renewable energy, low emissions intensity and energy efficient technologies.  Given the potential property has to reduce emissions, the PFA believes that a fair share of these incentives should be directed to property, particularly given the long term life cycle of real estate.”

In addition, the PFA believes the government needs to implement more direct action for property under programs like the Green Building Fund, and deliver on tax incentives under the green tax breaks program. This will help reduce emissions faster and bring other benefits such as increased employment and the development of exportable skills and technologies.

To this end, the PFA has been working for over three years to prepare its members for the inherent changes in the property and investment sector which will be bought about byclimate change.  A dedicated Sustainability Committee has been addressing the risks and rewards of the impact of climate change on property and has been arming its members with tools so they can take meaningful steps to transition. 

“This is about knowledge” says Murchie, “and armed with the right information we hope our members can make the right decisions. Like the Target 155 program or the Green Star ratings tool, whenarmed with relevant information and a benchmark to aspire to, the market typically tends to change its behaviour for the better.”

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• The Federal Government has proposed a new tax on carbon emissions of $23 a tonne to apply to 500 of the biggest corporate emitters from July 2012.
• The aim of the tax is to increase the price of goods produced by carbon-intensive industries and thus change behaviour of consumers and businesses. But the extent of the compensation mechanisms substantially reduces the effectiveness of the tax. If consumers are no worse off, and in fact many are better off, then you don’t have the incentive to change behaviour.
• The cost to the budget over the next four years is $4,281 million, including assistance packages for the steel and coal industries ($2,906 million in 2011/12). The Government expects the carbon tax to reduce emissions but income per person will be lower than in the absence of the scheme. Employment is tipped to increase by 1.6 million over the next nine years after rising by 2.18 million over the past nine years.
• The proposed tax on carbon emissions could work to reduce global emissions provided other countries moved at the same time. The risk of moving too quickly before other countries is that it reduces the competitiveness of Australian industries.

What does it all mean?

• The good news is that the release of details of the proposed carbon tax reduces uncertainty. The price of carbon is finally known as are the compensation mechanisms. The bad news is that the uncertainty has only just begun for consumers and businesses. Now Australians will be inundated with the pros and cons proffered by politicians, industry associations and interest groups.
• The Federal Government is proposing a tax on carbon emissions based on the theory that the global increase in carbon emissions is contributing to climate change. If you believe in the theory then it is reasonable that efforts are made to reduce carbon emissions. But a global problem requires a global situation. Australia represents just 1.5 per cent of global carbon emissions. So without significant efforts by large countries – China, India and the United States – then Australia’s efforts will have negligible effect.

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• At the end of the day, a tax on carbon emissions would work to reduce global emissions provided other countries moved at the same time. The risk of moving too quickly before other countries is that it reduces the competitiveness of Australian industries. Ahead of similar measures to price carbon by other countries, a better move in the interim may be to legislate for the gradual reductions of carbon emissions by companies.
• Unfortunately, as Greens senators acknowledge, there is the real risk that the Kyoto Protocol agreement to reduce carbon emissions will not be renewed when the United Nations climate change summit is held in Durban later in the year.
• In practical terms, the efforts to tax carbon emissions represent a lot of effort to produce little benefit. Australian consumers are likely to be rightly sceptical about whether their cost of living will rise. The Government says 5 million households will be super-compensated for the carbon tax. But until the compensation comes through, consumers will remain sceptical, entrenching “consumer conservatism”. While it is proposed that 90 per cent of households will be compensated, it still means that 10 per cent will be made worse off by the introduction of a new tax.
• In pure economic terms, there will be debate that the carbon tax – as currently proposed – is the right approach. As Professor Judith Sloan pointed out in The Australian on July 9/10, taxation measures are assessed on three grounds: efficiency, equity and simplicity. Professor Sloan argues that the tax fails on all three grounds. Clearly the tax is far from simple, as the Prime Minister acknowledged at the press conference. On efficiency grounds, the tax falls short of ideal for the simple fact that other countries are not moving at the same time. And on equity grounds, some in the community are actually made better off by the introduction of the carbon tax while others are made worse off. In addition, the extent of compensation measures reduces the effectiveness of the tax as it fails to change consumer and business behaviour.
• In political terms, the Federal Government faces significant risks in proposing a new tax on carbon. The tax is far from simple, making the selling job more difficult. The “Clean Energy Future” documents alone total 250 pages. And, rightly or wrongly, the fact that Julia Gillard ruled out a carbon tax ahead of the election will mean that consumers will be sceptical that they won’t be worse off with the introduction of the new tax. Consumer confidence is currently weak with the principal concern being on the rising cost of living and impact on household finances. The new carbon tax won’t ease those concerns – especially in the short term.· If opinion polls show a substantial fall in support for the Government then this will increase political uncertainty. Understandably foreign investors will be reluctant to put money to work in Australia until the carbon tax legislation is passed. There will be on-going hesitancy to invest until the tax begins in July 2012.

What are the details of the proposed tax? (note: much of the detail below is directly taken from Government documents)

• The Federal Government has proposed a “Clean Energy Future” program” that involves:
  • introducing a carbon price
  • promoting innovation and investment in renewable energy
  • encouraging energy efficiency
  • creating opportunities in the land sector to cut pollution.

• The Government has committed to reduce carbon pollution by 5 per cent from 2000 levels by 2020, and by up to15 or 25 per cent depending on the scale of global action. These targets will require cutting expected pollution by at least 23 per cent in 2020. The Government also commits to a new 2050 target to reduce emissions by 80 per cent compared with 2000 levels.

Carbon price

• The Government is proposing a tax of $23 per tonne on carbon emissions to begin from July 1 2012. The carbon pricing mechanism will be fixed for the first three years and will rise at 2.5 per cent per annum in real terms. On 1July 2015, the carbon price will transition to a fully flexible price under an emissions trading scheme, with the price determined by the market.
• A carbon price will be applied to domestic aviation, domestic shipping, rail transport, and non-transport use of fuels. A carbon price will not apply to household transport fuels, light vehicle business transport and off-road fuel use by the agriculture, forestry and fishing industries. Household fuel is exempt from the tax. The Government intends to apply a carbon price to heavy on-road transport from 1 July 2014. This measure was not agreed by the Multi-Party Climate Change Committee.
• There will be a household assistance package and it is estimated that 50 per cent of the revenue from the carbon tax will be spent on household assistance.
• The Federal Government claims that the average household will see cost increases of around $9.90 per week, while the average assistance provided will be around $10.10 per week. The effects of the carbon tax are estimated to lift the Consumer Price Index by 0.7 per cent in 2012/13.
• The cost of electricity for the average family is expected to increase by $3.30 a week with gas up $1.50 a week and food up by $1 a week.
• The Federal Government is also proposing that the revenue raised from the carbon tax will allow the tax-free threshold to be more than trebled to $18,200 in 2012-13. From 2015, the tax-free threshold will be further raised to $19,400.
• The Government estimates that 4 million households will be better off – that is, they will receive assistance that covers at least the average price impact of the carbon price on their cost of living.· Pensions, allowances and benefits will also increase. Pensioners and self-funded retirees will get up to $338 extra per year if they are single and up to $510 per year for couples, combined. Families with two children will get up to $220 in extra Family Tax Benefit Part A, and other families will get up to $110 per child. Families will get up to an extra $69 in Family Tax Benefit Part B. Allowance recipients will get up to $218 extra per year for singles,$234 per year for single parents and $390 per year for couples, combined. Self-funded retirees on the Commonwealth Seniors Health Card (CSHC) holders will get $338 per year for singles and $510 per year for couples, combined, through their Seniors Supplement.

The Climate Change Authority (CCA)

• The CCA will be established by legislation as an independent body to provide expert advice on key aspects of the carbon pricing mechanism and the Government’s climate change mitigation initiatives. The Government will remain responsible for carbon pricing policy decisions with significant and far-reaching implications. A Clean Energy Regulator will be established to administer the carbon pricing mechanism within a limited and legislatively prescribed discretion.

Federal Government initiatives

• Clean Energy Corporation: The Federal Government will invest $10 billion in a commercially orientated Clean Energy Corporation. Of the total $5 billion will be dedicated to investments in renewable energyprojects. The other $5 billion stream will fund investments in renewable energy, energy efficiency and clean technology.
• Australian Renewable Energy Agency (ARENA): The Government has proposed establishing a new,independent statutory body – the Australian Renewable Energy Agency (ARENA). “The Australian Government is funding around $3.2 billion in renewable energy investment to promote the research and development of renewable energy technologies”.
• Carbon Farming Initiative: The Government proposes a Carbon Farming Initiative for farmers and landholders that take steps to reduce carbon pollution. It will do this by creating credits for each tonne of carbon pollution which can be stored or reduced on the land. These credits can then be sold to other businesses wanting to offset their own carbon.
• Clean Technology Investment Program: The program will support manufacturers by providing $800 million in grants to upgrade to less polluting equipment and cleaner technologies. It will boost their international competitiveness and help keep manufacturing strong. Funding will be provided on a co-contribution basis,with industry providing three dollars for every dollar provided by the Government.
• Clean Technology Food and Foundries Investment Program: The Government will provide $200 million in grants to help companies in food processors, metal forgers and foundries industries to upgrade to less polluting equipment and cleaner technologies.
• Clean Technology Innovation Program: The Government will provide grants of up to $200 million through the Clean Technology Innovation Program over five years to support business investment in renewable energy, low emissions technology and energy efficiency. This could support manufacturers to develop new clean technology products.
• Energy Security Fund: The Government proposes an Energy Security Fund. The Government will seek to negotiate the closure of around 2000 megawatts (MW) of generation capacity by 2020 and provide transitional assistance to the most strongly affected coal-fired power stations.

Carbon permits

• The Government will allocate Australian carbon permits to the most emissions-intensive and trade-exposed industries. This will shield eligible businesses from the full impact of a carbon price, while retaining incentives to reduce carbon emissions.
• The most emissions-intensive and trade-exposed activities will initially be eligible for 94.5 per cent shielding from the carbon price. A second category of assistance will provide an initial shielding level of 66 per cent of the carbon price. This will apply to activities assessed as having a lower risk of carbon leakage. LNG projects will also receive a supplementary allocation to ensure an effective assistance rate of 50 per cent, in recognition of the wide dispersion of emissions among some prospective LNG developments. The assistance rates will be reduced by a carbon productivity contribution’ of 1.3 per cent a year to provide additional incentives over time for these industries to reduce pollution.

Assistance for small business

• The Federal Government says that small businesses will benefit from being able to claim an immediate tax deduction for assets costing up to $6,500 under changes to business tax deductions. This will help business invest in more energy efficient equipment and help small businesses to respond to the carbon price. The small business instant asset write-off threshold will be increased to $6,500. This applies to businesses with a turnover of less than $2 million a year.

The Jobs and Competitiveness Program

• The Jobs and Competitiveness Program will support local jobs and production, and encourage industry to invest in cleaner technologies. The ongoing program will provide $9.2 billion of assistance over the first three years of the carbon pricing mechanism, targeted at companies that produce a lot of carbon pollution but are constrained in their capacity to pass through costs in global markets. Assistance will be provided to around 40-50 of these ‘emissions-intensive trade-exposed’ industrial activities, such as steel, aluminium, cement and zinc manufacturing. Businesses producing over 80 per cent of the manufacturing sector’s emissions are expected tobe eligible for assistance under this program.

Additional measures proposed by the Government:(additional to that agreed by Multi Party Climate Change Committee)

Treatment of heavy on-road transport

• The Government intends to apply an effective carbon price to fuel used by heavy on-road transport from 1 July2014 through changes in fuel tax credits. This will significantly broaden coverage of the carbon price as heavy on road vehicles account for over 25 per cent of road transport emissions. Moreover, as rail, domestic shipping and domestic aviation will face an effective carbon price, extending coverage to include heavy on-road vehicles will provide consistent treatment across the freight sector.

Steel Transformation Plan

• The Steel Transformation Plan will provide assistance worth up to $300 million over five years to encourage investment and innovation in the Australian steel manufacturing industry. This will help the sector transform into an increasingly efficient and economically sustainable industry in a low-carbon economy. The Steel Transformation Plan is designed to improve the environmental outcomes of steel manufacturing and promote the development of workforce skills.

Coal Sector Jobs Package

• The Coal Sector Jobs Package will provide assistance over six years to the most emissions-intensive coal mines. The Government has allocated $1.3 billion to this program.

Coal Mining Abatement Technology Support Package

• The Coal Mining Abatement Technology Support Package will provide transitional assistance to help the coal industry implement carbon abatement technologies. Assistance will be provided in the form of grants on a co contribution basis. The Government has allocated $70 million over six years to this program.

What are the implications for investors?

• The United Nations climate change conference in December may not renew the Kyoto agreement on carbon emissions. Simply, there has been a re-assessment of the climate change theory. While the Clean Energy Future documents warn of global warming and point to a similar situation in Australia, long-run figures from the Bureau of Meteorology indicate that the gradual upward trend in temperatures has occurred for almost 150 years. The risk isthat Australia ends up leading the world on an issue whether there is less agreement on the right response.
• The Government gives the impression that it has created the perfect tax – where no one is worse off, in fact some are better off, and Australia takes a lead over other countries to price carbon emissions. But if it was that easy and painless then Governments would have done it years ago.
• The simple fact is that there is a cost to the economy – the budget bottom line is worse off by $4.3 billion with much of that impact actually made in the current financial year. Employment and income are expected to increase with the carbon tax, but will do so at a slower pace than without the carbon tax.
• Foreign investors will continue to be cautious on investing in Australia. If the carbon tax is introduced and runs successfully then foreign investors may warm to Australia – but success is unlikely to be proven for a number of years. There are risks in Australia moving at a faster pace on pricing carbon than other countries. The economy will be negatively affected in the short-term, albeit modestly. And then there is the mining tax, which has yet to be passed by Parliament.
• The Australian dollar is unlikely to be significantly impacted. If anything the impact is mildly negative, but that clearly would be welcomed by miners, rural producers, manufacturers and tourism operators.
• The extent of change and uncertainty for the coal and steel sectors as well as manufacturers will lead to a softening of investment support in the short term.
• While the Government has been generous with income and taxation support for households, consumers are likely to remain sceptical. It is important to remember that household incomes have been rising but the sharp lift in the cost of living – especially gas and electricity bills – has still made consumers cautious about spending. Electricity and gas are inelastic goods meaning that substantial changes in prices lead to only small changes in demand.
• Any increase in the headline rate of inflation makes the Reserve Bank nervous. So the Reserve Bank is more likely to lean in favour of rate hikes in the first half of2012/13 as the new tax gets bedded down.The other risk relates to the potential for business to lift prices in response to higher electricity and gas prices.

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