In the wake of Federal election result returning the Coalition Government and with a likely majority in the lower house there are near-term implications for the Australian economy. Because the election result was a genuine surprise, some implications run from changes in business and household expectations that had started to be built-in ahead of the election based on the strong likelihood of a labor victory.

It is fair to say that Australian businesses and households were starting to plan based on what was likely to occur if Labor won the election and Chris Bowen was the new Treasurer. The first Bowen economic statement or mini budget was expected to contain details of scrapping negative gearing on existing housing; reduction in the capital gains tax rate concession; loss of dividend imputation tax credits for those who had paid no income tax. There would have been sweeteners too, increases in some social welfare payments and the same immediate income tax rebate offered by the Coalition.

Instead of the Bowen economic statement widely expected, and in some cases feared, Treasurer Josh Frydenberg’s pre-election Budget delivered back in April and thought likely never to be enacted and legislated is now likely to be first order of business for the re-elected Coalition Government. The Government is particularly keen to get the personal income tax measures legislated promptly – the doubling of the low and middle income tax rebate from $540 to $1,080 per taxpayer for 2018-19 tax returns and the changes over the next few years to the four-step 19%; 32.5%; 37%; 45% tax scales to a three-step 19%;30%,45% in 2024-25.

In short, most Australian households can look forward with some certainty to paying less income-tax in the near-term and extending out over several years. The higher tax rebates starting in July are likely to lift near-term household consumption spending growth. The further cuts legislated to income tax rates over the next few years are likely to lift consumer sentiment more than otherwise would have been the case.

Also, Australian households can look forward with certainty to no changes to the tax concessions applying to negative gearing; capital gains tax; and dividend imputation. Labor’s unexpected loss at the Federal election would seem to have come down in part to negative voter reaction to proposed changes to tax. Clearly the Coalition Government will not want to look at tax changes in these areas. It is also likely that the Labor party will be wary about re-proposing these changes in the foreseeable future.

Households were preparing for changes to negative gearing; capital gains tax and dividend imputation and investment housing was one area of the economy that looked set to be impacted negatively. The removal of the threat of these tax changes is likely to mean that the outlook for spending on housing investment is better than it would have been otherwise. Conceivably the tentative signs that the housing market is bottoming out will become more pronounced. At the very least it is possible to be more confident that the worst of the sharp downturn in house prices is over.

The pre-election Frydenberg Budget also contained higher tax write-offs for a wider range of businesses plus more public infrastructure spending and a $4 billion provision to fund many of the additional spending promises from the Coalition in the election campaign.

All told the Frydenberg Budget was net supportive of GDP growth in 2019-20 but is now also likely to provide additional boost to business and consumer sentiment because of what it unexpectedly replaces – the first Bowen economic statement with proposals for higher taxes.

The surprise election outcome with its potential to lift business and consumer sentiment and even economic growth is likely to give the RBA another reason to consider waiting longer before making any decision on the cash rate. Neither of the two key economic reports released last week relating to wages and the labour market provided clear evidence of the need for a rate cut. Wages rose 2.3% y-o-y in Q2 one percentage point above the 1.3% y-o-y lift in the CPI. Employment rose by more than 28,000 in April and although the unemployment rate ticked up one notch to 5.2% it came as a result of the labour force participation rate lifting to a record high 65.8%, a sign of confidence in the strength of the labour market.

At the very least, the RBA is likely to wait until August when growth and inflation forecasts are revised next. The boost to business and household sentiment from the unexpected election result plus more signs that the labour market is firm should tip the pendulum more in favour of caution before lowering the cash rate. Our view remains that the 1.50% cash rate will persist through this year and well in to 2020.