Political uncertainty undermines retail confidence

reserve bank of australiaThe Super Saturday by-elections around the nation were bad news for retailers as much as they were for the Prime Minister and the federal Coalition.

The Coalition can and will spin the defeats in the two gettable seats in Tasmania and Queensland, but the Turnbull government now faces an overhaul of key policies or almost certain defeat at the next federal election.

The looming defeat is partially the result of the federal government’s own making, but also matters outside its control that play into the Labor party’s narrative.

The Turnbull government’s key initiatives simply don’t translate to election vote winners and that includes tax cuts.

With apologies to William Shakespeare, the personal income tax cuts can be described as much ado about nothing.

The Turnbull Government spent months spending political capital on the contortions necessary to get the personal income tax cuts through the Senate and the judgement of the voters in the by-elections was that they were not worth the effort.

The tax cuts delivered a $500 “windfall’ to voters on the lower tax rates or the equivalent of two cups of coffee a week – and effectively less than the penalty rates cuts that are haunting the Turnbull Government.

The tax cuts are not enough to offset rising government and government agency bills as well as household costs such as utility bills, health insurance levies and transport costs and are not even going to see coffee shops realise the windfall of selling those two extra cups of coffee a week.

Labor’s cut through line during the by-elections about the Turnbull government proposing multi-billion dollar tax cuts for the banks and major corporations while wage growth remains stagnant, was ultimately incisive.

The opposition didn’t have to talk about the personal income tax cuts, which most Australians are more often than not prepared to forgo for improved spending on hospitals and health services, education and the national disability insurance scheme that is falling well short of community expectations.

The personal tax cuts may be worth boasting about in Canberra but they have no political traction with voters and the proposed company tax cuts are likely to prove politically toxic if the Turnbull government persists with them.

Interestingly, Pauline Hanson’s One Nation had a better and potentially much more electorally-friendly idea on reducing the tax burden, in proposing the abolition of state government payroll tax with the federal government reimbursing the states for the lost revenues.

The Coalition government has inherited financial timebombs from the former Rudd-Gillard-Rudd governments that have not seriously been addressed in the boasts about returning the Federal Budget to surplus, a boast that also fails to take into account global risks of trade wars and another financial meltdown.

The two major financial timebombs are an underfunded and impossibly stretched NDIS, which the Government is perceived to be squeezing, and the ill-conceived National Broadband Network, which voters are being forced to sign up to – generally at a higher cost for an inferior service to what they currently enjoy.

Then there is the niggle about the GST being applied to online purchases.

The decision is fair enough in the context of a level playing field where bricks and mortar retailers who have to chip in to the national  treasury while overseas retailers have been enjoying a distinct competitive advantage, however, the decision has not increased the popularity of the Turnbull government with voters.

Much more damaging for the government though is the reduced penalty rates decision of the Fair Work Ombudsman last year.

Labor referred the contentious penalty rates issue to the Fair Work Commission after lobbying retailers whose wage bills have ballooned as a result of the weekend, public holiday penalty rates.

The Commission conducted a comprehensive review and recommended a gradual and relatively modest reduction in penalty rates.

The umpire made the decision and the Turnbull government accepted the decision but the Labor Opposition under Bill Shorten, who actually referred the issue to the Commission, sees much more political gain in rejecting the decision than accepting the objective economic evaluation.

Awaiting the Turnbull government are the outcomes of the Royal Commission into the banks and superannuation funds and the Senate Inquiry into the Franchising Code of Conduct.

There is also likely to be an expanded debate on wage theft legislation, portable long service leave entitlements and labour hire and contractor obligations for employers.

The wage theft legislation is a direct result of the extensive deliberate underpayment of employees by retailers, particularly those in retail franchising.

Around Australia, Labor is proposing new laws that would criminalise the deliberate underpayment of workers with penalties that extend to jail terms.

These laws are, for the most part, popular with working Australians and present a further test for non-Labor or Green parties around the country who can scarcely defend the wage and entitlement scandals that have been reported so frequently in recent years.

Retailers have endured a long period of subdued market conditions and there have been a significant number of casualties.

The outlook appears to be no less certain and the political and broader economic circumstances in Australia are as much, if not more, to blame than increased competition from overseas retailers entering the market and online retailers.

Uncertainty undermines confidence and, in turn, impacts directly on consumer spending.

The by-election results last Saturday will generate a lot of soul searching in the Coalition government and there may just be enough fear among marginal seat members to push for a leadership change.

In any event, politics will cast a heavy shadow over economic conditions and retail prospects this financial year with vigorous campaigns for Federal, Victorian and New South Wales elections.

If politics is not enough to unnerve retailers this financial year, there are also potential storm clouds gathering in economic conditions with a credit squeeze looming, in part, as fallout from the Banking and Superannuation Royal Commission.

Housing prices are already retreating and, while that is affording some relief to buyers wanting to get into the market, it is eroding the “wealth” and confidence of existing homeowners.

Consumers tend to spend more when house prices are rising because they believe they have a safety net for any debts they create.

Bank lending in Australia has tightened and the Chinese  government has reined in the flight of capital for investment in residential properties overseas.

These actions have led to the recent decline in housing prices and, historically, when housing prices fall, those consumers have become more cautious and ease up on spending.

The Reserve Bank is loathe to raise interest rates with inflation in check and modest wage growth but the banks are mulling over increasing their rates as they face the pressure of increasing costs of money in international financial markets.

Any movement in interest rates could have serious consequences for retailers as many homeowners do not have a sufficient buffer to meet rising mortgage obligations.

The Reserve Bank has indicated a key reason why it has not moved to lift official interest rates is the fact that Australian households have high debt exposure and are vulnerable to any economic shock.

Household debt has markedly increased over household income in the past three years in Australia with total household liabilities currently estimated at $2.46 trillion, representing a household debt to disposable income ratio of almost 200 percent, one of the highest in the world.

The uncertainty of the current political and economic landscape suggests retailers need to think carefully about the mood of voters and consumers in the months ahead, just as much as federal Coalition members of parliament are stuck in a policy quagmire.

 

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