Expect fiscal tightening

The election of the Labor Party is likely to result in a tighter fiscal policy and wage inflation in the short-term and strong economic growth in the long term, according to BT Financial Group chief economist Chris Caton.

Speaking at the Financial Planning Association (FPA) 2007 National Conference in Sydney yesterday, Canton said that, because changes in government do not normally have major effects on financial markets, Labor’s election should not herald substantial changes.

However, he said he expects the newly-elected Government will adopt a more stringent fiscal policy — at least initially.

“With regards to their fiscal responsibility, I think Labor will do better and run a somewhat tighter ship,” he said.

Canton said he expects Labor’s decision to scrap the Work Choices regime will result in minor wage inflation, although he does not think most new workplace agreements will differ markedly from those currently in place.

Canton also predicts Labor’s stated dedication to tackling climate change to boost economic growth and reduce inflation in the long term — although the reverse will be true in the short term.

“It’s about deliberately opting for negative growth and price rises in the short-term so as to achieve greater benefits in the long term.”

As such, he added, companies that offset climate change, such as those dealing in renewable energy, will benefit most, while those contributing to it will suffer.

He said expects Australia’s economic growth and currency to remain robust for some time yet, provided the United States economy does not hit a major speed bump — something he does not rule out completely.

“Right now, Australia’s sitting at the top of the chart for global medium to long-term economic growth and inflation prospects … The exchange rate should fall a bit, but will remain strong.”

He later added: “There will be another recession, but not in the near future. Unless the US falls into a big hole.”