Questions:
(1) Examine Australia’s recent economic performance and provide an overview of the current economic outlook. Critically review the governments’ policy approach to meeting the key domestic challenges identified.
(2) There is often a tension in setting macroeconomic policies, where some policies can have undesirable consequences. In the context of the governments’ current policy approach, examine the following and discuss how these countervailing forces might constrain desired policy settings and outcomes.
a) Providing incentives for work and innovation via a reduction in company and income tax (which are high by international standards), in the context of a large budget deficit.
b) Lowering interest rates to stimulate economic activity, while moderating housing price growth and improving housing affordability.
The macroeconomic policies of a country are the most important policies and these policies play significant role in the economic growth of the company. These also decide the economic position of the country as well as decide the direction of the economy of the country. There are several different types of the macroeconomic policies and among them most important policies are fiscal policy, monetary policy as well as exchange rate policy (Barbieri and Pezzini, 2001). The fiscal policy of a country helps to allocate the budget of the country’s necessary development and other requisites. The monetary policies of the government help in allocating the fund in correct investment option so that the country can able to achieve the desirable economic growth. In addition to that the exchange rate policy helps the government to maintain the rate of domestic currency as compared to the standard international currency. In Australia the government put great emphasis on developing effective macroeconomic policies in order to ensure the desirable high growth rate for the country (Brittle, 2010). This report is an attempt to analysis the macroeconomic policies of Australia, which help in improving the growth of the country.
The Australian Government has taken significant economic policies, which help the country to establish substantial growth for the country. The government of Australia has been at the front position for utilizing the fiscal policies in order to minimizing the macroeconomics effects of the financial crisis, which influence the global economy (De Menil, Portes and Sinn, 2008). The Australian Government can do so as the debt of the country is minute compared to the international standard. Even after many years of fiscal deficits, the net government debt is remaining lower than 10% of the GDP of the country. This compares positively with the debt ratio of the United Nations Government of around 70%.
The country has implemented sustainable fiscal policies, that needs the debt of public does not enhance connecting to the GDP in long term. The gross domestic product of Australia has expanded up to 0.7% in December 2015, in comparison to upward revised 1.2% growth in previous quarter and the market consequences (Fender, 2012). The expenditure on consumption is positively contributed to the expansion, net exports and investment also contributed to the growth of GDP.
The growth of economy is around 3% by accelerating from the upward revised 2.8% in September quarter and thus beating the expectation. Therefore, it is considered to be the fastest growth since the third quarter of the year 2012. The growth rate of GDP in the country is around 0.88% from the year 1959 to 2015. The growth rate reached to 4.50% in the first quarter of the year 1976 and recorded low at the rate -2% in second quarter of the year 1974. The current economic performance of the country is good and is supported by high production level (Freebairn, 2003). It is also a significant contributor of the five sectors that is expected to drive the future global development: education, agribusiness, mining, wealth management, and tourism. The structural reforms of the government of Australia can face decade of deficits due to the increase in the spending on the older households. The repaying costs will fall on the younger households. The Australian GDP is seemed to be expanded for the last quarter of the year 2015 and it also seems to be upward rising in with the growth percentage of the 2.7 percent and thus the expectations are seemed to be fastening the expansions that are required for the proper enhancement of the resources for the utilisation of the resources in the Australia. The growth rate of the country Australia is enhanced at the third quarter of the 2012 whose GDP annual growth is seemed to be fastening the expansion of at the rate of the 9 percent. Thus the bureau of the statistics also shows the growth of the economy in the country of the Australia also helps in the development of the economy of the country of the Australia. Thus the country Australia’s national GDP seems to be increasing at the next year of second year of at the low interest rate of the GDP and thus it also shows the growth of the -3.50 percent which also helps in the creation of the statistics of the Australian Bureau of the statistics (Abs.gov.au, 2016). The structural reforms of the government of Australia can face decade of deficits due to the increase in the spending on the older households. The repaying costs will fall on the younger households. Hence, the Australian economic centre seems to be dominated by the services sectors and thus it also helps in the increment of the success of the of the other sectors including the mining sectors that are require for the proper enhancement of the percentage at the rate of 13.5 % and thus it also helps in showing the key developments in the commodity of the exports and the imports and thus it also helps in the proper increment of the investments in the infrastructural services for the proper enhancement of the sectors data. Thus the Australian GDP also shows the actual values of the Australian GDP shows the historical and the forecasting of the economic calendars that are related to the new releases of the year.
Therefore, it would be difficult for the government of Australia for next ten years (Tawadros, 2016). Therefore, the commonwealth government is funding to adopt and implement new policies. Apart from this, government of Australia is still to respond the scale of the budget challenges. These challenges are difficult to overcome as the government does not have enough funds to purchase the reform. The sustainability of economy depends on the government policies (Friedman, 2000). The policies implemented by the government are reducing the superannuation tax, changing the capital gain tax and the negative gearings, introducing broad property levy and broadening the goods and service tax. The country has significant economic policies, which help substantial economic growth of the country. The GDP of the country is stable from the last several years as well as improved substantially in last few years.
a). The companies providing incentive for work to the employees and innovation via reduction in organization and income tax might constrain the desired policy setting and outcomes. The strategies can affect the policy setting of the country (Relative fiscal capacities of the States 2006, 2006). The government can have a significance influence on incentives that affects investment, innovation and taking decisions whether the workforce should participate or not and all the drivers for development. The incentives are influenced by disciplines imposed by the competitive markets. The reduction in the income tax can affect the income source of government (Gruen, 2005). The approach of the government to the fiscal policy is significant to imparting credibility and certainty to the market through application of the macroeconomic policies. The creditability policy contributes to the reduced uncertainty and thus creating more attractive business environment. The disciplined fiscal policy with credibility over medium terms allows the business to make decision regarding investment with greater confidence. The rates of payments which include their adequacy should be balanced against the impacts on the incentives for the employees to get off the welfare (Gruen, 2005). Therefore, the economic policy settings through the welfare and tax system impact on the work incentives and it should be frame in such a way that avoids the discouragement of employees. When the government of the country reduced the income tax rate along with the tax for the companies, the government do so for promoting the business activities of the countries. When the income tax reduced for the individuals of the country the citizens have more money and they can expense more thus, the cash flow in the market is increasing and there is more liquid money in the market so the growth of the market is increasingly increased and from the growth rate of the market the economy of the country use to be boosted significantly. In case of reducing tax for the companies the companies have more liquid money, which the companies can invest in the future development of the companies and it help in prospectus growth and development of the country and its economy. The economy is boosted by these particular novel policies, which is different from the traditional economic policies. By these economic policies the government of country use to take substantial risk as by this policy the taxation income of the country will be reduced and the wealth of the country will be reduced initially but at the same time it open huge potentiality of growth and economic development of the country. The policy of reducing income tax and the company tax is innovative taxation policy of the government of the country that substantially help the country to improve its economic growth and development.
At the time when the countries, in order to encourage the investment and growth of the companies of the country reduce the income tax rate as well as company taxes, which lead to deficit in the budget as the tax collection from the income tax Act of the countries as well as from the others taxes which are levied to the companies performing their business activities within the constituency of the country. By reducing the taxes the wealth collecting from the taxation will be reduced initially, however, it encourage the companies within the country to do more investment as well as this policies encourage the companies to do expansion for the growth and development of the company (Gumus, 2011). Therefore, in order to proceeding expansion the companies have to use several government facilities and have to provide taxes for availing the facilities and so that the taxation wealth of the country will be increased. Besides this, it helps in the growth of the market as due to this policy of government to reduce company and income tax the market use to be growing substantially (Nagel, 2000). Moreover, in this way the economy of the country will be growing. In case of reducing the income tax, the taxpayer citizens of the country will get more money in their hand so they incline to buy more or they use to expense more in this case the market use to grow substantially (Itō and Rose, 2008). Therefore, by the help of this policy the government can be able to improve the economy of the country.
b). When the central bank of the country takes initiatives for lowering the interest rate, it plays significant role stimulating the economic activities within the country as several organizations use to take finance from the banks in order to improve their business activities so that the companies can be able to establish desirable growth and development (Kincaid and Shah, 2007). The decrease in the interest will help in the development of the economic activity of Australia. The price growth can also be controlled of the houses so that the middle and low income group family can afford for the houses. Therefore, the affordability of the houses can be improved with the lower rate of interest and decreasing the rate of price of the houses. It has been concluded that the housing policy in the country is inappropriate that affected the housing affordability of lower income and middle income group of the people. It has been forecasted that the rise in the price of the houses imposes negative impact on the people of the country. The decrease in the rate of interest of the houses will encourage the lower and middle income group of the people. The increase in the rate of interest and decrease in the price of the houses will enable to afford houses. The tax amount should be reduced and the combination of the Negative gearing and capital gain tax has contributed problems to the affordability of the houses all across the country. The decrease in the interest rates and price of the houses will help to increase in the investment in houses and attracts more number of investors towards purchasing of houses in the country. The complexities in the changes in the price of the houses have created difficulties in front of the government of the country. However, decrease in the rate of interest and decrease in the principle price will increase the affordability of the houses among the investors and other people. In the following policy banks play an important role as they provide loan to the people for different purposes as well as for the housing in the country. The policies and factors should help in the growth and appropriate development of the country.
Therefore, in case of lowering interest rate by the central bank of the country a boom in the market can be evident as the economic activities by the companies use to be improved substantially by the governmental policy of the country. At the time, when the price of the housing is growing the lowering in the interest rate help in improving the affordability of the housing as the customers of the housing can obtain the house in lower rate of interest and thus the tendency of buying a new house will be increased and maximum number of people incline to buy new house thus, a boom can be evident in the real estate industry (Monacelli and Perotti, 2010).
Conclusion
The government of Australia should undertake reforms on the spending and revenue side. The government is focusing on cutting down the spending. The government has reduced the budget for the foreign aid and the savings have been proposed for primary care, welfare through the changes in arrangement in the benefits and eligibility threshold and primary care. The revenue measures can help the government to improve the budget deficit and other policies.
References
Barbieri, S. and Pezzini, M. (2001). OECD territorial reviews. Paris: Organisation for Economic Co-operation and Development.
Brittle, S. (2010). Ricardian Equivalence and the Efficacy of Fiscal Policy in Australia.Australian Economic Review, 43(3), pp.254-269.
De Menil, G., Portes, R. and Sinn, H. (2008). Economic policy. [Oxford]: [Blackwell].
Fender, J. (2012). Monetary policy. Hoboken, N.J.: Wiley.
Freebairn, J. (2003). Economic policy for rural and regional Australia. Australian Journal of Agricultural and Resource Economics, 47(3), pp.389-414.
Friedman, B. (2000). Monetary policy. Cambridge, MA.: National Bureau of Economic Research.
Gruen, D. (2005). The Evolution of Fiscal Policy in Australia. Oxford Review of Economic Policy, 21(4), pp.618-635.
Gruen, D. (2005). The Evolution of Fiscal Policy in Australia. Oxford Review of Economic Policy, 21(4), pp.618-635.
Gumus, I. (2011). Exchange Rate Policy and Sovereign Spreads in Emerging Market Economies. Review of International Economics, 19(4), pp.649-663.
Itō, T. and Rose, A. (2008). International financial issues in the Pacific Rim. Chicago: University of Chicago Press.
Kincaid, J. and Shah, A. (2007). The practice of fiscal federalism. MontreÌÂal: Published for Forum of Federations = Forum des feÌÂdeÌÂrations and iacfs by McGill-Queen’s University Press.
Monacelli, T. and Perotti, R. (2010). Fiscal Policy, the Real Exchange Rate and Traded Goods*. The Economic Journal, 120(544), pp.437-461.
Nagel, S. (2000). Handbook of global economic policy. New York: Marcel Dekker.
Relative fiscal capacities of the States 2006. (2006). Canberra, A.C.T.: Commonwealth Grants Commission.
Tawadros, G. (2016). Asymmetric monetary policy rules in Australia. Applied Economics, pp.1-15.9-24-14 [Accessed 29 May 2016].
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