According to the Australian federal budget in 2018, it is clear that the Australian economy has some overarching weaknesses. For instance, the high quality of life by many citizens is unsustainable. This paper first analysis the Australian federal budget for the year 2018 to reveal some of the weaknesses in the economy, scrutinizes some of the factors which are considered by the RBA when determining the cash rates and which can also be regulated by the federal government to enable the RBA increase the cash rate and improve the economy at the same time. The factors identified include unemployment rates, wage growth, household debt, consumer confidence index and Australian dollar. Lastly, the paper gives some recommendations on how the Australian economy can be improved and enables the RBA to increase the cash rate after some few months.
The centerpiece for this year’s Australian federal budget is the government’s personal income tax plan. The plan has provided an immediate tax relief for both low and middle-income earners in a targeted non-refundable offset on top of low-income tax offset. It also combats the bracket creep with a modest upsurge in the ceiling of 32.5% tax bracket (Rekova, Dolozina, Nitsenko, Zamlynskyi and Zaitsev, 2018, p.40). The government also announced its expectation to push back the economy to surplus by the next budget, creating an opportunity to make changes that target financial goals of tax revenues less than the 23.9% GDP. Also, the passage of a bill to ease company tax rates has been an indication that the government is aware of the consequences of the increasing unemployment rates in the country (Salisbury et al, 2018). From the summary of the budget analysis by the economists, it is clear that more measures are supposed to be put in place to facilitate economic growth within the country. For instance, the unemployment rate although has gradually fallen from the 5.6% where it stood in the last financial year to 5.3% currently, much need to be done to reduce the rates further. In consideration to the public net debt which touches on household debt, the statistics have shown that the debt is on a rising phase (19.1-19.2%) which also sends an alarm that the sector should also be looked into for the economy to improve (Purnell, 2018, p.60). Lastly, the consumer price index has also indicated an increasing phase from the previous year 2017 and that calls for attention if the economy has to improve.
When it comes to setting RBA cash rates, there are a number of factors which are considered. This is because RBA acts as the backbone to the entire Australian economy and without due considerations can lead to more harm than benefits. For the cash rate to be increased in the next few months, the Federal Government will have to consider the factors which improve the economy as well as necessitating the increment of cash rates (Tong, 2018, p.18). Such factors will include but not limited to: unemployment rates, the household debt, inflation, wage growth, Australian Dollar value, and consumer confidence index. Considering each of these factors, it dawns that each has its own way of affecting the cash rates. This paper will only consider the factors which can be regulated by the federal government to increase the cash rate and improve the economy at the same time.
For instance, the cash rates can’t be increased under the current unemployment rate in Australia which has nudged higher to 5.3%. This rate edged up higher in February after a fall in the part-time jobs (Pham, Liu, and Roca, 2015). By putting in measures to reduce the rates of unemployment within the country, the RBA will be in a position to increase the cash rate. On the other hand, reducing unemployment will be an approach to improve the country’s economy through the reduction of dependency levels and increasing investments in the country. Through the adoption of measures which control the unemployment rates, the federal government will stand a chance of improving the economy and facilitating the increase in the cash rate on the other side.
Wage growth is the second factor which must be looked into before the cash rate can be increased. The wage growth in Australia has been slow in the recent quarters, approximately at a rate of 2% (Product, 2017, p.16). Weak wage growth rates in different sectors are a major factor considered by the RBA in deciding the cash rate as, without higher wages, the household consumption remains limited. Considering the fact that household debt has been growing rapidly while wage growth stagnating, adjustments by the federal government to balance the two will both strengthen the economy and also allow the RBA to increase the cash rate.
The household debt is another factor considered by the RBA in setting the cash rate. When the household debts are very high, the RBA is constrained from raising the cash rate. High household debts imply that many Australians operate on large borrowed amounts for their homes and this force the RBA to consider the fact because raising the cash rate would immensely affect the household sector (Howell and Rodger, 2018). Adopting the measures which can reduce the household debts will not only play a role in improving the economy but also will make it possible for the RBA to increase the cash rate.
The performance of the Australian dollar in terms of the exchange rate is another factor taken into consideration by the RBA when setting the cash rate. For that matter, the cash rate is increased when the exchange rate is performing well and reduced when the exchange rate is poorly performing. A well-performing exchange rate depicts that the economy is improving and this can be achieved through measures which enhance the performance of Australian dollar. Putting the measures into play by the federal government will, therefore, ensure that the economy improves and on the other side enable the RBA to increase the cash rate (Chappell and Campbell, 2018, p.300).
The last factor to be considered in this paper is the consumer confidence index. RBA considers this index as an indicator of the optimal level of consumers towards their financial status. This is in consideration of the fact that consumers tend to spend more on goods and services when confidence is high compared to when it’s low (Esposito, 2018, p.5). So, to be able to improve both the economy and enable the RBA to increase the cash rate, the federal government will have to put into place some of the measures which increase consumer confidence.
To be able to improve the economy and at the same time facilitate an increase in the cash rate within the next few months, the federal government will have to consider eliminating some of the factors which hinder RBA from increasing the cash rate while facilitating economic growth at the same time. Factors like high unemployment rates within the country hinder the RBA from increasing the cash rate (Savage and Lewis, 2018, p.120). For that matter, efforts by the federal government to reduce unemployment rates will not only improve the country’s economy but also enable the RBA to increase the cash rate within the next few months. The same case will apply to all the other factors listed above including the wage growth, household debt, the Australian dollar, and consumer confidence index.
The primary approach by the federal government to reduce the current 5.6% unemployment rate will be the use of the expansionary monetary policy. In this approach, the Federal Reserve will have to change its monetary policy through the reduction of fed fund rates. Through this approach, the overall interest rates will be lowered and businesses spurred to borrow money and buy capital equipment hence hiring more workers. The low-interest rates will also boost the housing markets and spur auto sales as well as other consumption spendings (Watts et al, 2018, p.240). Within the next few months, the economy will have stabilized since the dependency level will have declined following the declining rates of unemployment and investments. At such a state, the RBA will be in a position to increase the cash rate comfortably with no adverse impacts on the prevailing economy.
The second main approach by the federal government to reduce unemployment rates will be through the expansionary fiscal policy. This will entail the government creation of jobs directly by increasing its spending on government projects. An example of such project is the New Deal and 2009 Economic Stimulus Program enacted by the government after the 2008 economic crisis (Bonoli, 2017). This can also be achieved by cutting corporate taxes which will enable them to hire more workers than before. A good example under this category is the Bush tax cuts of 2001 and 2003 in the US. In 2010 also, Obama tax cuts are also recorded to have stimulated the spending within the country just like the decreases in interest rates.
Apart from these two main approaches, the federal government can also reduce unemployment rates by lowering employment taxes like national insurance contributions to increase labor demand. Through this approach, corporates will be in a position to source more employers than before considering the availability of resources and the expansion of the firms. Improving on export competitiveness may also play a major role in ensuring that the businesses which operate on export basis have competitive advantages in their business (Gray and Tesfaghiorghis, 2018). This can be achieved by the federal government through educating and enlightening the exporters on the state of global markets as well as advising them on the market demands.
As discussed in chapter three of this report, wage growth is a major factor considered by the RBA when adjusting the cash rate. The wage growth in Australia has been slow in the recent quarters, approximately at a rate of 2%. Weak wage growth rates in different sectors are a major factor considered by the RBA in deciding the cash rate as without higher wages, the household consumption remains limited (Dosi, Pereira, Roventini and Virgillito, 2016). Considering the fact that household debt has been growing rapidly while wage growth stagnating, adjustments by the federal government to balance the two will both strengthen the economy and also allow the RBA to increase the cash rate.
Modernizing the labor market institutions is one of the major approaches which the federal government can use to ensure that wage growth is achieved. It will achieve this by restoring real values of minimum wages and overtime thresholds as well as protection of union rights (Martin, 2015, p.4). Through this approach, institutions will be forced to compensate their workers as per their expertise and skills hence promoting the wage growth.
Wage growth can also be achieved by the federal government by enforcing education and training programs which match the demands of the labor market. This will work better for the short courses like CPA and CCNA and will increase the learners’ chances of getting early- career wages. Measures to eliminate non-compete contracts for low wage employees backed up with banning the agreements that prevent franchisees from hiring each other’s employees will work better to promote wage growth and enable the RBA to increase the cash rate while improving the economy at the same time (Sanders, 2018).
The household debt in Australia has been rising steadily in the past few decades as more Australians strive to own their homes and relying on products such as credit cards and car loans. (Cassells, Duncan, Kelly, and Ong, 2015)According to OECD statistics, household debt to income ratio has doubled between 2000 and 2018, going up from 104 to nearly 220%. This is an implication that an average person earning $80,000 spends $169,600 per year. When the household debts are very high, the RBA is constrained from raising the cash rate (Carvalho, 2015, p.36). High household debts imply that many Australians operate on large borrowed amounts for their homes and this force the RBA to consider the fact because raising the cash rate would immensely affect the household sector. Adopting the measures which can reduce the household debts will not only play a role in improving the economy but also will make it possible for the RBA to increase the cash rate (Lowe, 2017, p.125).
In order to reduce this debt, the federal government will have to tweak some policies touching on the property to ensure that Australians do not “securitize” all their life. The first step would be ensuring that all the property curbs are upheld until the economy is restructured and the targets set have been achieved satisfactory (Bishop and Cassidy, 2017, p.15). This is because the gap will continue to widen as more and more people will continue taking loans and credit cards with an aim of owning their own houses, cars and other luxuries. This will not only affect the housing sector but the entire economy (André, 2016).
Secondly, the federal government may opt to compel foreigners with local property to resell to locals only. This will prevent foreign speculations and excessive rates of asset appreciation rendering property prices unaffordable to the ordinary Australians and have long-term economic consequences (Weir, 2018). Through this approach, the local Australians will be able to acquire property at affordable prices which can be met through normal earnings without having to take loans.
Thirdly, the federal government may opt to refine total debt servicing ratio to restrict total loan repayment contract for property purchases to a maximum of a certain period. This ensures that Australians pay all their outstanding mortgages first property and adhere to Central Provident Fund minimum sum requirements before envisaging another property (Lombardi, Mohanty and Shim, 2017). Through this approach, the household debt will immediately start declining because most of the people with outstanding mortgages will not be able to acquire any other until they complete paying the one they have. That will not only improve the economy but also enable the RBA to increase the cash rate after some time (Flodén, Kilström, Sigurdsson and Vestman, 2017).
The performance of the Australian dollar in terms of the exchange rate is a factor taken into consideration by the RBA when setting the cash rate. For that matter, the cash rate is increased when the exchange rate is performing well and reduced when the exchange rate is poorly performing (Apergis, 2014, p.80). A well-performing exchange rate depicts that the economy is improving and this can be achieved through measures which enhance the performance of Australian dollar. Putting the measures into play by the federal government will, therefore, ensure that the economy improves and on the other side enable the RBA to increase the cash rate (Apergis, 2014, p.77).
The federal government can promote the dollar value by promoting the terms of trade within the country. Since 1983 when the Australian dollar floated, its value has tracked the commodity prices closely and the ratio of the country’s imports to its exports (terms of trade). To promote the terms of trade within the country, the federal government should ensure that the country’s exports and imports closely balance. Export sector has been lagging behind and hence the government should enact measures like entering into trade agreements which will open wider markets for its exports.
RBA considers consumer confidence index as an indicator of the optimal level of consumers towards their financial status (Castelnuovo and Tran, 2017, p.150). This is in consideration of the fact that consumers tend to spend more on goods and services when confidence is high compared to when it’s low. So, to be able to improve both the economy and enable the RBA to increase the cash rate, the federal government will have to put into place some of the measures which increase consumer confidence (Salas-Vega and Mossialos, 2016, p.820). Some of the factors that affect consumer confidence index are high unemployment rates, inflation, debt levels, and economic growth. As discussed above taking care of some of these factors will increase consumer confidence index (Wu and Yu, 2017).
For instance, the expansionary fiscal policy will help reduce the unemployment rates and increase consumer confidence index. This will entail the government creation of jobs directly by increasing its spending on government projects (Ali, Anderson, McRae and Ramsay, 2014). Also, In order to reduce this household debt, the federal government can tweak policies touching on the property to ensure that Australians do not “securitize” all their life. The first step would be ensuring that all the property curbs are upheld until the economy is restructured and the targets set have been achieved satisfactory hence increasing consumer confidence index (Sum, 2014, p.21).
Conclusion
From the above discussion, it is clear that the RBA regulates the cash rate in consideration to several factors. Such factors include unemployment rates, inflation, wage growth, household debt, dollar value, and the consumer confidence index. Since the federal government aspires to improve the economy as well as increasing the cash rate, the paper has looked at measures which can be regulated to not only enable the RBA to increase the cash rate but also improve the economy of the country generally. Such measures include; compacting the high rates of unemployment, promoting wage growth, promoting consumer confidence index, promoting the Australian dollar value and reducing the household debt.
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