Australia is one nation that has experienced the longest period of an uninterrupted growth for the economy. It records fastest growth in the developed world and is the thirteenth largest economy in the world. Australia however has experienced a slight decline in the economic growth. The GDP growth deviated from the average growth rate. Economic growth in 2017 recorded to be 2.2 percent. The slower growth resulted from a slowdown of mining and construction sector. Investment in non-mining sector and government and consumption spending continued to be a driving force of economic growth (Groenewegen and McFarlane 2014). The federal government budget set fiscal and economic outlook for the nation. The budget includes estimate revenue and expenditure for the ongoing financial year, the budget year and for three upcoming years (budget.gov.au 2018). It summarizes economic, political and social priorities of the government and designs the strategy to achieve this outcome.
The paper evaluates Federal government budget of 2018 in Australia. The strategies prescribed in the budget are analyzed along with global and domestic economic outlook. Based on recent budget and state of the economy recommendations are given to strengthen the economic condition of Australia such that cash rate can be increased in coming years.
In the latest budget of Federal Government for the financial year of 2018 – 19, government sticks to the plan of achieving a stronger economy. Despite a slide down of mining sector, the economy continues to remain stronger. Government successfully implement the policy plan of creating new job opportunities along with boosting investment (Robinson and Wang 2018). A stronger economy enables government to secure supply of essential goods and services for Australians. The budget plans to strengthen Australian economy so that people can reap the benefits of a stronger economy. This in turn helps to secure a modest growth rate. The last budget is a plan, which will offer a tax relief in order to encourage Australian through a higher return from their work effort. This will also encourage business to increase investment that will create new jobs. The main components of the budget are discussed below
Despite stronger economic growth and improvement of fiscal position, many Australian still experience an increasing burden of living cost. Providing tax reliefs to people belonging to lower and middle income group is expected to make structure of personal income tax structure fairer, lower and simpler. It is projected that in the new tax regime, nearly 94 percent of the taxpayers will face a marginal tax rate of 32.5 percent compared to 63 percent if the tax structure remained unchanged (Chohan 2017).
Objective of national government plan is to achieve a stronger economy, accounting growth of jobs and recovering business investment in non-mining sector. In order to achieve sustainable economic growth, government needs to stick to its plan for a stronger economy. Rewards of a job in the form of wage, income or in any other form are important components of a stronger economy (budget.gov.au 2018). Government is attempting to stimulate economic growth by cutting tax rate for business, giving priorities to small and medium sized enterprises. Government offers necessary infrastructure to support businesses and jobs, provide incentive to encourage research and development and advanced technology. This will help business to grow and make domestic industries more competitive. In order to secure the economy, Australia should continue to adapt changing economic environment. Government focuses to develop capacities in technology and science to ensure that the economy does not left behind.
A stronger economy guarantees that necessary services such as Medicare, disability services, hospital and care to aged persons. Government aims to ensure that all Australians are able to access a high quality and necessary services at an affordable price. The latest budget includes specific funding for schools and hospital. A comprehensive approach is taken to for ensuring proper aged care service to encourage older people to live their life with security. Government in the budget also secures fund to ensure disability services.
In addition to securing a stable growth rate, Australian government also aims to provide citizens’ a secure life. Government protects the community from any harm by strengthening security of Australian airport. The government has also strengthened the intelligence capabilities to encounter complex and challenging economic environment (Jericho 2018). The Federal Government also protects the natural environment by an enhancing smarter biosecurity system and continues to strengthen security at border.
Restrict government spending within its means
The Federal budget conducted this year presents its final update that projects underlying cash balance to reach to a surplus by 2020 – 21. The sustainable management of government budget results in a significant reduction in government debt. This year, for the first time government does not need to borrow to finance regular expense. Australian government accounted the lowest growth in the average real expense compared to any Commonwealth government in the past 50 years. Net that that peaked during 2017-2018 is projected to follow the path of systematic decline (Courvisanos, Jain and Mardaneh 2016). One key component of nation’s economic plan is the defense expenditure and spending on infrastructure. Government borrowing will be used to finance these expenditures.
Federal government in its latest budget primarily aims to build a stronger economy. In order to accomplish this goal focus has been given on systematic management of fiscal policy, improvement in revenue receipts to secure a stronger economic growth. All these together contribute to an improvement in fiscal position. The budget provides tax concession to low and middle income household. The budget has been designed in such way that it can provide necessary backing to business investment. The government’s infrastructural plan of covering $75 billion for a period of 10 years is expected to benefit both business and people in almost every state and territories. Infrastructure has been improved by increasing road safety, managing road congestion and providing necessary railway links (Smith, Crawford and Signal 2014). In order to develop necessary skills of workers’ government also makes necessary investment in research, science and technological jobs. This will help to maintain position of Australia on global platform. Government put continuous effort to unlock economic potential in different region. Necessary support has also been given to the farmers. To strengthen educational base funding has been given to school. In order to ensure a healthy life for Australia’s citizens focus has been given to improve health care services. The strong fiscal position allows government to provide essential goods and services to its citizens with no need of borrowing.
In an integrated world economic state of one nation is vulnerable to changes in the global economy. Before designing government budget, the global economic condition needs to be analyzed. Globally, economic growth continued to increases at faster pace in the past six years. In the global economy, Australia maintained a good position and benefitted from global economic upswing (Holland 2018). There is a continuous improvement in global economic growth both in developed and emerging economies. This indicates a stronger integration in the global cycle in recent years compared to its experience in past. The stronger global economic growth has implication for business expansion for different nations. There is a significant growth in industrial production and business across several economies (Haas et al. 2015). There is also an improvement in global trade relation especially among the Asian countries. The strong trade relation between Australia and different Asian countries support business growth by providing opportunities to export in the global market. With projection of a growth of trading partners above global average growth businesses in Australia will expand at an even faster rate. In the service industry, education and tourism services are expected to grow at a faster pace. Despite recent protectionist measures in some nations, international trade continues to be one of the important source of economic growth in the global economy (Bussiere, Delle Chiaie and Peltonen 2014). Following the benefits of international trade Australian continues to support economic openness.
Figure 1: Economic growth in major economies in world
(Source: budget.gov.au 2018)
Australian economy is gaining momentum as it enters into the 27th consecutive years of economic growth. However, it is not right to take the ongoing trend as granted. The economy is currently undergone to a phase of economic transition. Focus of the economy is now shifted from mining to expansion of non-mining sectors (Alexander, Rutherford and Floyd 2018). Transition to a newer phase of growth cannot happen accidently. It needs continues support through secure and steady government policies. Despite significant contraction in mining and construction sector, the economy remained steady gaining support from improvement in non-mining investment. State of business in Australia has reached to the peak since the occurrence of global financial crisis (Langcake and Robinson 2018). All these indicate that domestic economy is doing better than that projected one year back.
Not only economic growth, labor market has strengthened to a significant extent. Labor market in Australia has recorded a significant growth in new job opportunities in 2017. Seventy-five percent of these jobs are created for full time position. The January 2018 was the 16th consecutive month of continuous creation and the longest positive sign for the economy as indicated by the official economic record. The official employment figure published on ABS shows on an average more than 1000 new jobs were created in the past year. Employment opportunities have been created across different industries and regions. Strong performance of the labor market is projected to continue in future along with a further decline in unemployment rate. With a tight labor market condition wages are projected to increase (Abbott 2018). The domestic economy is expected to account a growth rate of 2.75 percent and further to 3 percent in 2018-19 and 2018-19 respectively.
Figure 2: Labor market statistics in Australia
(Source: budget.gov.au 2018)
The Federal government sticks to its commitments to return to a state of balanced budget and accomplish the goals of medium term fiscal strategy. The process of attaining a surplus in budget was initiated long since 2013 (Badreldin 2018). After a phase of five years the government’s goal is now close to the destination. This encourages government to stick to its current economic plan. The objective of a balanced budget can be achieved through building a stronger economy along and restriction on spending. Controlling government spending is a more feasible strategy compared to increasing tax burden to strengthen the fiscal position. In response to government measures and suitable design of fiscal strategy there is a considerable improvement in existing deficit in government budget. The ratio of budget deficit to GDP has been declined to 0.8 percent in 2018-19 from an earlier 3.0 percent during 2013-14 implying 2.2 percent fiscal consolidation (Ellis 2018). The fiscal balance is expected to reach a surplus of 0.8 percent of GDP within 2026-27. The expectation is consistent with fiscal strategy of the government. Following the fiscal discipline, government has successfully cornered net debt. Share of net debt in the economy is expected to decline in the coming years. Net debt is expected to decline to 3.8 percent of GDP by 2028-29. The budget thus has reduced future debt burden of the economy while rewarded the present generation for their work effort through tax relief.
Figure 3: Fiscal consolidation
(Source: budget.gov.au 2018)
Figure 4: Net debt as a proportion of GDP
(Source: budget.gov.au 2018)
Figure 5: Recent trend in Australia’s GDP growth rate
(Source: tradingeconomics.com 2018)
The figure of GDP growth rate indicates rate of economic growth. The growth rate in the third quarter reached to a standard rate of 3.4 percent. Growth has been improved by 0.2 percentage point when compared with the previous quarter. The rate of GDP growth in 2017 was around 2 percent only indicating a slow-down in the economic activity. The GDP growth rate in recent year has been recorded to be stronger that that expected. Consumption expenditure is one significant contributor in the recovery of economy growth. Household consumption and government expenditure both add to an increase in overall consumption expenditure. Two other sector contributing to economic growth include non-dwelling construction and international trade. Spending on inventories through remained unchanged but quick recover of other sectors has helped in economic recovery.
Figure 6: Recent unemployment trend in Australia
(Source: tradingeconomics.com 2018)
The rate of unemployment has dropped to 5 percent in the third quarter of 2018. This is the lowest unemployment rate since October 2017. With this the Australian economy has accounted the lowest rate of jobless in the labor force since April 2012. The economy currently added 5600 new jobs resulting in a decline in unemployment rate. Number of unemployment people declined by 37200. Number of people looking for part time job though have increased but the same for full time jobs has been declined. Employment in the economy increased by 5600 to 12, 636, 300 (Tiwari, Harris and Van den Akker 2018). Full time employment has increase while part time employment has been dropped. The participation rate in the labor force slightly dropped by 0.2 percent. The ratio of employment to population however stayed steady at 62.2 percent.
Figure 7: Recent inflation trend in Australia
(Source: tradingeconomics.com 2018)
The inflationary pressure in Australia has been lowered in the third quarter of 2018 with a recorded inflation rate of 1.9 percent. In the previous quarter inflation rate was 2.1 percent. The latest inflation figure matched to the market expectation mainly due to a remarkable slowdown in cost of housing. The housing cost increased only at 1.6 percent in September as against 3.1 percent growth in previous quarter. There is also a marked decline in the cost of tobacco and alcoholic beverages, health and financial services (Nath and Sarkar 2018). Cost has been further declined for household equipment, furnishing and other services. In contrast, cost of food and non-alcoholic beverages has increased by 1.6 percent. Food prices are increased mainly due to an increase in cost of vegetables, fruits, meat and different seafood.
In Australia both monetary and fiscal policy play an important role in stabilizing the economic growth. The main objective of monetary policy though is to attain a stable price level but is also targets to smooth path of economic growth along with full employment in the economy. The main instrument used for this purpose is he cash rate which controls all other interest rate in the economy. Australia though experienced a relatively strong growth rate for a long period, in the past few years’ growth has undergone severe turmoil. Long since mining sector had provided a steady support to the economy. The recent slowdown in mining investment due to China’s economic transition and other factors economic growth went below the expected growth rate (Baldwin, Chenoweth and dela Rama 2015). The construction sector also had experienced a marked decline. Amid with internal and external pressure Australia experienced a marked slowdown in economic growth. Inflation also went below the targeted level. In order to revive the economy, the Reserve Bank of Australia took the strategy of lowering cash rate. The cash rate was set at the lowest level of 1.5 percent in 2016 and remained there (rba.gov.au 2018). A lower cash rate reduces other prevailing interest rate which in turn implies a lower borrowing cost. The lower cash rate thus stimulates business investment leading to economic recovery.
A persistently lower cash rate however increases the tendency of borrowing among people. In Australia, the lower cash rate results a huge burden of household debt. Most of this borrowings are made to invest in property market. The increasing demand of housing increases price of houses at a rapid rate. This is likely to create a situation similar to that of subprime mortgage crisis in United States during 2008. Therefore, lowering cash rate is no longer is feasible solution to boost economic activity. Instead, focus should be given to improve the state of Australian economy so that RBA can raise the cash rate along with a stable economic growth and price level. Given below are some of the suggested ways through which state of the economy can be improved.
An increase in cash rate should be backed by a string fiscal position. Government should focus on shifting the tax base relying more on taxes that do not hurt investment and productive work. For example, government should cut the tax on capital gain. This would create room to reduce several distortionary taxes. Stamp duties should be replaced by General property tax. Stamp duties currently prevent people to move to a place that satisfy their current needs. It is enough to place a levy of 0.5 percent on values of unimproved values to replace the existing the stamp duty (Botterill 2016). This is able to provide a more stable base of tax across the states allowing almost uniform distribution of tax burden. This would also raise the tax revenue by nearly $9 billion in a year.
Government should encourage people to return to work or stay in the current work. In Australia, participation among female labor force is lower compared to most high income economies. A relatively lower rate for take home pay prevents some women to join the labor force or doing full time jobs. Government should enhance the system family payment or improve child care service to increase participation among females (thenewdaily.com.au 2018). The older Australia are not much encouraged to work. In order to encourage participation of older Australia government should revise the ages of superannuation and pension access.
Measures should be taken to remove all the barriers towards a more flexible economy. The past reforms in the economy though helped in economic expansion but many of such policies involve a wide range regulation, occupational license and anti-dumping tariff. This often impedes economic growth. Government should relax some regulation to improve economic condition.
Another important aspect of steady economic growth is innovation and adaption of advanced technology. The existing programs to encourage innovation though supports innovators but there is a reasonable cost. Government should remove regulatory barriers that prevent spread of global innovation (Haidar, Muttaqi and Sutanto 2015). Businesses should be encouraged towards new creation and improve collaboration in business research.
The economy though has undergone a series of economic reform, individual sectors need specific reform and opportunities to expand. Superannuation industry in Australia charges a fee more than $16 billion in a year comprising 1 percent of GDP. Government should enhance competition in the industry, push the subscale funds to close and close the accounted excess amount (theconversation.com 2018). The regulated industries exert countervailing pressure to the economy. Government should establish a new national organization of competitive body that can design policy reform to encourage competition.
Infrastructure of a nation is an important determinant of growth. Investment in high quality infrastructure promotes economic growth. Government should investment more and more funds for infrastructural investment.
The period between 1950 and 1960 was the period of booming in Australian manufacturing. Manufacturing however started to decline since 1974. Hi-tech manufacturing however has an increasing important role to play in growth revival of Australian economy. Hi-tech manufacturing involves products that are research intensive. Some areas where hi-tech manufacturing is used extensively includes solar industry, hospital and for scientific research (Plotnikov et al. 2015). Promoting hi-tech manufacturing however needs promotion research and development to support production of research intensive instrument.
Conclusion
The paper briefly analyzes the latest Federal Government budget. The federal budget of 2018 – 19, government takes strategy to build a stronger economy. Australian economy though has undergone a recent slow-down mainly due to decline in investment in construction and mining sector. Govern has planned to provide a tax concession to low and middle income group to reward for work effort. Considerable support has been given to business that would expected to create new jobs and strengthen the economy in future. The budget also targets to offer Australians a secure and safer lifestyle. To maintain a stronger fiscal position government has cut down the necessary spending. The global economic condition determines the state of domestic economy. The stronger growth and spread of trade are expected to have a beneficial impact on Australian economy. Currently Australian economy is in stable state as observed from a modest economic growth, lower unemployment and stable trend in price level. Strategies however should be taken to improve economic condition so that monetary policy can be tightened in the form of an increase in cash rate. Firstly, tax structure should be revised in the form of a shift in the tax base on activities that do not harm business investment and productivity. Secondly, focus should be given on increasing flexibility and innovation in the economy. Thirdly, the economy at this stage needs a sector specific reform. Finally, Hi -tech manufacturing can be an important driver of economic growth.
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