Discuss about the Fiscal Policy of Australia Effects on Australian Economy.
Every government of each nation implement a different type of macroeconomic policies to enhance its financial growth and maintain the economic balance of the country. Two different sorts of macroeconomic policies are used by each government that are known as Fiscal Policy and Monetary Policy (Wade, 2015). Fiscal policy can be better understood as the strategies used by the government of a nation to control its economic balance. It is the strategy through which the government adjusts its tax revenue and spending to influence the financial performance of the nation. John Keynes, a British Economist, first introduced the concept of Fiscal Policy (Gruen, 2015). According to the economist, the government of every nation can use it to improve the employment rates, regulate inflation in the market, and balance business inflow and outflow to develop economic performance (Morrison, 2015). The study has been conducted to observe the last five years economic growth of the nation along with the fiscal policies implemented by the Australian government in order to judge the effectiveness and efficiency of the economic reforms that are undertaken to improve the economic balance of the nation. On the other hand, the paper presents the various types of fiscal policies that are implemented by the Australian government to manage the economic indicators of the nation by controlling the supply and demand in the domestic market. In the last four years, the Australian economy has been one of the leading economies of the world with sound and stable fiscal balance that are taken by different major countries of the world. But, in the current position, the economy has been facing a downfall due to the decline in demand in the international market. In the paper, the GDP of Australia will be compared with the deficit balance of the country in order to understand the current scenario of the Australian economy. The current budget deficit of Australia is around 2.4 percent (Simes, 2013). Comparatively, the budget deficit of the United States is around 10.6 percent of the GDP, and that of Spain is around 11.4 percent. Irrespective of the downfall in the Australian economic growth, the country holds the 13th position in the World GDP ranking that makes it one of the successful and developed economies of the world (Salvadori and Balducci, 2015).
According to Morrison (2015), fiscal policy is identified as an effective economic tool used by any government to influence the financial infrastructure of the nation by utilising the government spending and taxation rates (Morrison, 2015). It is important for the government of Australia to identify a particular fiscal target by the end of the financial year after considering the current market scenario to control the average price level, unemployment rate and inflation (Poke and Wells, 2009). The effectiveness of the fiscal policy can be evident on the economic growth rate of the nation. In the case of divergence from the targeted goals by any of the above mentioned economic factors, the government of the country must make appropriate changes in the fiscal policy to control the economic growth in the future. It is important to note that the fiscal policy is used in two different ways (Morrison, 2015). Firstly, the fiscal policies are developed to achieve the desired targets by boosting the economic performance of the nation. Secondly, it is used to control or slow down the uncontrollable economic growth of the nation that may lead to a high level of inflation in the future (Wade, 2015). Hence, it can be said that the fiscal policy is mainly used to control the aggregate supply and demand in the market by controlling the investment, consumption, government spending, and export policy of the country (Poke and Wells, 2009).
Two different types of fiscal policies are used by the government of every nation to control the economic growth of the country and maintain its trade balance. The firstly and the mostly used fiscal policy is the expansionary fiscal policy. The expansionary fiscal policy is used to stimulate economic growth in the nation (Gruen, 2015). The expansionary fiscal policy is used to get relief from the recession phase. As per the expansionary method, the government spends more on subsidiary and cuts the tax rates to promote more business in the nation (Makin and Narayan, 2011). The primary idea of the expansionary fiscal policy is to put more money in the hands of the consumers to enhance the aggregate demand in the market. The high level of aggregate demand will keep the businesses boost the production and increase the availability of jobs in the labour market.
On the other hand, the second technique that is used by the government of any country is the contractionary fiscal policy. The contractionary fiscal policy is mainly used to reduce the economic growth of the nation. The primary idea of contractionary fiscal policy is to control the inflation rate in the market (Simes, 2013). Long-run inflation damages the standard of living of the people which is as dangerous as a recession. In other words, the policy is used to control the aggregate demand by increasing tax rates and reducing government spending to minimise the growth of the aggregate price of commodities in the country. Hence, the Contractionary fiscal policy is rarely used by any government of a nation (Makin and Narayan, 2011).
By considering the last five years, it can be seen that the government of Australia has focused on implementing a tight fiscal policy to control the international trade, unemployment and inflation rate. During the first of the last five years, the Australian government has used the fiscal policy to control its expenditure in order to increase the aggregate demand in the market (Lewis and Wallace, 2015). Furthermore, the government has been quite effective in managing the aggregate price of the commodities and maintained an inflation rate of 2 percent to 3 percent. Since 2011, an increased can be seen on the government debt to GDP rate of Australia. The government debt to GDP rate increased from 24.24 percent in the year 2011 to 36.8 percent in the year 2015 (Salvadori and Balducci, 2015). Additionally, the increase rate of government debt to GDP has negatively affected the bond yields structure and borrowing cost of the economy. It can be seen through study that the primary reason for the hike in the government debt to GDP is the recent decision of increase government spending and the major company taxes. On the other hand, a change has been evident in the fiscal budget of Australia during the 2012-13 budgets. It can be seen that the Australian government used a Contractionary Fiscal Policy during this phase by reducing its spending by AUS$7 billion and increasing the tax revenue by around AUS$39 billion. The contraction policy was used by the government to control the rising price of the commodities (Lewis and Wallace, 2015). The tactics of contractionary fiscal policy helped the Australian government to reduce the aggregate demand by around 2 percent. On the other hand, the inflation rate was controlled by the end of 2015 and came down to 1 percent which was a good achievement for the government of a developed nation.
The Reserve Bank of Australia (RBA) and the Australian government has identified a slow rate of consumer price growth due to the sluggish economic growth. Furthermore, the tight fiscal policy of the government has forced the RBA to cut down the interest rates in order to promote businesses in the market (Farrer, 2015). On the other hand, the RBA further reduced the interest rate by the end of 2015 due to the low rate of CPI to promote trade and growth of GDP. Meanwhile, the increasing government debt to GDP has forced the Australian government to reduce its spending that has further resulted in a decline in aggregate demand in the market (Salvadori and Balducci, 2015). Hence, it can be seen that the budgetary tactics of the Australian government have worked effectively in controlling the economic balance as per the changes in different situations. Therefore, it can be said that that the tight fiscal policy of the government has successfully managed the targeted trade balance, unemployment rate and inflation of the Australian economy to seek economic growth in a sustainable way (Wade, 2015).
By considering the current economic scenario, it can be seen that the Australian economy has been facing an uncertain downfall in its growth rate. It is expected by the finance ministry that the growth rate will remain under 3 percent until 2018. On the other hand, a rise in the inflation rate has been evident by the end of 2016 along with a rise in the unemployment rate. Hence, the government of Australia must take necessary measures in the form of changes in its fiscal policy to control the economic balance of the country.
The effect of fiscal policy has been significant to the Australian economy. Predominantly, the previous five years or so, the role of fiscal policy has been crucial to recovering the economic growth, the Gross Domestic Product, the rate of inflation, unemployment rate, government spending, the balance of trade and other factors leading to the sustainable business environment (Jensen and Webster, 2014). In the current economic scenario, the fiscal policy of the Reserve Bank of Australia has targeted to stabilise the rate of inflation at 1 percent leading to price check of commodities. Alternatively, the increasing debt figure of the economy has been largely supported by the fiscal policy to control the rising debt. According to the reports of Australian Treasury, the budget deficit of Australian economy by 2020 will be reached as high as AU$ 10 billion. Therefore, thought out fiscal policy will be effective to reduce the government expenditures. Herein, the role of the RBA’s economic policy on Australian economy has been summarised in the following section (Ryoo and Skott, 2016).
The rate of inflation has been identified to check the surging pricing standards of essential commodities. Meanwhile, the fiscal policy of the RBA has aimed to achieve inflation rate to be 1 percent or below. The data released by the Australian Bureau of Statistics has shown that the inflation rate in Australian rose 1.5 percent in the last quarter of 2016 (Abs.gov.au, 2017). In September 2016, the rate of inflation recorded as 1.3 percent. The increase in inflation has been fuelled by the increasing price of transport and consumer prices leading to surging in commodity prices as well. Moreover, the rate of inflation has seemed to be hovering around 1-1.5 percent that is considerable for a developed economy such as Australia. As described in the underlying figure, the economy has maintained a staggering rate of inflation below 3 percent for the last five years.
Figure: Australia Inflation Rate
Source: (Abs.gov.au, 2017)
The impact of fiscal policy of the RBA can be largely reflected in the Gross Domestic Product of the nation. A comparative study of the GDP of the nation since the last ten years has identified the pattern of GDP of Australia. During the global crisis scenario in 2008, Australian fiscal policy was aimed to fuel GDP growth in the country. Since then continuous rise in GDP can be noticed up to 2013. As shown in the figure given below, in 2015 the GDP recorded was worth US$1339.54 billion that is the 2.16 percent of value of the entire world’s GDP. Currently, the recent contraction in GDP growth by 0.5 percent has put the brakes on GDP estimations (Hutchens, 2016). Predictably, till 2018, the growth rate of the country will be expected to be below 3 percent.
Figure: Australia Gross Domestic Product (2006-2015)
Source: (Abs.gov.au, 2017)
Notably, the fiscal policy applied in the year 2016 has to be altered accordingly as the outcomes are not fruitful to say the least. On the other hand, the effect of fiscal policy can be reflected in the employment market as well. During mid-2015, the rate of unemployment reached as high as 6.3 percent. Meanwhile, the RBA’s fiscal policy has controlled the rate of unemployment a bit. In the December quarter of the previous year, the seasonally adjusted rate of unemployment recorded at 5.8 percent. In the long-term scenario, since 2012, the unemployment rate crept up from 5 percent to 5.8 percent. In the current situation, the Australian economy has added 13,500 employments whereas 14,700 jobless claims are added to the list (Abs.gov.au, 2017).
Figure: Australia Unemployment Rate
Source: (Abs.gov.au, 2017)
Apart from the unemployment situation, fiscal policy has made a major impact on the balance of trade. The fiscal policy of Australia has reported to create trade surplus in November 2016. Meanwhile, AU$ 1.24 billion trade surplus has been recorded in the report beating all the expectations. In a comparative discussion, the revised data has been better than the last data recorded in October 2016 whereas the balance of trade has shown AU$ 1.12 billion trade deficit. In the underlying figure, the comparative analysis of trade balance of the economy has been presented. Notably, in November, AU$ 0.5 billion deficit of balance was estimated. Understandably, the fiscal policy has increased the exports contributing to the turnaround of trade balance (Robinson, 2016).
Figure: Australia balance of Trade
Source: (Abs.gov.au, 2017)
Admittedly, for the first time the balance of trade has been recorded a surplus as high as this after 2014. In the discussion, the government budget deficit has been included to identify the effect of fiscal policy on a bigger perspective (Aslan et al., 2014). The data released by the Abs has stated that the government budget deficit of the Australian economy has been recorded equal to 2.4 percent of the entire GDP of the country during 2015. For a comparative study, a detail scenario of government budget for the past decade has been presented.
Figure: Australia Government Budget
Source: (Abs.gov.au, 2017)
The above figure has shown to identify that since 2009, the government of Australia has faced significant challenges due to budget deficits. In 2010, the budget deficit of the economy was 4.2 percent to the entire GDP of the nation. Notably, in the recent five years or so, the deficit in budget has been controlled using effective fiscal policy measure. Moreover, a detail review of the government spending has been figured out in the study to evaluate the role of fiscal policy in controlling the government spending (Oliver, 2016). According to the reports, during the third quarter of 2016, the government spending of the Australia has been reduced to AU$77644 million whereas in the second quarter the expenditure of government has been recorded worth AU$77832 million (Abs.gov.au, 2017).
Figure: Australia Government Spending
Source: (Abs.gov.au, 2017)
The representation of the government expenditure of the last five years has shown that since 2014, the spending has been continuously followed the uptrend till the second quarter of 2016. The pull back in the government spending is necessary to fill the gap of budget deficit. Currently, the fiscal policy has been largely supported to control the unproductive spending of the government.
In the existing economic status, the budget deficit has been a major issue hindering the credit rating as well as growth prospects of the economy. Due to the budget deficit, the central idea of the fiscal policy has been to control the government spending directed towards the public and private infrastructure (Lane and Perotti, 2015). Also, significant tax reforms must be taken into consideration under the current fiscal policy to fill the gap of the massive budget deficit. As a result of the controlled government spending, the government has to compromise with the GDP growth, annual GDP, per capita income, inflation rate, and unemployment situation (Wade, 2015). Lack of government expenditure has limited the investment in the infrastructure leading to economic growth. In the past five years, the fiscal policy has made a significant and long-term change in the economic sustainability (Robinson, 2015). Meanwhile, the fiscal policy of the RBA has massively contributed to keeping the inflation rate down close to 1 percent.
Specifically, looking at the fiscal and economic outlook of the economy, the RBA has set inflation target at 2-3 percent. Alternatively, the downgrading of credit rating from S&P can create a negative impact on the economic growth (Hill, 2016). Hence, the RBA must review the current set of fiscal policy to fill the gap of the budget deficit. In order to control the increasing amount of budget deficit, the fiscal policy must put the brakes on government spending. During the period of 2015-16, a $5.5 billion budget package has been provided by the Australian government to increase the employment market as well as industrial production. The fiscal policy of Australia has maintained the growth of the economy since the past two decades or more without a single recessionary phase (Daley and Wood, 2016). In the existing financial situation, the fiscal policy must bring foreign investment so that the debt situation of the economy can be covered by a certain margin.
The investigation of the Australian fiscal policy over the last five years has delivered significant role of the economic policy of the RBA and the federal government of Australia. In the past decade or so, the fiscal policy of the nation has continuously supported the employment market and commodity prices. The fiscal policy of the government has decided the federal budget status so that the government spending to the public and private sector can be made as per the regulation. Also, there are significant targets attached to the fiscal policy such as employment, inflation rate, budget deficit, the balance of trade and budgetary funding. In the recent economic context, strict fiscal policy measures must be recommended to check the government expenditure. Thus, aggregated demand can be increased to a significant order supporting job market. Most importantly, the recent threats of economic downgrading and poor fiscal and economic forecasts have created significant doubts on the economic growth. Predominantly, specific fiscal targets of the RBA have helped to create the most effective economic policies suitable for creating jobs and control the rate of inflation. In the sluggish growth outlook, tax reforms must be included in the fiscal policy so that a large amount of debt situation can be filled.
References
Abs.gov.au. (2017). Australian Bureau of Statistics, Australian Government. [online] Available at: https://www.abs.gov.au/ [Accessed Feb. 2017].
Aslan, M., Buyrukoglu, S., Oz, E. and Nazlioglu, S. (2014). Does fiscal policy matter for trade balance in the OECD countries? Panel vector error correction estimation. International Journal of Trade and Global Markets, 7(4), p.271.
Daley, J. and Wood, D. (2016). Fiscal Challenges for Australia: The Next Decade and Beyond. Asia & the Pacific Policy Studies, 3(3), pp.475-494.
Farrer, M. (2015). Unemployment in Australia rises to 6.4%, highest for 13 years, ABS figures show. [online] the Guardian. Available at: https://www.theguardian.com/business/2015/feb/12/unemployment-in-australia-rises-to-64-in-january-abs-figures-show [Accessed Feb. 2017].
Gruen, D. (2015). The Evolution of Fiscal Policy in Australia. Oxford Review of Economic Policy, 21(4), pp.618-635.
Hill, R. (2016). Australia: Australian government presents 2016/2017 budget, revises upwards expected fiscal deficits. [online] www.focus-economics.com. Available at: https://www.focus-economics.com/countries/australia/news/fiscal/australian-government-presents-20162017-budget-revises-upwards [Accessed Feb. 2017].
Hutchens, G. (2016). Australian GDP: economy shrinks by 0.5% in September quarter. [online] the Guardian. Available at: https://www.theguardian.com/business/2016/dec/07/australian-economy-shrinks-by-05-in-september-quarter [Accessed Feb. 2017].
Jensen, P. and Webster, E. (2014). Patterns of trademarking activity in Australia. 1st ed. Melbourne, Vic.: Intellectual Property Research Institute of Australia.
Lane, P. and Perotti, R. (2015). The trade balance and fiscal policy in the OECD. European Economic Review, 42(3-5), pp.887-895.
Lewis, M. and Wallace, R. (2015). The evolution of the Australian financial system. 1st ed. Nottingham: University of Nottingham, Dept. of Economics.
Makin, A. and Narayan, P. (2011). How Potent is Fiscal Policy in Australia?. Economic Papers: A journal of applied economics and policy, 30(3), pp.377-385.
Morrison, S. (2015). IMF Supports Government’s focus on building a stronger economy. [online] Sjm.ministers.treasury.gov.au. Available at: https://sjm.ministers.treasury.gov.au/media-release/002-2015/ [Accessed Feb. 2017].
Oliver, S. (2016). The 2016-17 Australian Budget – putting popularity ahead of austerity. [online] Ampcapital.com.au. Available at: https://www.ampcapital.com.au/article-detail?alias=/olivers-insights/may-2016/the-2016-17-australian-budget [Accessed Feb. 2017].
Poke, J. and Wells, G. (2009). The Term Spread and GDP Growth in Australia. Economic Record, 85(269), pp.121-131.
Robinson, M. (2015). Accrual accounting and Australian fiscal policy. Fiscal Studies, 23(2), pp.287-300.
Robinson, M. (2016). Medium Term Fiscal Policy Issues and Challenges in Australia.
Ryoo, S. and Skott, P. (2016). Fiscal and Monetary Policy Rules in an Unstable Economy. Metroeconomica.
Salvadori, N. and Balducci, R. (2015). Innovation, unemployment and policy in the theories of growth and distribution. 1st ed. Cheltenham, UK: E. Elgar.
Simes, R. (2013). Fiscal policy rules in Australia. 1st ed. Barton, A.C.T.: Chifley Research Centre.
Wade, M. (2015). It’s time to borrow, the IMF tells Australia. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/how-well-is-australia-managing-the-postboom-transition-20151002-gjzvhi.html [Accessed Feb. 2017].
Every government of each nation implement a different type of macroeconomic policies to enhance its financial growth and maintain the economic balance of the country. Two different sorts of macroeconomic policies are used by each government that are known as Fiscal Policy and Monetary Policy (Wade, 2015). Fiscal policy can be better understood as the strategies used by the government of a nation to control its economic balance. It is the strategy through which the government adjusts its tax revenue and spending to influence the financial performance of the nation. John Keynes, a British Economist, first introduced the concept of Fiscal Policy (Gruen, 2015). According to the economist, the government of every nation can use it to improve the employment rates, regulate inflation in the market, and balance business inflow and outflow to develop economic performance (Morrison, 2015). The study has been conducted to observe the last five years economic growth of the nation along with the fiscal policies implemented by the Australian government in order to judge the effectiveness and efficiency of the economic reforms that are undertaken to improve the economic balance of the nation. On the other hand, the paper presents the various types of fiscal policies that are implemented by the Australian government to manage the economic indicators of the nation by controlling the supply and demand in the domestic market. In the last four years, the Australian economy has been one of the leading economies of the world with sound and stable fiscal balance that are taken by different major countries of the world. But, in the current position, the economy has been facing a downfall due to the decline in demand in the international market. In the paper, the GDP of Australia will be compared with the deficit balance of the country in order to understand the current scenario of the Australian economy. The current budget deficit of Australia is around 2.4 percent (Simes, 2013). Comparatively, the budget deficit of the United States is around 10.6 percent of the GDP, and that of Spain is around 11.4 percent. Irrespective of the downfall in the Australian economic growth, the country holds the 13th position in the World GDP ranking that makes it one of the successful and developed economies of the world (Salvadori and Balducci, 2015).
According to Morrison (2015), fiscal policy is identified as an effective economic tool used by any government to influence the financial infrastructure of the nation by utilising the government spending and taxation rates (Morrison, 2015). It is important for the government of Australia to identify a particular fiscal target by the end of the financial year after considering the current market scenario to control the average price level, unemployment rate and inflation (Poke and Wells, 2009). The effectiveness of the fiscal policy can be evident on the economic growth rate of the nation. In the case of divergence from the targeted goals by any of the above mentioned economic factors, the government of the country must make appropriate changes in the fiscal policy to control the economic growth in the future. It is important to note that the fiscal policy is used in two different ways (Morrison, 2015). Firstly, the fiscal policies are developed to achieve the desired targets by boosting the economic performance of the nation. Secondly, it is used to control or slow down the uncontrollable economic growth of the nation that may lead to a high level of inflation in the future (Wade, 2015). Hence, it can be said that the fiscal policy is mainly used to control the aggregate supply and demand in the market by controlling the investment, consumption, government spending, and export policy of the country (Poke and Wells, 2009).
Two different types of fiscal policies are used by the government of every nation to control the economic growth of the country and maintain its trade balance. The firstly and the mostly used fiscal policy is the expansionary fiscal policy. The expansionary fiscal policy is used to stimulate economic growth in the nation (Gruen, 2015). The expansionary fiscal policy is used to get relief from the recession phase. As per the expansionary method, the government spends more on subsidiary and cuts the tax rates to promote more business in the nation (Makin and Narayan, 2011). The primary idea of the expansionary fiscal policy is to put more money in the hands of the consumers to enhance the aggregate demand in the market. The high level of aggregate demand will keep the businesses boost the production and increase the availability of jobs in the labour market.
On the other hand, the second technique that is used by the government of any country is the contractionary fiscal policy. The contractionary fiscal policy is mainly used to reduce the economic growth of the nation. The primary idea of contractionary fiscal policy is to control the inflation rate in the market (Simes, 2013). Long-run inflation damages the standard of living of the people which is as dangerous as a recession. In other words, the policy is used to control the aggregate demand by increasing tax rates and reducing government spending to minimise the growth of the aggregate price of commodities in the country. Hence, the Contractionary fiscal policy is rarely used by any government of a nation (Makin and Narayan, 2011).
By considering the last five years, it can be seen that the government of Australia has focused on implementing a tight fiscal policy to control the international trade, unemployment and inflation rate. During the first of the last five years, the Australian government has used the fiscal policy to control its expenditure in order to increase the aggregate demand in the market (Lewis and Wallace, 2015). Furthermore, the government has been quite effective in managing the aggregate price of the commodities and maintained an inflation rate of 2 percent to 3 percent. Since 2011, an increased can be seen on the government debt to GDP rate of Australia. The government debt to GDP rate increased from 24.24 percent in the year 2011 to 36.8 percent in the year 2015 (Salvadori and Balducci, 2015). Additionally, the increase rate of government debt to GDP has negatively affected the bond yields structure and borrowing cost of the economy. It can be seen through study that the primary reason for the hike in the government debt to GDP is the recent decision of increase government spending and the major company taxes. On the other hand, a change has been evident in the fiscal budget of Australia during the 2012-13 budgets. It can be seen that the Australian government used a Contractionary Fiscal Policy during this phase by reducing its spending by AUS$7 billion and increasing the tax revenue by around AUS$39 billion. The contraction policy was used by the government to control the rising price of the commodities (Lewis and Wallace, 2015). The tactics of contractionary fiscal policy helped the Australian government to reduce the aggregate demand by around 2 percent. On the other hand, the inflation rate was controlled by the end of 2015 and came down to 1 percent which was a good achievement for the government of a developed nation.
The Reserve Bank of Australia (RBA) and the Australian government has identified a slow rate of consumer price growth due to the sluggish economic growth. Furthermore, the tight fiscal policy of the government has forced the RBA to cut down the interest rates in order to promote businesses in the market (Farrer, 2015). On the other hand, the RBA further reduced the interest rate by the end of 2015 due to the low rate of CPI to promote trade and growth of GDP. Meanwhile, the increasing government debt to GDP has forced the Australian government to reduce its spending that has further resulted in a decline in aggregate demand in the market (Salvadori and Balducci, 2015). Hence, it can be seen that the budgetary tactics of the Australian government have worked effectively in controlling the economic balance as per the changes in different situations. Therefore, it can be said that that the tight fiscal policy of the government has successfully managed the targeted trade balance, unemployment rate and inflation of the Australian economy to seek economic growth in a sustainable way (Wade, 2015).
By considering the current economic scenario, it can be seen that the Australian economy has been facing an uncertain downfall in its growth rate. It is expected by the finance ministry that the growth rate will remain under 3 percent until 2018. On the other hand, a rise in the inflation rate has been evident by the end of 2016 along with a rise in the unemployment rate. Hence, the government of Australia must take necessary measures in the form of changes in its fiscal policy to control the economic balance of the country.
The effect of fiscal policy has been significant to the Australian economy. Predominantly, the previous five years or so, the role of fiscal policy has been crucial to recovering the economic growth, the Gross Domestic Product, the rate of inflation, unemployment rate, government spending, the balance of trade and other factors leading to the sustainable business environment (Jensen and Webster, 2014). In the current economic scenario, the fiscal policy of the Reserve Bank of Australia has targeted to stabilise the rate of inflation at 1 percent leading to price check of commodities. Alternatively, the increasing debt figure of the economy has been largely supported by the fiscal policy to control the rising debt. According to the reports of Australian Treasury, the budget deficit of Australian economy by 2020 will be reached as high as AU$ 10 billion. Therefore, thought out fiscal policy will be effective to reduce the government expenditures. Herein, the role of the RBA’s economic policy on Australian economy has been summarised in the following section (Ryoo and Skott, 2016).
The rate of inflation has been identified to check the surging pricing standards of essential commodities. Meanwhile, the fiscal policy of the RBA has aimed to achieve inflation rate to be 1 percent or below. The data released by the Australian Bureau of Statistics has shown that the inflation rate in Australian rose 1.5 percent in the last quarter of 2016 (Abs.gov.au, 2017). In September 2016, the rate of inflation recorded as 1.3 percent. The increase in inflation has been fuelled by the increasing price of transport and consumer prices leading to surging in commodity prices as well. Moreover, the rate of inflation has seemed to be hovering around 1-1.5 percent that is considerable for a developed economy such as Australia. As described in the underlying figure, the economy has maintained a staggering rate of inflation below 3 percent for the last five years.
Figure: Australia Inflation Rate
Source: (Abs.gov.au, 2017)
The impact of fiscal policy of the RBA can be largely reflected in the Gross Domestic Product of the nation. A comparative study of the GDP of the nation since the last ten years has identified the pattern of GDP of Australia. During the global crisis scenario in 2008, Australian fiscal policy was aimed to fuel GDP growth in the country. Since then continuous rise in GDP can be noticed up to 2013. As shown in the figure given below, in 2015 the GDP recorded was worth US$1339.54 billion that is the 2.16 percent of value of the entire world’s GDP. Currently, the recent contraction in GDP growth by 0.5 percent has put the brakes on GDP estimations (Hutchens, 2016). Predictably, till 2018, the growth rate of the country will be expected to be below 3 percent.
Figure: Australia Gross Domestic Product (2006-2015)
Source: (Abs.gov.au, 2017)
Notably, the fiscal policy applied in the year 2016 has to be altered accordingly as the outcomes are not fruitful to say the least. On the other hand, the effect of fiscal policy can be reflected in the employment market as well. During mid-2015, the rate of unemployment reached as high as 6.3 percent. Meanwhile, the RBA’s fiscal policy has controlled the rate of unemployment a bit. In the December quarter of the previous year, the seasonally adjusted rate of unemployment recorded at 5.8 percent. In the long-term scenario, since 2012, the unemployment rate crept up from 5 percent to 5.8 percent. In the current situation, the Australian economy has added 13,500 employments whereas 14,700 jobless claims are added to the list (Abs.gov.au, 2017).
Figure: Australia Unemployment Rate
Source: (Abs.gov.au, 2017)
Apart from the unemployment situation, fiscal policy has made a major impact on the balance of trade. The fiscal policy of Australia has reported to create trade surplus in November 2016. Meanwhile, AU$ 1.24 billion trade surplus has been recorded in the report beating all the expectations. In a comparative discussion, the revised data has been better than the last data recorded in October 2016 whereas the balance of trade has shown AU$ 1.12 billion trade deficit. In the underlying figure, the comparative analysis of trade balance of the economy has been presented. Notably, in November, AU$ 0.5 billion deficit of balance was estimated. Understandably, the fiscal policy has increased the exports contributing to the turnaround of trade balance (Robinson, 2016).
Figure: Australia balance of Trade
Source: (Abs.gov.au, 2017)
Admittedly, for the first time the balance of trade has been recorded a surplus as high as this after 2014. In the discussion, the government budget deficit has been included to identify the effect of fiscal policy on a bigger perspective (Aslan et al., 2014). The data released by the Abs has stated that the government budget deficit of the Australian economy has been recorded equal to 2.4 percent of the entire GDP of the country during 2015. For a comparative study, a detail scenario of government budget for the past decade has been presented.
Figure: Australia Government Budget
Source: (Abs.gov.au, 2017)
The above figure has shown to identify that since 2009, the government of Australia has faced significant challenges due to budget deficits. In 2010, the budget deficit of the economy was 4.2 percent to the entire GDP of the nation. Notably, in the recent five years or so, the deficit in budget has been controlled using effective fiscal policy measure. Moreover, a detail review of the government spending has been figured out in the study to evaluate the role of fiscal policy in controlling the government spending (Oliver, 2016). According to the reports, during the third quarter of 2016, the government spending of the Australia has been reduced to AU$77644 million whereas in the second quarter the expenditure of government has been recorded worth AU$77832 million (Abs.gov.au, 2017).
Figure: Australia Government Spending
Source: (Abs.gov.au, 2017)
The representation of the government expenditure of the last five years has shown that since 2014, the spending has been continuously followed the uptrend till the second quarter of 2016. The pull back in the government spending is necessary to fill the gap of budget deficit. Currently, the fiscal policy has been largely supported to control the unproductive spending of the government.
In the existing economic status, the budget deficit has been a major issue hindering the credit rating as well as growth prospects of the economy. Due to the budget deficit, the central idea of the fiscal policy has been to control the government spending directed towards the public and private infrastructure (Lane and Perotti, 2015). Also, significant tax reforms must be taken into consideration under the current fiscal policy to fill the gap of the massive budget deficit. As a result of the controlled government spending, the government has to compromise with the GDP growth, annual GDP, per capita income, inflation rate, and unemployment situation (Wade, 2015). Lack of government expenditure has limited the investment in the infrastructure leading to economic growth. In the past five years, the fiscal policy has made a significant and long-term change in the economic sustainability (Robinson, 2015). Meanwhile, the fiscal policy of the RBA has massively contributed to keeping the inflation rate down close to 1 percent.
Specifically, looking at the fiscal and economic outlook of the economy, the RBA has set inflation target at 2-3 percent. Alternatively, the downgrading of credit rating from S&P can create a negative impact on the economic growth (Hill, 2016). Hence, the RBA must review the current set of fiscal policy to fill the gap of the budget deficit. In order to control the increasing amount of budget deficit, the fiscal policy must put the brakes on government spending. During the period of 2015-16, a $5.5 billion budget package has been provided by the Australian government to increase the employment market as well as industrial production. The fiscal policy of Australia has maintained the growth of the economy since the past two decades or more without a single recessionary phase (Daley and Wood, 2016). In the existing financial situation, the fiscal policy must bring foreign investment so that the debt situation of the economy can be covered by a certain margin.
The investigation of the Australian fiscal policy over the last five years has delivered significant role of the economic policy of the RBA and the federal government of Australia. In the past decade or so, the fiscal policy of the nation has continuously supported the employment market and commodity prices. The fiscal policy of the government has decided the federal budget status so that the government spending to the public and private sector can be made as per the regulation. Also, there are significant targets attached to the fiscal policy such as employment, inflation rate, budget deficit, the balance of trade and budgetary funding. In the recent economic context, strict fiscal policy measures must be recommended to check the government expenditure. Thus, aggregated demand can be increased to a significant order supporting job market. Most importantly, the recent threats of economic downgrading and poor fiscal and economic forecasts have created significant doubts on the economic growth. Predominantly, specific fiscal targets of the RBA have helped to create the most effective economic policies suitable for creating jobs and control the rate of inflation. In the sluggish growth outlook, tax reforms must be included in the fiscal policy so that a large amount of debt situation can be filled.
References
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Aslan, M., Buyrukoglu, S., Oz, E. and Nazlioglu, S. (2014). Does fiscal policy matter for trade balance in the OECD countries? Panel vector error correction estimation. International Journal of Trade and Global Markets, 7(4), p.271.
Daley, J. and Wood, D. (2016). Fiscal Challenges for Australia: The Next Decade and Beyond. Asia & the Pacific Policy Studies, 3(3), pp.475-494.
Farrer, M. (2015). Unemployment in Australia rises to 6.4%, highest for 13 years, ABS figures show. [online] the Guardian. Available at: https://www.theguardian.com/business/2015/feb/12/unemployment-in-australia-rises-to-64-in-january-abs-figures-show [Accessed Feb. 2017].
Gruen, D. (2015). The Evolution of Fiscal Policy in Australia. Oxford Review of Economic Policy, 21(4), pp.618-635.
Hill, R. (2016). Australia: Australian government presents 2016/2017 budget, revises upwards expected fiscal deficits. [online] www.focus-economics.com. Available at: https://www.focus-economics.com/countries/australia/news/fiscal/australian-government-presents-20162017-budget-revises-upwards [Accessed Feb. 2017].
Hutchens, G. (2016). Australian GDP: economy shrinks by 0.5% in September quarter. [online] the Guardian. Available at: https://www.theguardian.com/business/2016/dec/07/australian-economy-shrinks-by-05-in-september-quarter [Accessed Feb. 2017].
Jensen, P. and Webster, E. (2014). Patterns of trademarking activity in Australia. 1st ed. Melbourne, Vic.: Intellectual Property Research Institute of Australia.
Lane, P. and Perotti, R. (2015). The trade balance and fiscal policy in the OECD. European Economic Review, 42(3-5), pp.887-895.
Lewis, M. and Wallace, R. (2015). The evolution of the Australian financial system. 1st ed. Nottingham: University of Nottingham, Dept. of Economics.
Makin, A. and Narayan, P. (2011). How Potent is Fiscal Policy in Australia?. Economic Papers: A journal of applied economics and policy, 30(3), pp.377-385.
Morrison, S. (2015). IMF Supports Government’s focus on building a stronger economy. [online] Sjm.ministers.treasury.gov.au. Available at: https://sjm.ministers.treasury.gov.au/media-release/002-2015/ [Accessed Feb. 2017].
Oliver, S. (2016). The 2016-17 Australian Budget – putting popularity ahead of austerity. [online] Ampcapital.com.au. Available at: https://www.ampcapital.com.au/article-detail?alias=/olivers-insights/may-2016/the-2016-17-australian-budget [Accessed Feb. 2017].
Poke, J. and Wells, G. (2009). The Term Spread and GDP Growth in Australia. Economic Record, 85(269), pp.121-131.
Robinson, M. (2015). Accrual accounting and Australian fiscal policy. Fiscal Studies, 23(2), pp.287-300.
Robinson, M. (2016). Medium Term Fiscal Policy Issues and Challenges in Australia.
Ryoo, S. and Skott, P. (2016). Fiscal and Monetary Policy Rules in an Unstable Economy. Metroeconomica.
Salvadori, N. and Balducci, R. (2015). Innovation, unemployment and policy in the theories of growth and distribution. 1st ed. Cheltenham, UK: E. Elgar.
Simes, R. (2013). Fiscal policy rules in Australia. 1st ed. Barton, A.C.T.: Chifley Research Centre.
Wade, M. (2015). It’s time to borrow, the IMF tells Australia. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/how-well-is-australia-managing-the-postboom-transition-20151002-gjzvhi.html [Accessed Feb. 2017].
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