As of June 2018, the Australian economy had beaten expectation to post a big economic growth. According to data from RBA the country’s economic growth was at 3.4% (Hutchens, 2018). The aggregate supply statistics from the Australian Bureau of statistics show that exports contributed largely to the economic growth with markets from China to the U.S. The current growth in exports accounts for over half of the country’s growth in GDP. Besides, the output from the mining sector accounted for 2.9 % growth characterised by increased coal and iron production. Although the economy is growing, household consumption is on the decline with less money into the pockets of individuals. The country has not experienced real wage increases for over ten years now with low job growth rate with wage increase marched with the rate of inflation. The stable world economy can explain the current growth and stability of the economy. China and U.S economy has been doing so well, and even the European economy is good. The country’s macroeconomic indicators continue to be positive for over five years now. The GDP, current account balances and the rate of inflation are very favourable. The increased aggregate demand of the country’s products and services has propelled the economy well. For years the high demand for the country’s minerals such as iron ore has sustained the economy. However, the country continues to invest more in non-mining opportunities. For quite some time the country continues to have the lowest debt ratio when compared with countries such as the U.K and the U.S. The aggregate demand has been increasing since 1991 thanks to the Australia biggest trading partner, China (RBA, 2018). The Australian economy is currently facing significant structural changes majorly from a shift from the mining industry. Infrastructural development in the country is targeted towards improving the non-mining sector with the focus shifted towards promoting entrepreneurship (RBA, 2018). The country continues to have a free market democracy that encourages trade. The state has opened up free competition by also allowing foreign firms to invest in all sectors of the economy by providing a conducive environment for trade and market competition.
Moreover, the state still has one of the best regulatory environments in the world. The economic regulations are transparent and most significantly efficient towards the promotion of business. Today, registering for a company does not take more than three days. The country boasts of a universal employment code that governs the labor market. Although farm subsidies are no longer there, the government still provides subsidies through its monetary policies. The subsidies have been directed toward the production of clean and renewable energy. As of 2017, the unemployment rate stood at 5.4% depicting a significant decline in the rate. The rate is projected to remain the same for this year although the rate will reduce in2019. There have been a record low wages for some time now although the rate of inflation in the country is still low which according to projections will remain the same till the year-end. Many economists agree that there is little chance that the wages will increase in the near term. The country expects headline inflation of2.5% by the year-end due to higher utility prices and the anticipated rise in the prices of tobacco.
Recommended Economic Targets
The country has some economic targets that it wants to fulfill in the near and long-term. The country targets to increase its GDP rate like the current 3.4% growth rate. The country also targets to increase its business investments more to compliment with the mining industry. The country aims at focusing on increased investment in the other industries. For years now, the RBA continues to have inflation targets that are aimed at keeping the yearly consumer price inflation rates between 2 to 3% which I recommend as a fiscal policy to ensure growth (RBA, 2018). The low inflation impact is shown below where AD increases (Pettinger, 2015);
AD increase from the figure is due to low inflation. Inflation is determined by Consumer Price Index. The measures are effective since it is used to determine the change in prices for both goods and services. The Australian Bureau of Statistics is responsible for determining this rate. The RBA has a goal of achieving price stability in the economy hence the need to for the determination of the inflation rates.
Moreover, it has the goal of achieving full employment of the citizens eligible to work and most significantly improve the welfare of Australians. With a target of low inflation rates, then the economic growth can easily be realised. High inflation results in low purchasing power due to a reduction in the real value of money. The high rates also result in low investment level in the country since the consumer will increase by less of produced goods. This means that foreign countries will shy away from investing in the country thus not achieving the targeted annual increase in the GDP. High rates come down to low returns on investments in the country with exports affecting the balance of payment. The figure below illustrates the targeted inflation in the long run (RBA, 2018);
Moreover, another target I recommend to the state is to increase the level of wages. To date, the low wages witnessed in the country continues to be a growing concern where many of the employees have little real wages after factoring in inflation. The low wages have significantly reduced the household spending levels hence undermining the overall economic growth target. Spending is driven by necessity, and with the falling household prices, the rate of inflation cannot be trimmed down. The result of this is also low-interest rates since the consumers save less. Low-interest rates push away investors especially foreign investors who go to countries with the probability of higher rates of return. To achieve these targets and solve most of its issues then the government currently has a set of policies aimed at meeting its objectives. The country has set up sound monetary and fiscal policies that are positive to business development. The government has done well by giving RBA independence. The move has made the control of monetary policies to be effective. The use of fiscal policies by the government is intended to provide better welfare for all citizens. The policies hence are aimed at the provision of better wages, subsidies and providing a conducive environment for business development. The economic indicators such as, the CPI, GDP, Employment and inflation rates will determine the success of the current fiscal and monetary policies that have been set out by the government.
Moreover, the execution of the policies has made the country to realise most of its targets in this financial year. The current me notary policy should also involve the setting of the interest rates by the RBA between 2 and %. The rates should be set to align with the governments mid-term and long-term fiscal policies.
The current budget outlines the government objective of having a budget surplus as one of its mid-terms, fiscal strategies that I also strongly recommend. The government intends to have a strong economy through funds investment and expenditure redirection to boost productivity. The assumption is that the government will reduce its overall expenditure to free up resources for development. The government is shifting towards other sectors of production. To drive the economy, then the government is encouraging investment in other fields apart from mining. The direct investment should be encouraged by introducing tax cuts to companies. The reduction in taxes should be done to stimulate economic growth. Also, the government should invest more in healthcare to improve the welfare of the people. There is also the creation of the disability funds according to the budget to help the disabled in the country (fiscal strategy and outlook, 2018, 9). The government through its monetary policies should increase expenditure on education to provide the best education for the next generation. The government targets the reduction of prices to ensure housing affordability a target I also support and recommend. There is a housing plan that will encourage first home buyers to make deposits only. The funds will also address the rising number of homelessness (fiscal strategy and outlook, 2018, 13). Through these infrastructural developments, the governments will construct more homes through the funds set aside for development. It is assumed that the set ten-year budgetary allocation of funds estimated to be worth $75 will mainly go towards the construction of new roads and railway network. Another fiscal target I recommend through expenditure reduction is to balance out its budget. The government according to the budget is targeting to have a surplus of $7.4 billion by 2020-2021. The table below illustrates the budgetary targets (fiscal strategy and outlook, 2018, 14);
Budgetary aggregates above show how the state want to curb deficits.
The government wants to achieve enterprise growth in the various sectors of the economy and the promotion of small businesses to make them stronger. The realisation of this will mean that the government will have created more jobs for the citizens and finally achieve its long-term goal of creating opportunities for all the people. The assumption is that the government will accomplish this by reducing the stringent regulations starting from a business entry level. The government intends to provide more than 300 million dollars through the national partnership with the aim of removing these barriers according to the 2018 budget. The government targets full employment of all almost all young Australians eligible to work hence it has set up the new Youth Employment Package worth $ 840.3 million to support this labor force. The funds will enable the youth to be more competitive and be able to have the needed employment skills.
Risk Analysis
Tax Cuts
The recommendation for tax cuts is intended to spur economic growth through the diversification of the economy where the country has to shift from the mining sector. Tax cuts are known to cause the multiplier effect where they affect both the aggregate supply and demand. The figure demonstrates the tax cut effects on both aggregate supply and demand (Sonali, 2018).
The tax cuts will make the curves shift to the right in normal circumstances. However, there is the risk that the country will not meet its projected investment levels due to the tax cuts. If investments are low, the state runs the risk of having a much lower deficit since revenue collection from taxes will be low (Sonali, 2018). The reduction in taxes is meant to be offset by an increased level of investment into the country industrial sectors failure to which the fiscal policy will plunge the country into more deficit hence going against the planned balancing of the overall budget. There is also the risk that consumers at the time of such cuts might be heavily indebted due to low wages. Although tax cuts are also intended to increase spending, many will save the tax breaks given to meet up their financial obligations further hindering the goals of the tax breaks. However, this can happen if the state's interest rates are high. The current strategies by RBA have managed to keep a hold of the rates to as low as 1.5%. There is also the risk of curbing and monitoring of the government goods which the government will use to offset with the value of the tax cuts. Through careful analysis of the 2017-2018 budget, there is less likelihood of these events occurring in the current structure of the Australian economy.
Reducing Government Expenditure
Through a reduction in government expenditure, the state will be able to achieve its targeted budget surpluses. Currently, the government has a budget deficit of over 29.7 billion dollars. Reducing the level of expenditure will make sure the gap has been offset. Also, the government intends to focus more on the critical areas of the economy to stimulate growth. Cutting expenditure on non-critical areas of the economy will be required to ensure other areas such as infrastructure and housing get the needed funds to spur economic growth. With the recommendation on tax cuts, it is imperative that the government carefully analyses its expenditure to make sure the low revenues from taxes do not go further down due to expenditure on non-essential sectors of the economy. However, doing all this cannot avoid the risk of a reduced GDP through slow economic growth.
At ceteris paribus, any cuts on the expenditures levels of the government will always hurt the aggregate demand. The AD will be expected to go down leading to slow growth of the economy but at the same time have low rates of inflation (Pettinger, 2017). Since we are not dealing with a ceteris paribus situation, then other factors will mitigate this risk. For example, the country is experiencing a rise in consumer demand meaning that the reduced government expenditure will have an almost little effect on the growth rate of the economy. The figure below illustrates the effect of a low expenditure level where the states GDP levels will go down (Pettinger, 2017);
From my assessment, the risk of low GDP occurring is very minimal. The probability of the adverse effect is depended on the state of the economy. Cutting off government expenditure when an economy is in turmoil like huge fiscal deficits, then the country will experience a fall in the GDP. However, if the country is experiencing economic growth or boom in some cases, then there is little change since the components of the economy are strong.
The Australian economy is pegged on sound monetary policies that have been successful for years now. The recommended reduction in government expenditure can still work since the interest’s rates are very friendly to investors and the general public. The favorable rates promise to make the AD remain the same and even increase shortly. The model will only fail if the rates are not flexible. Based on this explanation, the stability of the various macroeconomic variables in the Australian market it less likely for the aggregate demand to reduce even in the long run. The monetary policies thanks to the independence of the RBA will make the realisation of economic growth even with a reduction in government expenditure. With such a reduction, annual borrowing will drastically reduce within years hence realising the targeted reduction in public debt. The bond market at times downgrades the liability of the state when the signs of default are witnessed. The budget cuts on spending will, therefore, help the government to focus on the crucial drivers of the economy.
2 to 3 % Inflation Rates
The maintenance of the inflation rates is intended to increase demand for commodities but at the same time march the level of inflation with the current wages. Although the issue of wages continues to be a growing concern to the Citizens, the low rates of inflation have made the living conditions bearable. The low rates of inflation according to the budgetary targets will spur economic growth through increased production and demand. The reduction and stabilization of the inflation rates will be the driving force in making sure that youths and all those employees have access to opportunities. Low levels of inflation will also attract investments in the country. Inflations rates affect aggregate demand in that, a low rate of inflation, in this case, will shift the aggregate demand in the right side showing a rise in demand for products.
From the figure below, the AD means a high demand from consumers showing that the low rates result in the creation of high disposable income for workers. The wages do not rise but the reduction in inflation releases more funds hence most of them are willing to go out and spend. Through the low rates, it is intended that the local production will be more competitive leading to the increased export of goods. The high export will result in a favourable balance of payment. Despite the need to maintain the rates at these two values, there is the risk that it might lead to deflation. The effect of the deflation will translate in a low AD where a consumer will demand less as shown below (Pettinger, 2016);
The reason can be attributed to the waiting strategy of the buyers. The consumers might see the prices falling hence continue waiting for the prices even to drop further making the AD be at a low level affecting the overall GDP. An example will be the purchase of luxurious goods such as cars where many will be waiting for the prices to go down. Should the rates fall below the set levels, then the value of debts will be increased. Although it increases the value, the reduction will also raise the value of money. The move means that the Australian firms will have to produce less due to the high debts to be paid. As a result, businesses will have to cut on wages making the consumers to earn less leading to a low AD in the long run. The cutting of the wages will translate in job loss in the long term since workers will resist such cuts.
Low Interest Rates
To effectively achieve the recommended target of the households program to achieve increased production, then a low-interest rate has to be realised. Australia is seeking to have a shift from the mining sector to the other sectors of production. The move requires new investments from both domestic and international investors. The investment can only be achieved through favourable interest rates. The rates which are to be maintained at 3% by the RBA will make firms to borrow more hence increase investment opportunities. Citizens, on the other hand, will experience low borrowing cost making houses and health easier to realise. The asset prices will increase hence result in high demand for houses. The figure below illustrates that keeping rates at 3% will increase aggregate demand a variable that the economy needs to make balances in the budget (Pettinger, 2016).
However, there is the risk that the lending rates being at this position will degrade the confidence of consumers on the monetary policy hence they will save more. Moreover, there is the risk that the rate will reflect the deflation level hence making people shy away from spending. Also, it is not known if banks will extend the cut rates to the consumers who will inhibit the spending capabilities of the consumers making growth to stagnate. The RBA has to ensure that it encourages the other banks to comply with the set regulations when setting their lending rates. Looking at the strength of the Australian economy, the probability of the risk occurring is very minimal. The budgetary policy outlines how the set objective will be met with clear projections set out.
Conclusion
The Australian economy is very stable. The stability of the economy is characterised by it having low debt levels when compared with other European countries. The country intends to shift from its mining-oriented economy and focus more on other sectors of the economy. To achieve this, then the government has to come up with ways of attracting both domestic and foreign investors. The attraction can be possible if the government implements sound fiscal and monetary policies. The RBA has done great work in streamlining the monetary situation where the cash rates and the inflation levels have been stable for quite some time. The rates will be instrumental in ensuring the demand and supply model of the economy is realised. The state is strictly fixed on an increased AD and AS economy. The orientation towards this is the reason why we have tax cuts intended to attract new investors.
Moreover, the reduction in government expenditure will help the government to achieve a budgetary surplus. Besides the move will make it possible for the state to direct resources towards the critical areas of the economy. The policies if effectively implemented will guarantee that the GDP of the country is on a positive path where the government will have high growth levels in the long run.
References
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Hutchens, G. (2018). Australia's economy hits 3.4% annual growth rate, exceeding expectations. [online] the Guardian. Available at: https://www.theguardian.com/business/2018/sep/05/australias-economic-growth-exceeds-expectations-at-34 [Accessed 8 Oct. 2018].
Pettinger, T. (2015). [online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/13345/inflation/effects-of-zero-inflation-on-aggregate-demand-ad/ [Accessed 8 Oct. 2018].
Pettinger, T. (2016). [online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/3417/interest-rates/effect-of-lower-interest-rates/ [Accessed 8 Oct. 2018].
Pettinger, T. (2016). [online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/glossary/deflation/ [Accessed 8 Oct. 2018].
Pettinger, T. (2017). [online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/2070/economics/cutting-government-spending/ [Accessed 8 Oct. 2018].
RBA (2018). Economic Outlook | Statement on Monetary Policy – February 2018 | RBA. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/publications/smp/2018/feb/economic-outlook.html [Accessed 8 Oct. 2018].
RBA (2018). Inflation Target | RBA. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/inflation/inflation-target.html [Accessed 8 Oct. 2018].
Sonali (2018). Effects of Cutting Tax Rates on AD and AS. [online] Economics Discussion. Available at: http://www.economicsdiscussion.net/microeconomics/effects-of-cutting-tax-rates-on-ad-and-as/2880 [Accessed 8 Oct. 2018].
