Analysis of Australia Economy

Question: Discuss about the Analysis of Australia Economy. Answer: Introduction Each of the four macroeconomic indicators is essential. The primary benefit of keeping the prices stable is that it helps to preserve the value of money and encourage healthy and sustainable growth over a prolonged period (Berlatsky, 2013). Growth in employment and the economy helps to enhance the standards of the living. Since each of the four economic indicators is essential, this report will examine the state of Australian economy based on these indicators, the trend in the indicators for the past ten years, as well as the current macroeconomic policies of the RBA and the federal government regarding the four. In the final part, we will examine whether the present policies are suitable, given the current economic environment. Appropriate policy recommendations will also be outlined. Description of the four economic indicators and their trend over the last ten years Real GDP refers to the total output. It has continued to thrive despite the end of the mining boom. The outlook for GDP growth for 2016 is 2.5 - 3.5 percent but is expected to rise to around 3-4 percent by 2018. Households perception of own revenues growth has continued to be above average. Over the years, the economy has remained resilient to various external shocks among them the US sub-prime credit bubble, and the most recent Global Financial Crisis. At no time in ten years did the annual growth turn out to be negative. Year 2006 2007 2008 2009 2010 2011 2012 Annual GDP growth (%) 4.38 4.31 1.84 1.68 4.35 3.13 2.48 2013 2014 2015 2.4 2.63 2.47 Source: World Bank Consistent with the economic growth, employment is expected to increase gradually and unemployment to fall a little. Over the recent months, the unemployment rate has remained constant at 5.75 percent but is projected to decline slightly to around 5.5 percent in the future (Reserve Bank of Australia, 2016). Unemployment Rate in Australia, 20-74 years Year Males (%) Female (%) Average 2006 3.5 4 3.75 2007 3.2 3.8 3.5 2008 4.1 4.2 4.15 2009 4.7 4.6 4.65 2010 4 4.4 4.2 2011 4.2 4.6 4.4 2012 4.6 4.7 4.65 2013 5.1 5.1 5.1 2014 5.2 5.3 5.25 2015 5.8 Source: Australia Bureau of Statistics The trend in Unemployment Rate The underlying inflation has recently picked up by 0.5 percent to be about 1.5 percent over the year. Increases in price for volatile goods such as vegetables, fuel, and fruit have made a significant contribution to the rising Consumer Price Index. Inflation is expected to remain around the current rates, before slowly picking to around 2 percent as spare capacity in labor and other product markets continue to diminish. As shown below, the highest CPI was in 2008, notably due to the mining boom, and the effects of previous years high employment rate. The lowest annual inflation was in 2015 as the economy approached to what some economists define as the end of the mining boom. Year March June September December Annual 2016 1.30% 1% 2015 1.30% 1.50% 1.50% 1.70% 1.50% 2014 2.90% 3% 2.30% 1.70% 2.50% 2013 2.50% 2.40% 2.20% 2.70% 2.50% 2012 1.60% 1.20% 2% 2.20% 1.70% 2011 3.30% 3.50% 3.40% 3% 3.30% 2010 2.90% 3.10% 2.90% 2.80% 2.90% 2009 2.40% 1.40% 1.20% 2.10% 1.70% 2008 4.30% 4.40% 5% 3.70% 4.40% 2007 2.50% 2.10% 1.80% 2.90% 2.30% 2006 2.90% 4% 4% 3.30% 3.50% Source: Australia Bureau of Statistics The Trend in Inflation Weaker commodities demand from China and emerging economies have restrained growth in trade over the years. Latest data shows that net exports made a smaller contribution to the national output in the June quarter in comparison to May quarter. However, net exports are projected to continue making a positive contribution to the economy, as supported by ramping up of LNG production and a depreciation of the exchange rate. Current macroeconomic policy in Australia and assessment of its effectiveness Monetary and budgetary/fiscal policies are the two macroeconomic policies used in Australia to control the level of economic activity. The government has an ambitious plan to successfully transition Australia from the mining boom to a healthier, stronger, and more diversified economy through innovation, opening up of new markets, boosting investor confidence, and promoting a balanced budget (Aph.gov.au, 2016). Amid the challenging budget environment and spiraling deficits, the government is making responsible choices to boost the economy, support jobs and growth, by targeting spending where it is most appropriate. The government has a 10-year tax plan designed to support growth, promote higher wages, and encourage competition. Businesses with an annual turnover of less $2 million will receive a one percentage reduction in corporate taxes in this financial year. The threshold for the tax cut will, however, rise from $10 million to $25 million, and finally to $100 million by the year 2019-20. The government is planning to keep on raising the threshold for one percent cut until all companies are included in the scheme in 2023-24. Corporate taxes for all businesses are expected to reduce to 25 percent by 2026-27. In the next financial year, all small businesses with a turnover of not more than $10 million will be eligible for an instant tax write-off for equipment purchases of not more than $20,000. Hard work in Australia is punished. The government has raised middle-income tax bracket from $80, 000 to $87,000. The tax cut on middle income will encourage Australians to work more and get promotion without paying more in taxes (Budget.gov.au, 2016). It will encourage more investment and consumption, hence more economic growth. Though the tax cuts will cost the government approximately $ 5.3 billion in lost revenues over a period of four years, economists are of the view that the move will boost the countrys long-term economic growth by about one percentage point. Small businesses make a significant contribution to Australias economy. They employ over 3 million people. The tax cuts will enable small businesses to invest, grow, and hire more labor force. For the economy to continue to grow there is the need to attract new investment. Australias corporate taxes are way too higher and even above the average for the OECD and countries in the Asian region. The tax cut will make the corporate taxes globally competitive, which will over time, encourage investment, support growth, create more jobs, and raise the wages. The government is also devoted to limiting the rise in expenditure and sustainable revenue function to support growth and return the budget back to balance (Focus Economics, 2016). Keeping spending in control will create an opportunity for further tax relief and chart the path for sustainable budget balance and reduce fiscal burdens on the coming generations. The government is planning to increase expenditure on the main sectors of the economy such as innovation, infrastructure, defense, and employment. About $1.1 billion is committed to supporting innovation and science agenda, and will keep Australia in the path of a leading innovator (Budget.gov.au, 2016). Innovations will increase investment in the economy, and this will contribute to economic growth. The government has also committed a whopping $50 billion dollars in infrastructure on roads, airways, rails, and dams. Given that Australian population is expected to rise in future, we can conclude that investment in infrastructure is well timed. The Australian government has a twenty-year defense industry plan committed to growing defense funding to around 2 percent of the GDP by 2020-21. To support youth employment, the government has set aside $840 million packages, which will assist more than 120,000 vulnerable youths to get jobs (Budget.gov.au, 2016). More jobs mean more income tax, greater consumption, more investment, less unemployment, and more economic growth. The government has plans to open up Australia to overseas markets and affordable prices for household items. Australia has trade agreements with Japan, Korea, and China. The three new trade agreements cover a greater share of Australias exports than all the previous ones combined. These trade agreements mean that exporters have preferential access to the entire North Asia powerhouses. The new trade agreements have placed Australia as a go to destination for people wanting to establish export platforms to tap into North Asian markets. Australia is in the process of enacting the historic Trans-Pacific Partnership which will reduce more than 98% tariffs on 12 economies. Tariffs worth US$9 billion Australian exports will be eliminated. Once implemented, the partnership will contribute to job growth across all sectors of the Australian economy. Reduction in tariffs will encourage seamless trade and enhance the investment environment (Cole and Nightingale, 2016). The agreement will provide greater opportunities to businesses, remove red tape, reduce costs, and promote more participation in the global supply chain. The government has plans to crack down on multinational companies evading tax. Diverted Profits will be charged a 40 percent tax. The government is also seeking to raise the penalty from $4500 to $450 000 for those multinationals failing to adhere to tax disclosure obligations. The government has invested more than $679 million in the tax avoidance task force. The RBA is tasked with controlling inflation in the Australian economy. The appropriate monetary policy in Australia is to achieve 2-3 percent inflation over the cycle, which is sufficiently small to distort the economic activity in the communities (Reserve Bank of Australia, 2016). The RBA board has eased monetary policy and lowered the cash rate to 1.5 percent to encourage sustainable growth in the economy and return inflation to target over time. Conclusion The government has appropriate fiscal and monetary policies aimed at the four major economic indicators. It is investing in infrastructure and innovations as well as encouraging investments, consumption, and savings through tax cuts. The government has a package to create more than 120,000 jobs to vulnerable youths. To promote BOP stability, the government has engaged in newer trade agreements, which will open up Australia exporters to outside world. The government has an appropriate monetary policy to assist to control inflation. While the government is committed to promoting Australia as a favored investment destination, penalties to multinationals and overly high taxes on diverted profits will send negative signals to investors. The current policies also blow out a deficit and Australia will not return to a surplus until 2020-21. Higher education is one of the biggest losers in the current budget. Uncertainty clouds Universities after they were stripped US $1.4 billion funding in this years budget. Though the current policies concentrate more on jobs and growth, the reality is that growth in the national economy will not come from savings on cut alone but innovative business practices by startups. Another weakness of the current policy is that it gives minimal focus on service-based industries such as hospitality and tourism. As a foreign exchange earner, tourism should have been one of the top priorities in supporting the economy after the end of the mining boom. References Abs.gov.au. (2016). 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GDP growth (annual %) | Data. [online] Available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2015start=2006 [Accessed 18 Sep. 2016]. Focus Economics. (2016). Australian government presents 2016/2017 budget, revises upwards expected fiscal deficits. [online] Available at: https://www.focus-economics.com/countries/australia/news/fiscal/australian-government-presents-20162017-budget-revises-upwards [Accessed 17 Sep. 2016]. Reserve Bank of Australia. (2016). Minutes of the Monetary Policy Meeting of the Reserve Bank Board. [online] Available at: https://www.rba.gov.au/monetary-policy/rba-board-minutes/2016/2016-08-02.html [Accessed 17 Sep. 2016].