Economics Capa 4

8/22/2019 Economics Capa 4

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Budget at a Glance (2013 - 2014)

The Government has a clear path to return the budget to surplus while building astronger economy, a smarter nation and a fairer society.

A stronger economy

Australias economic fundamentals are

strong. However, difficult global

conditions and the sustained high

dollar are weighing heavily on prices

and profits across the board and

reducing budget revenues. The hit to

revenues will see a budget deficit of

$18.0 billion in 2013-14.

The Government has responded tothese changing circumstances by

setting a pathway to return the budget

to balance in 2015-16 and to surplus

by 2016-17. It is achieving this while

continuing to invest in our economy to

keep it strong.

To boost our nations productivity, this

Budget invests $24 billion over six

years in public transport and roads,

including regional highways.

A smarter nation

We are making historic investments in

our children, schools and workforce to

help drive productivity and a smarter

nation.

Our unprecedented investment in early

childhood education, once in a

generation school reforms, and

additional higher education places will

ensure our children have the educationthey need for the high-skilled, high

wage jobs of the future.

These reforms will provide more

support in the classroom, more training

for teachers and support for kids doing

it tough. This investment will ensure

every child has the opportunity to

achieve their potential.

A fairer society

The government is committed to

creating opportunities that provide a

fairer future for all.

This budget delivers permanent and

enduring funding for DisabilityCare

Australia, one of the biggest social

policy reforms in our nations history.

We have identified enduring savings to

make room for our priorities and helpachieve goals of our fiscal strategy.

As a result of our sound fiscal

management, we are able to

sustainably make the vital investments

needed to build a stronger economy,

smarter nation and fairer society.

Actual Estimates Projections

2010-11 2012-13 2013-14 2014-15 2015-16 2016-17

Underlying cash balance ($b) (a) -43.4 -19.4 -18.0 -10.9 0.8 6.6

Per cent of GDP -2.9 -1.3 -1.1 -0.6 0.0 0.4

Fiscal balance ($b) -44.5 -20.3 -13.5 -6.3 6.0 10.8

Per cent of GDP -3.0 -1.3 -0.8 -0.4 0.3 0.6

(a) Excludes expected Future Fund earnings.

Forecasts Projections

2012-13 2013-14 2014-15 2015-16 2016-17

Real GDP 3 2 3 3 3

Employment 1 1 1 1 1

Unemployment rate 5 5 5 5 5

Consumer Price Index 1 3 2 2 2

Nominal GDP 3 5 5 5 5

(a) Real and nominal GDP are year average growth. Employment and CPI are throughtheyear growth to the June

quarter. The unemployment rate is the rate in the June quarter.


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Analyze the role and operation of Fiscal Policy in the policy mix in achieving governments economic

objectives. In your response, you shoul d refer to the economic inf ormati on provided.

The Australian government uses fiscal and monetary policy as tools in achieving its maineconomic objectives. These include sustained economic growth, external stability and equalincome distribution. Monetary policy is a macroeconomic tool which involves the Reserve Bank ofAustralia selling and buying Commonwealth securities in the short term money market. Fiscal policyis a macroeconomic policy which involves the government reducing or increasing spending, taxationand the overall budget outcome. While the policy mix is the combination of fiscal and monetarypolicy in order to achieve the above goals. An overview of the history of the policy mix over pastdecade reveals that it has achieved some of its objective such as an average inflation rate of 2-3 p.a %,sustainable economic growth at 3% p.a and a stable Gini coefficient of 0.304-0.32 at some periodswhile at the same time not achieving other objectives e.g. external stability as a result of the GlobalFinancial Crisis(GFC).

Economic growth is the increase in real GDP over a period of time usually one year.Although economic growth is beneficial it must be kept at a sustainable level of 3-4% to

avoid inflation. Therefore the government will change its fiscal stance to, Neutral,Expansionary or Contractionary fiscal policy. Expansionary fiscal policy involves havinggovernment spending supersede taxation therefore adding money to the cash flow stimulatingeconomic growth. However this would increase the budget deficit and contradict the sourcematerial provided which states that they will return the budget to balance in 2015-16 and to

surplus by 2016-17. Therefore to make up the 43.4 billion dollar deficit in 2011 thegovernment must implement contractionary fiscal policy while involves taxation supersedinggovernment spending hampering economic growth. This is why the growth in real GDP willdrop to 2% in 2014 and not rise above 3%. This is because as shown below governmentspending influences Aggregate Demand as now people have less money with which buyconsumer goods and stimulate economic growth.

The equality of income is another objective of the Australian government. In general thegovernment uses progressive income tax systems combined with social welfare such asunemployment benefits and education to redistribute income from higher income earners. Inthe 2006 Budget several policy decisions were introduced which damaged the pursuit ofincome equality. Such as cuts to income tax, the surcharge for high income superannuationfunds and the disabled pensions. Many of these policies where over turned once Labour gotinto power but the gap between high income and low income is still large. A major reason ofthis is lack of education, without the funds to obtain higher levels of education they will not


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be able to increase their standard of living and force their same life onto their children. Nowthe government has begun investment in early childhood education, once in a generation

school reforms, and additional higher education places will ensure our children have the

education they need for the high-skilled, high wage jobs of the future. This will close theeducation gap and therefore increase income equality. This is extremely important for

governments because it reduces the unemployment rate and the strain of social welfare on theeconomy. The success of these policies will result in the unemployment rate dropping from5% to 5% showing that the Australian government can use more of its labour resources inthe economy.

In order to achieve external stability, the government has set itself the target of achieving abudget surplus by 2016-17 of $10.8 billion dollars. Governments strive to achieve externalstability through a budget surplus to reduce its consumption of domestic savings. Because thegovernment is not using these savings domestic firms can use the funds meaning they have to

borrow less from overseas. However the GFC destroyed investor confidence and causedmany countries creating great external instability though protectionist policies and a drop in

trade resulting in the slowing of cash flow in and out of countries. Going from a Budgetdeficit of 43.4 billion dollars to a forecast budget surplus of 10.8 billion in 2017 shows thegovernments determination to achieve external stability.

Monetary policy is can change monthly with the RBAs meetings and therefore has a much

more adaptable impact on Australias economic objectives. Externally the RBA has to judgethe impacts of Chinas slowing growth as well as the stabilizing ofAustralias moretraditional trading partners in Japan and the US. Internally however the high Australian dollarand low inflation has encouraged the RBA to cut interest rates to encourage spending andinvestment as people are getting less returns from their savings. The increased amount ofcash in the financial flow increases economic growth. However with increased spending

power consumers may now buy more imports increasing the CAD and therefore negativelyaffecting external stability. Monetary Policy must be carefully balanced otherwise oneobjective might be irrevocably damaged

Generally the budget does aim to reach all the Australian governments objectives. Thecontractionary nature of the budget only destabilizes economic growth in the short term,

because in 2015 a budget surplus will be reached and therefore the Australian budget willmove to a more balanced stance. Comparing the planned outcomes to those actuallyachieved, we wont have a budget surplus in 2015 shows the Australian government has not

been effective in achieving most of their economic objectives.

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Economics Capa 4