Federal Budgeting System of Australia - Case Study Example

Introduction This paper examines critical elements of macroeconomics and how it affects and is affected by the federal budgeting system of Australia.It begins by identifying the role of federal budgets in influencing inflation and unemployment. The research goes further to examine the elements of the 2011 federal budget and how it will influence inflation and unemployment. The paper concludes on how the 2011 federal budget can be brought under control before the next elections. Federal Budget and Inflation The federal budget is vital to inflation in the country because it sets the parameters and targets for the operations of the economy and financial trends in the coming year (Sloman & Norman, 2010). These parameters are greatly influenced by the volume of revenue to be raised by the Australian taxation system as well as the rate of government spending in the coming year. Inflation is “the rise in the prices of goods and services in a countrys economy in a given point in time” (Mankiw, 2009). In other words, inflation refers to a situation where prices of goods and services are rising an country. This therefore implies that there will be limited money in the economy and a decrease in the value of a given countrys currency, hence there is a rise of the prices of goods and services. Inflation is influenced by the macroeconomic policy of a country and this is laid down in real terms through the budget of the country. The main elements of the macroeconomic policy of the Australian federal government relate to money supply, fiscal policy and interest rate (Sloman & Norman, 2010). Money supply refers to the total amount of money in circulation in the country. Fiscal policy is concerned with the collection of revenue through taxation. The actual control of this is in the hands of the Central Bank of the country. Inflation becomes rampant if the countrys spendings exceed the revenue base. When this happens and the government does not take any actions, there is the need to monetise the situation. This refers to the practice of printing more money to save the situation (Mankiw, 2009). The resultant effect is a fall in the value of the countrys currency and this leads to inflation. The budget is a tool for the regulation of spending and raising money through taxation. It therefore lays down the targets and actual activities to be completed in a given period of time to ensure that the targets are met fully. This prevents the situation where spendings exceed revenues which can lead to the need to monetise the deficit which leads to inflation. The elements of regulating inflation are mainly short-term in nature. They include activities that will increase revenue and also decrease spendings. Federal Budget & Unemployment Unemployment refers to the number of people within the productive age of a country who are willing and able to work but do not have access to jobs (Mankiw, 2009). Businesses hire people to work for them in their production systems. However, in a case where businesses have to cut down on their production activities, they have no other option but to lay off some of their workers to ensure that they attain the level of profitability that they aspire to attain. This causes unemployment in the economy. Since businesses are at the forefront of the issues of employment and unemployment, their growth and survival is the main determinant of the rate of people employed in the labour force. Thus, the best contribution the government can do for such businesses is to create an enabling environment that will allow them to remain productive and expand in order to require more employees. Therefore, the budget of a country must seek to balance the short-term needs of the economy with this longer term need of getting businesses to grow and expand. This means that the federal government will have to put in place trade policies, economic growth plans and interest rate targets that will be favourable to businesses and prompt growth and development in the economy. These growth and expansion drivers will enable businesses to expand their operations and need more employees to meet their objectives. Trade policies refer to tariffs, trade agreements and international business policies. These policies will regulate and protect the countrys businesses and enable them to remain viable and employ more people resident in the country. Some of the tactics necessary to do this include discouragement of foreign imports and the encouragement of export of the countrys goods. Also, there are economy growth strategies that will help to increase the number of goods and services in the country. This could be done through tax cuts, regulation, decrease in interest rate and subsidies to support businesses operating in the country. According to Blythe (2011) the federal budget needs to encourage the three Ps, population, productivity and participation. Thus, the federal budget needs to spell out the longer term plans to increase the population to reduce labour shortages in areas like skilled employees and this is done through the encouragement of immigration and the development of Australian citizens. Productivity means getting businesses to enhance their activities so that the economy can be expanded and more people can be employed. Participation refers generally to the reduction in rates of unemployment and the reduction in the socio-economic gaps between people. Deficit in 2011 and Unemployment The deficit in the 2011 federal budget implies that government spending exceeds revenue over the stated period of time (Sloman & Norris, 2010). This means that the federal governments expenditure and payments for goods and services as well as grants to individuals and businesses in the economy exceeded the revenue it raised through taxation and other sources. This therefore indicates that the government would have to cut down on its spending in the coming period to balance the deficit to prevent the need to monetise or ease the economic difficulties that can potentially result from its overspending. It implies therefore, that the government is likely to cut down on its support to businesses and corporate entities operating in the country. This will be manifested in the form of increase in the interest rate and higher taxes. The resultant effect will be that businesses that were growing in the country would have to stop pursuing an expansion strategy and focus on survival. This is because their profit rates will fall and they will have to concentrate on how to cut down costs and remain viable. In cutting down costs, most businesses will seek to make some adjustments to its payments to its employee. This is because labour costs will have to be cut to keep the business profitable. The consequence is that workers would either have to be prepared to work for longer hours or there will be the need for some workers to be laid off. If the employees agree to work for longer hours, it will mean that the unemployment rate will remain as it is because there will be no motivation in hiring other employees. On the other hand, if employees are laid off by this businesses the rate of unemployment will go up. It is therefore conclusive that the budget deficit of the 2011 federal budget will lead to unemployment in the Australian economy. Individual Items in the Federal Budget The focus on returning to a budget surplus by 2013 is the main objective of the budget. It implies that the government is making an effort to cut down its spending and also increase its revenue. Blythe (2011) indicates that two thirds of this so to be done through measures of savings whilst another third will be done through new spending initiatives. If this is to succeed, it will ultimately reduce inflation and also increase employment. This is because when the government is able to balance its spending and revenue and it gets a surplus, there will be no pressures for the government to monetise its deficits hence leading to inflation. Prices will remain stable and there will be no increases in prices of goods and services. On the other hand, if these two initiatives work, the government will not have urgent needs to increase taxes and reduce its grants to businesses and individuals in the economy. The average businesses in the country will have the ability to expand and increase their operations and hence employ more people, reducing unemployment in the country. The government therefore hopes to accrue $22 billion in savings and real growth in spending. This will tremendously cut down the budget deficit and prevent inflation. Also, the government is making an effort to promote and encourage the MK II mining boom which is aimed at increasing the volume of revenue gained through mining. This will help the government raise more money and relieve pressure on the treasury and hence allow the government to fund its projects through its mining revenue rather than through taxation. This will allow some businesses to enjoy tax holidays and this will encourage growth and stimulate employment in the economy. The building of a better work force through targeted skills training and better educational structures is a positive plan that can enable the economy to experience a major boom. This is because when more and more people are productive and they keep on improving, the Gross Domestic Product of the country will increase. This will ultimately stimulate growth in the economy and increase the chances of a budget surplus rather than deficit. This implies that inflation will go down and the economy can expand to stimulate the creation of more businesses which can also lead to more employment. The tax reforms proposed by the budget are positive in a sense that it aims at improving fairness and integrity. The plan will enable to government to encourage productive sectors and discourage sectors that are not very productive in the economy. This will also support economic growth and ensure that the growth factors of the economy are enhanced. Attaining Surplus by the next Elections The budget promises to create overturn the 2011 surplus by the 2013 financial year. From an examination of the budget, it looks like the 2011 budget is a very idealistic roadmap to take the country into a surplus by FY2013. However, there are some issues that can potentially affect this proposition and this makes the budget sound a little too optimistic. First of all, the reliance on MK II as a major revenue generation line is problematic. This is because the mining boom is susceptible to changes in prices due to world market conditions. Hence, there is a chance that the revenue expectations of the federal budget would fail drastically due to volatility on the world markets and the challenges related to it. Also, there is little disclosure on tax reforms and related matters. The budget does not really describe the tax matters and its implications on the wider economy. This implies that the budget is not really a complete tool that can be relied upon for further analysis and forecasting and is still a work in progress. References Blythe, Michael (2011) 2011 Budget Overview. Available online at: http://www.youtube.com/watch?v=7IX2iAFJAuw Accessed 4th September, 2011 Australian Government (2011) Commonwealth Budget, 2011 – 2012 Available online at: http://www.budget.gov.au/ Accessed: 4th September, 2011 Evans Greg (2011) Impact of Inflation on Federal Budget 2011 – 2012 Available online at: http://www.youtube.com/watch?v=7hCjQ31XvSo Accessed 4th September, 2011 McLeod, Rob (2011) 2011 Federal Budget Review Ernst & Young, Published: May 11, 2011 Mankiw Gregory (2009) Brief Principles of Macroeconomics Mason OH: Cengage Sloman, J & Norris, K. (2010) Principles of Economics Pearson Education Australia Read More