Australian Economy - Fiscal Performance, Challenges in Bringing the Budget Back to Surplus - Assignment Example

Australian economy Name: Course: Instructor’s Name: Date: 1. Comment on its fiscal performance over the period of last twelve year The Australian economy boosts of 24 years continuous economic growth. This economy has been relatively consistent in the last decade with the budget having a surplus high of 2.0 in 1999-2000 and a deficit of 4% in 2007-08. This transform explains the changing tides of the 19th largest importer and 19th largest exporter in the world. The GDP per capita has increased from $33,982.95 in 2005 to $56,327.72 in 2015. It has a 2.3% GDP growth rate by 2015 (RBA, 2016). The manufacturing sector which experienced microeconomic reform with a 7.7% growth from 1984-2004 has also stunted in the recent past with a 2.1% growth in the last 12 years. The service sector, which includes tourism, education, and financial services, accounts for 68% of the GDP by 2015. The industry growth rate 12% in 2015 compared to a rate of 8% in 2006. The mining industry attributes for 7%, construction accounts for 9%, agriculture, banking, and export sectors also play a vital role in the economy. However, mining and agriculture (12% of the GDP) are the pillars of economic growth in Australia. The inflation rate has been 2-3% in the last 15 years (Treasury, 2015). The economy was prosperous and even was able to manage the net debt by 2004/05 since the average growth rate of GDP was 3.4%. The global financial recession led to an increase in net debt from 2007/08. Even though the economy still grew at an average annual rate of 3.8%, it is clear that the global economy has a direct effect on Australia. However, the country being the largest coal exporter, mining revenue offered a cushion to the economy. In addition, even though the poverty rate was 10.2% in 2000/01 it only rose to 11.8% in 2012/13 (ABS, 2016). 2. Critically analyze the reasons for this performance Before 2007, the Australian market growth and stability in the previous decade was remarkable. The annual GDP averaged at nominal terms of 7.25, and averaged 3.5%. This balance is credited to exceptional planning and introduction o reforms after the 1991 recession. The early 1990s recession led to a GDP fall of 1.7% with the unemployment rate rising to 10.8%. However, the introduction of structural reforms shaped the growth of the economy for the next millennium. These changes started with the floating of the Australian dollar and abolishing of foreign exchange controls and interest rate controls. Thus, business ventures in Australia had the decent growth prospects. This reform strategically aims at making the Australian market attractive for foreign investors. In turn, the economy is not only boosted by revenue but also jobs are created for Australian individuals. This boost catapulted the economy at a steady rate. The introduction of trade liberalization enabled the opening up of the Australian market for inputs from the global scene. This introduction was done by unilateral reduction of tariffs, deregulation of successive product markets and industries and lowering of import quotas. As a result, trade liberalization led to a GDP growth rate of 1.0% and the Gross National Income increased by 1.8%, which is $2,700 per annum per working family (OECD, 2016). In this period, the manufacturing sector grew drastically and revolutionized to become capital extensive, and export focused. Thus, the reform delivered substantial benefits to the economy and individual incomes (OECD, 2016). This facilitated the budget surpluses experienced before 2007/08. The introduction of the tax reform also fuelled positive economic growth. The widening of the tax base, lowering marginal tax rates on business and individual incomes and focusing on consumption taxes enabled the national economy to sustain itself while also maintaining the lives of its citizens. Thier was a conducive environment for local business to thrive which lead to the growth of the mining industry. This also stimulated the rate of exportation of commodities to East Asian countries. The government thus experienced an increase in revenue collection leading to the surplus in the budget. The global financial recession is one of the main reasons for budget deficits in Australia. During this global economic turmoil, the revenue collected by the Australian government slump. This recession made the tax revenues insufficient for the government to carry out its mandates such as welfare benefits, health spending, and other educational handouts. In depth, the indirect and direct taxes collected also fell short as major multinational companies and banking institutions based in Australia were adversely affected by the GFR. The Australia budget committees implemented a policy that ensures they increase spending to reduce the effects of the recession in Australia. Even though this led to a budget deficit thus forcing the government to go into debt, it also ensured the economy continued to grow steadily and in turn secured the Australian jobs. The increase in federal and national government expenditure from 25% to 34% of the GDP in a duration where revenue flow was falling short also facilitated the budget deficit (Parkin and Bade, 2016). Increased government spending reduced the income available for budget allocation thus leading the economy to debt to sustain itself. The slow growth in the manufacturing sector also plays a role in this menace. The productivity of the industry ensures high exportation rates thus high tax outputs. However, the productivity rate has been slower since 2010 due to the global financial markets condition. This reduced revenues achieved thus routing the budget to deficits. The mining boom contributed actively to the economy during the Global Financial Recession. The mining boom enabled the economy to sustain itself at a GDP growth rate of 3.8% during the harsh global economic times. The country has vast natural resources, which it imports and sells in the world market. Since 2003, the commodity prices of these resources have experienced a boom. This increase is associated with the growth of East Asian economies such as China and India, which needed raw materials for their manufacturing, and construction sector growth. Hence, revenue acquired and jobs created enabled the economy to thrive superficially to surplus. Even though the GFR affected various sectors of the economy especially the service industry, the mining industry protected the economy by providing high commodity export earnings, securing jobs and tax dividends. However, this could not help the economy avoid budget deficits. The mining sector contributes 50% of total Australian exports. At the height of the boom 2000-2010, the industry experienced 120% growth in the value of exports. This increase enabled the economy to develop and avoid nationwide recession extensively. The sector is widely controlled by foreign investments and has a high concentration ratio. This maximizes productivity and stimulating the economy. This foreign investment is a result of sound policies and tax reforms, which attract FDI. Even though, the boom is fading Australia has contracts with developed economies to supply gas. These countries include China, India, Japan, and South Korea. Forecasts suggest that export earnings from minerals and energy will increase by 6% by 2020. This is a slower rate compared to the 2000-2010 period. The major cause of this fade is because the mining sector is evolving from the construction phase, which creates revenue through licensing and jobs to the operation phase, which needs ten times fewer workers. In addition, the economy of major importers of Australian commodities such as China is moderating hence a fall in export earnings is expected in the next three years. Thus, it is high time to recognize that the commodity boom is fading and the economy requires another pillar or a combination of other pillars to support it extensively (Oliver, 2014). As a result, Commonwealth is having a hard time trying to offset debts and reduce the budget deficits now. The property sector in Australia is massively growing. In the past five years, the sector has experienced an increase in prices. Even though property bubble is one of the factors that led to hard economic times in the GFR period, the sector has risen by an average of 49% in Sydney since 2012. The investor-driven boom has enabled the economy to maintain high rate of FDI. These inner city construction plans tend to set up apartments that cater for immigration and international students. This has led to a surge in the construction sector to almost 9% of the GDP. This also creates employment in the construction sector and supplements’ loss of jobs in the mining segment. This sector also boosts the domestic economy since many homeowners spend more on furniture, renovations, and hardware and house ware supplies. These commodities are acquired and fitted locally. This property boom has also affected the banking sector, which has gained $29m from property loans since 2014. The majority of bank loans are currently used to fund the capital construction for retail. This has increased the revenue collected from stamp duty and other licensing offered by state governments. The mining boom played a significant role during the GFR. However, the boom is deflating, and the property boom is taking over. Fuelled by investors, the latter can enable the economy to grow consistently. However, for the economy to avoid budget deficits, the system requires updated tax reforms, increased productivity, and revival of the manufacturing sector and reduced social security spending (Oliver, 2014). Tax changes are inevitable for the Commonwealth to achieve a surplus in the budget (Oliver, 2014). The reforms should streamline tax collection thus limit evasion. The heavy reliance on income tax should be shifted to a more stable revenue source. The number of tax exemptions should also be reduced as they distort the economic system. The reforms should be channeled at not increasing the ultimate tax burden. These reforms should only streamline the tax system to increase the revenue acquired. They should reduce expenditure thus increase available revenue. 3. What are the significant challenges Australia faces in bringing the budget back to surplus The budget deficits are s big worry to the populace. The mining boom had facilitated a surplus in the budget. However, the boom is ending leading to a deficit pile up. It is hard for the economy Australia to bring back the budget to surplus because the rate of exports is decreasing thus a reduction in export revenue. Even though a property boom is currently ongoing, it has failed to counter the fall in mining earnings and resultant unemployment effectively. The shipping short fall in the mining sector is due to the increase of supply of minerals to the global market from Brazil and major mining companies. This increase in supply has led to a decrease in commodity prices thus affecting the revenue acquired from the export sector. China is one of the major importers of Australian exports. However, the large economy is experiencing a slow growth in the concurrent years thus affecting the uptake of Australian products (Bramble, 2015). The slowdown in China can influence a full percentage point off Australia’s annual growth by 2022 (IMF, 2015). The falling commodity prices in the global scene and China’s slowdown relate directly to Australia. This slow increase in turn replicates to small revenue inputs into the Australian economy thus making it hard for it to rejuvenate its export segment. The manufacturing sector has experienced slower growth in the recent years. This stunted growth has made companies reluctant in increasing their production levels. The firms prefer to pay out to shareholders rather than widen investment. This notion is associated with the wider speculation about the economy and its growth. Regulations and policies also need to be modified to suit modern day production and distribution. In the past when the sector was a jargon, the economy was stable, and the budget had a surplus. Thus Australia faces the challenge of awakening this area. A productive Australia can overcome budget deficits. Recession in individual states is also a factor that affects the economy directly. States such as West Australia were hit by the recession, which in turn led to job cuts and massive debts. To stabilize the economy, all players such are upbeat and secure enough financially (Bramble, 2015). The dependence of the states of mining as a sole source of income will affect them drastically with a decrease in mining activities. Thus, this relationship poses a challenge to the commonwealth especially in their bid to rejuvenate the economy. Tax expenditures are also a major problem to the economy. There has been an increased rate of tax expenditure, especially on government spending while the revenue collection is falling short. Thus, the Commonwealth is finding it hard to balance the budget due to high expenses in the health, education, and welfare sectors. The area of health is forecast to grow to 2% of the GDP by 2020. This statistic shows the robust growth in the industry is becoming a major expenditure. Thus, the government should formulate policies to regulate their spending to enable the budget to attain a balance. References Oliver S. (2014) The Structural Challenges facing Australia, AMP Capital, Retrieved on 2017/05/13 Bramble T. (2015) The Australian Economy after the mining boom, Retrieved in 2017/05/13 https OECD (2016) Benefits of Trade Liberalization, Retrieved in 2017/05/14 www.oec.org/trade/services-trade Parkin, M. & Bade, R. (2016). Macroeconomics: Australia in the Global Environment First edition, Pearson Australia. BUDGET (2015-16) Retrieved 2017/05/13 http://www.budget.gov.au/2015-16/content/myefo/html/16_appendix_d.htm Reserve Bankng of Australia (2016) The Mining Sector Retrieved 2017/05/13 www.rba.gov.au Australian Bureau of Statistics (2016) GDP Dec 2016, Retrieved 2017/05/13 www.abs.gov.au Australian Government (2015) The Treasury, Retrieved 2017/05/13 www.treasury.gov.au Read More