The Economy of Australia - Case Study Example

Name: Professor: Course Code: Submission date: Introduction The economy of Australia is a developed one with a very modern economy. The gross domestic product (GDP) for the country currently stands at US$1.23 trillion (Australian Bureau of Statistics). Compared with other world economies, Australia has the 13th largest economy in the world as per the report released by World Bank in June this year. In terms of purchasing power parity (PPP), Australia stands at position 17 in the whole world. Australia as a developed economy substantially contributes to the world economy through importation and exportation of goods and services. In the world, Australia is ranked number 19 both in exportation and exportation of goods and services (Lee, et el 34). The country is also a member of various trading blocks and treaties which include the World Trade Organization and the G20. The other countries that Australia has entered into bilateral trade agreements with include: the United States, Chile, Thailand, New Zealand and Singapore (Australian Bureau of Statistics). The entry and penetration of Australia into the world economy has been greatly motivated by its favorable macro-economic policies that have been put in place by the government in order to support both local businesses and those that are owned by foreign investors. Australia currently is on the run to form a single market economic partnership with New Zealand as one way of taking advantage of the local market and thereby avoid much of the costs incurred when exporting goods and services to those countries that are far. The major characteristic of the Australian economy is that it is mainly supported by the service sector industry which contributes up to 65% of the country’s GDP while agriculture and mining combined together contributes about 10% to the GDP (Australian Bureau of Statistics). However, much of the country’s exports come from the two industries and they contribute about 55% of the country’s total exports. On the other hand, the energy sector is one of the biggest importing sectors in the country since there are no crude oil deposits in the country and therefore the country depends greatly on imported oil and other allied products by around 82%. This essay will discuss some of the key macro-economic policies that have been introduced by the government and the Reserve Bank of Australia and that have contributed to this much development in the country. Evolvement of macroeconomic policies Australia’s economy was once faced with very serious challenges which occurred in the 1980s when the economy was found to be stagnant and its unemployment rate had risen to 6% as shown in figure 1 below. This was as a result of the macro-economic policies that had lapsed within the country and that could manage the OPEC oil shocks that were experienced around the world during that time (Lee, et el 44). Australia was not spared in anyway and it found itself in the worldwide recession. To add to the challenges that faced the country, Australia also suffered from severe drought which hit the country in 1982 thus greatly reducing the total firm output which then translated into a very inflation especially for basic commodities like rice, wheat and maize flour. The end result was that the trade unions were inspired to have their wage rates increased to cater for the rising cost of living and therefore the economy was in serious trouble. During this period, the unemployment rate which had dropped down to 5.75% in 1981 sharply rose again to around 10.2% in 1983 (Moschella 45). Figure 1: Real GDP growth and the output gap Source: Australian Bureau of Statistics. After coming getting out world economic recession, Australia’s economy again managed to regain its stability. The agreement that were signed between the government and the trade unions also acted as a booster to the economy since the agreement accord led to decline in labor cost thus positively promoting economic upswing and thus reducing the unemployment rate from 10% in 1983 to 6% in 1989 as shown in figure 2 below. Figure 2: Unemployment and inflation in Australia and the G7 countries Sources: OECD Main Economic Indicators and Reserve Bank of Australia. The tight monetary policy that was used by the country by then also played part to some of the economic challenges that the country faced in the last two decades of the 20th century. The stronger combinations of the monetary policy and the economic recession caused severe implications for the country even though showed some mild improvement in the labor even though its demerits were overwhelming. This again led to increase in unemployment rate from 6% in 1989 to 10.5% in 1992 (Lee, et el 36). However, after the 1992 economic recession, the country’ GDP has witnessed tremendous growth in terms of productivity more than the average of the OECD member countries as shown in figure 3 below and this was a clear contrast with the previous decade. This is perhaps because of the reforms that had been made by the government with regard to macro-economic policy and frameworks (Lee, et el 35). Figure 3: Australian GDP per capita Source: Groningen Growth and Development Centre and the Conference Board, August 2005. Macroeconomic policy The country’s macroeconomic policy has continued to evolve over the last two and half decades and they have been put forth as a government strategy to address the economic related challenges within the country. Although the government of today did not embrace and support the policy framework, these policies were first introduced in 1980s (Moschella 58). During the presentation of the government budget, the government made three main commitments which included: 1. Not raising tax revenues 2. Not raising government expenditures 3. Reducing the budget deficit The three commitments were made by the government to ensure that the government expenditure was well within its limit as one way of ensuring that borrowing was reduced to a very minimum level so as to avoid raising the tax rates and consequently the barriers to economic growth (Lee, et el 34). Since that time, this has been one of the government policies that the government has used to increase public saving in response to the emergence of CADs. The argument that public was so much concerned with the tax policies and its role in promoting national saving was clearly and expressly addressed in the budget during the same time (Lee, et el 34). This strategy proved to be very vital since the government managed to cut its spending thereby reducing its deficits of 3.5% of GDP in 1983/84 financial year and converting it into a surplus of 2% in the years that followed (Organization for Economic Co-operation and Development 14). The govern initiative was good since it created an environment where taxes could be increased in order to finance the deficits. Increase in tax will have meant that more and more was to be sourced from the public and thus affecting their disposable income. The end result of the effect is that the people will not have anything to save and therefore investment will not be possible. On the other hand, cutting down on government expenditures, will also mean that the government will not have much budget deficit to finance. One way of financing budget deficits is through borrowing. The high cost associated with the borrowing is the main challenge every government must consider in order to determine the net value of any borrowing being made. In order to sustain its economic growth, the government together with the reserve bank of Australia has been on the verge to ensure that various aspects of the economy are addressed. This is according to the report by the Charter of Budget Honesty, which provides a clear guideline on policy framework with regard to fiscal policy and fiscal reporting (Lee, et el 39). The legislation was passed in 1998 by the Liberal-National Government. The legislation demanded that the Australian government addresses both long-term and medium-term fiscal strategies that are based and build on sound management principles which include: management of government debts and financial risks, the economic cycle, the level of national saving, stability as well as integrity of tax base and equity among all generations. The ultimate objective of medium-term fiscal strategies was to ensure that there was balance in government budget on average and it was adequate in supporting the economic cycle. Through the strategies, the government has also been able to maintain some surpluses in its budget thus showing that the prospects are sound and good for economic growth. This has helped the government of Australia not to increase the tax but rather utilize the surplus budget in domestic investment (Organization for Economic Co-operation and Development 89). Management of inflation by use of the inflation targeting team by the government, as proved to be very successful in promoting the economic growth and has gained a lot of support from the government statement on the ‘conduct of the monetary policy’ together with Australian reserve bank. This way, the fiscal policy has managed to win so much credibility and sustainability in taming inflation. Ageing and public health costs policy One of the major fields that the government policy has adequately addressed is the one that deals with those people who are currently working but are aging and their services could no longer be required. The policy also addresses the needs of those people with health related problems. The reason for doing this is to ensure that the cost of managing this group is determined and appropriate budget allocation done (Australian Bureau of Statistics). On the same line, the government is also determined of finding ways of replacing these important people whenever they are no longer in the economic world. In order to manage the economic related challenges, the government of Australia has decided to take this problem as one of the main challenge to the economy. According to the National Commission of Audit Report, the government has the responsibility of putting in place certain measures to ensure that a lot of funding is not spent of offering supportive services by coming up with strategies of ensuring caring cost is reduced to a minimum (Organization for Economic Co-operation and Development 67). Economic liberalization policy As seen earlier from this evaluation, Australian economy has undergone numerous challenges which have witnessed the introduction of several liberal changes to the economy. The economy of Australia is liberalized in such away that different people from local and foreign countries are allowed to invest in the country as long as they meet the legibility criteria laid down by the Foreign Direct Investment (FDI) policy (Australian Bureau of Statistics). This policy on free trade has seen many foreigners flocking into the country to search for investment opportunities because of the conducive political and legal environment to do business. This has led to the strengthening of the local currency against other currencies including the US Dollar and thereby reducing the effect of inflation on imported goods. In general terms, this liberalization has seen even the locals benefit from reduced goods and service taxes as well as income tax for low income earners and the result has been high domestic savings and consequently high rate of investment. Conclusion In concluding this essay, it is important to highlight that following areas have been discussed and evaluated with regard to main macroeconomic policies used by the Australian Government and the Reserve Bank of Australia. They include: reducing of tax burdens and government expenditures as well as the reduction of the budget deficit apart from discussing the economic performance of Australia in the last two years where it was found that Australia is among the top great economies of the world after being ranked the 13th in the whole world. The other macroeconomic policies that have also been discussed include: Ageing and public health costs policy and Economic liberalization policy (Australian Bureau of Statistics). However, some of the important lessons that have been learnt are: first, monetary and fiscal policies in Australia have evolved over years more especially in the last two decades of the 20th century which have seen great development in the country. This continuous evolvement of macroeconomic policies has seen the government manage its cost in terms of borrowing to finance its budget and instead has managed to convert the deficits into budget surplus by cutting own its expenditure. Second, the Australian fiscal framework has evolved alongside these policy developments. And in the modern economic environment, the policy framework creates principles that are important in achieving and maintaining a budget balance on average in order to support the economic cycle. Third, the inflation target is used as constraint to macroeconomic policies by ensuring that they are workable and can yield the intended economic results. Works Cited Australian Bureau of Statistics. 6401.0-Consumer Price Index, Australia. Sept. 2010. 10 Nov. 2011, http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0 Lee, Mylne, et el. Frommer’s Australia 2011. London: John Wiley & Sons, 2010. Moschella, M. Governing Risk: The IMF and Global Financial Crises. London: Palgrave Macmillan, 2010. Organization for Economic Co-operation and Development. OECD Economic Surveys: Australia 2010. Sydney: OECD Publishing, 2010. Read More