Fiscal Policy in Australia
WHAT IS THE FISCAL POLICY?
The fiscal policy involves the use of the Commonwealth Government Budget to help it in achieving its objectives. The budget is the annual statement (released in May) from the government, of its estimated income expenditure for the following financial year, which varies the amount of government spending and revenue which alters economic activity, therefore influencing internal balance, external balance and the rate of economic growth.
THE MAIN GOALS OF THE 2013-14 BUDGET:
1. Fiscal consolidation and return to budget surplus in the medium term:
One of the government’s main goals of the 2013-14 Budget is to return to its planned and delayed budget surplus. However, the planned surplus for 2013-14 has been transformed to an underlying cash deficit of $19.4 billion, with a deficit of $18 billion expected in 2013-14 (mildly contractionary fiscal stance).
Planned fiscal tightening from 2013-14 to 2016-17 estimates that net public debt will peak at 11.4% of GDP in 2014-15, before expecting to return to surplus by 2016-17.
The government has planned $43 billion dollars in savings over the next four years in order to return the budget to surplus. They will do this in the form of discretionary spending and increases in taxation. It is also said that GDP growth is forecast to be slightly below average at 2.75% in 2013-14 but is expected to return to 3% by 2014-15.
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A gradual return to surplus is most appropriate considering significant downgrades to revenue and the transition underway in the economy towards new sources of growth. Trying to return to surplus in a hurry by making drastic cuts in the near future would resolve in significant costs to jobs and growth.
2. Boost Education, productivity and participation:
The main objective of the 2013-14 Budget is to boost the economy’s long-term productive capacity through education reforms. This is expected to boost workforce skills, productivity and participation in the long run. The government aims on achieving this by investing $9.8 billion in comprehensive reforms to schools over six years. This will implement recommendations into the Gonski report on school funding’s, published in 2011. These reforms, which include The National Plans for School Improvement, aim to improve the quality of education in order to improve the skills and productivity of the labour force in the long term.
On top of this, the government will be investing $1 billion in support of “A Plan for Australian Jobs”. This goal to create jobs will encourage the sharing of skills, knowledge and technology in order to improve productivity and increase Australia’s international competitiveness.
3. Boost Australia’s infrastructure capacity:
The National Building Program is a $36 billion investment announced in the 2008-9 budget that aims at improving Australia’s infrastructure and helping to reduce capacity constraints that have restrained the growth in Australia’s export volumes and have contributed to cost-push inflationary pressures. Now, the government has announced that an additional $24 billion is to be invested into road, rain and port infrastructure over six years until 2018-19.
On top of this, the government is set on investing $2.3 billion in the Regional Infrastructure Fund, addressing the urgent infrastructure needs in regional areas.
The budget aims on continuing to develop the Pacific Highway and continue to extend the Great Western Highway on the condition that the NSW government agrees to impose no new tolls on roads that are currently toll-free. As well as this, the government is partnering with the private sector in attempt to improve the infrastructure of the M2 motorway by investing $400 million.
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4. Increased Spending on priority areas:
The 2013-14 budget has funded an additional $14.3 billion towards DisabilityCare Australia (the national disability insurance scheme).
DisabilityCare Australia will abolish the countries current disability care and support system by funding life-time care and support for those who battle life time impairment and disability. This program will be funded by an increase in the Medicare levy from 1.5% to 2% of taxable income, as of July 2014. This is expected to raise $20.4 billion within five years.
The budget also mentions the improvement and funding of a number of other important social and communal needs including an improvement to Defence and Safety, Health care reforms, Regional and rural support and Support for the ageing population.
THE LIKLEY EFFECTS OF THE CURRENT FISCAL POLICY ON:
1. Domestic resource use:
The Fiscal policy can influence resource use in Australia either directly or indirectly. It effects is directly in the sense that the government has to choose to spend money in a particular industry for example, investing money to build a tunnel or investing money to provide a public good which otherwise would not be funded like defence. This may result in the funds being directed to these industries therefore more resources are needed to be used.
On the other hand it could affect the use of domestic resources indirectly for example, the government may impose taxes or subsidise particular industries. If the government were to impose taxes on industries which produced a lot of pollution it would deter firms from entering that particular industry therefore more resources will be moved away from it. On the other hand, if the government were to subsidise a particular industry it would encourage resources to this industry.
It is estimated that the resources boom will transition from a phase of massive spending in resources investment to a new stage of growth in production and export revenue. The economy is also set to move to non-resource drivers of growth, as there are signs of strengthening household consumption and business investment outside the resources sector.
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2. Income Distribution:
income distribution occurs through the Progressive income tax and Welfare system. Any changes that the government makes to the fiscal policy can result in a redistribution of income.
Overall, it is expected that the 2013-14 budget will improve the distribution of income in Australia. Some relevant policies, which will improve the distribution of income, include:
→ The Gonski school reforms- will apply a reasonable model of school funding and will provide disadvantaged students and schools with necessary finding therefore distributing the income in a more equal manner.
→ DisabilityCare Australia will cover the out-of-pocket expenses of receiving care for people suffering disability. This makes income distribution more equal in the sense that people with a disability will not be charged a fee they would not have to pay if they were not impaired.
3. Economic Activity:
The 2013-14 budget is likely to have the effect of a mildly contractionary fiscal stance over the next year. The economy is set to grow by slightly below average at 2.17% before returning to the norm of 3% by 2014-15. Unemployment is expected to rise slightly to 5.75%.
The treasure estimated household consumption to grow solidly at 3% reinforced by a moderate growth in wages and a gradual growth in household’s wealth as asset prices recover.
Business investment is estimated to grown solidly in 2013-14 at 4.5% and peaking at 8%, before easing back again.
The overall effect of the contractionary fiscal stance will result in a decreased level of economic activity through dampened demand, which will lead to a decrease in inflation.
4. Savings and the Current account deficit:
The delayed return to budget surplus will have a negative effect on external stability because budget’s deficit deteriorates the current account deficit. An increase in interest rates will be expected due to the sale of government bonds to finance the budget. This will force the private sector to borrow from foreign financial markets instead. However this will lead to an increase in foreign debt, recorded as primary income outflows, which will worsen the Current account deficit. Furthermore, because overseas investors are able to invest into Australia and buy government bonds, the financing of Australia’s budget deficits are likely to increase Australia’s foreign liabilities. This will lead to an increase in the net primary income deficit.
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Despite all these negatives, Australia’s comparatively low level of net public debt, our strong dollar and AAA credit rating continues to increase investors’ confidence into the economy.
