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Analysis of Australia's Fiscal Policy

1411 words (6 pages) Business Assignment

19th Oct 2020 Business Assignment Reference this

Tags: Business AssignmentsEconomics

On the 2nd of April 2019 the Australian government led by Treasurer Josh Frydenberg presented to the Australian People the 2019-2020 Australian budget. He famously announced “The budget is back in black” indicating that for the first time since 2008 Australia has a budget surplus rather than a budget deficit. A budget surplus is when revenue exceeds spending. The 2019-2020 budget surplus was $7.1B compared to the 2010 budget which had a $54.5B deficit when Australia was still recovering from the global financial crisis (Scott, 2018). The job of the Australian government and its fiscal policy should always be to ensure the economic and social wellbeing of our nation is maximized. As well as dealing with the economic problem all civilisations face. The economic problem is how to best satisfy societies infinite wants and desires with finite resources.

The conflict in fiscal policy will be the battle between high wages which may stimulate the economy as more workers have more of their disposable income to spend and the small business owner which may not afford to pay workers higher wages. 44% of jobs in Australia are created by small businesses, they are the engine of our economy and all big businesses started as small ones so therefore the government should be allowing small businesses to keep as much revenue as possible.

Resource Allocation

To fully analyse the economy of Australia, we must understand how the Australian economy functions and which industries are being heavily invested in. Australia is a mixed market economy, one with both the private and public sector. Tax money is therefore money taken from the private sector and injected into the public sector.

The budget surplus is from the underlying cash surplus which is estimated to be $7.1B in the 2019-2020 period. Total government receipts for 2019-2020 is estimated to be $505,500,000,000 and total payments for 2019-2020 is $493,300,000,000 which leaves $12.2B in surplus of which $5.1B goes towards Net Future Fund earnings. Therefore, the underlying cash balance for 2019-2020 is estimated to be $7,100,000,000.

The main sectors of government spending in this budget include: social security and welfare, education and healthcare. Of the $580B spent in the budget the largest sector was social security with $180B spent. Other large sectors the government has invested in include Healthcare with $81.8B, education with $36.4B and defence with $32.2B.

Within the sector of healthcare there are a range of initiatives the government is doing that are aimed at fighting problems within society. For example, investing $737M into mental health over the next seven years. This is important as depression and anxiety rates in Australia are rising. The government is also invested $386M into encouraging Australians to participate in sport. This is crucial in fighting Australia’s obesity crisis.

Income Distribution

The goal of income distribution should never be to make incomes equal as that would remove incentives to produce value to the market place. However, more equality will result in better social mobility as working class people tend to spend their disposable income. The government has reduced the number of income tax brackets and made the tax system flatter so that a high proportion of people will pay the same % in income tax. Those earning between $45,001 to $200,000 will have a tax rate of 30% this represents 70% of all tax payers. The government has therefore been promoting the fact that 94% of taxpayers will pay no more than 30 cents in a dollar to the government. A flatter income tax rate may result in more income inequality however due to the 19% tax rate for up to $45,000 someone earning $200,000 will earn 4.4X more income than someone with $45,000 but pay around 10X more in tax. Therefore, Australia still has a fairly progressive taxation system whilst rewarding hard work and aspirations to contribute to the economy. The eliminating of income brackets will also reduce bracket creep. Bracket creep occurs when

State of Australian and Global Economy

The global economy is slowing and is predicted to slow even more as the world’s population is aging which means a lower workforce to support an increasing retiree demographic. As well as the escalating trade war between the two largest economies, China and USA. Both of these countries are strong trading patterns with Australia and therefore we will feel the effects. The number of births in China is rapidly declining from around 19M in 2016 to 15M in 2018 and therefore less workers to support an aging population of Australia’s biggest trading partner.

Australia’s GDP per capita has been growing slowly and has even been in the midst of a recession. However overall GDP has been growing due to Australia’s high level of immigration and population momentum. Our high level of immigration levels are also helping slow aging which is in contrast to nations such as Japan, China or Korea which do not take in many migrants and are therefore aging a lot faster.

Inflation in Australia has fluctuated between 1.3% and 2.1% of the last few years, this is a good rate of growth that allows for maximizing both imports and exports without massively reducing incentives to spend or save within Australia to allow for both short term and long term economic growth.

Stance Australian Government Should Take Over next 12 months

When tax cuts are given to middle and working class people it generally stimulates the economy as they have more of their disposable income to spend. This generating short term economic activity allowing for new businesses and jobs to be created. Therefore, the recent tax cuts are welcomed as they put more money in the hands of the public rather than the government.

The Australian government should be reducing subsidies in agriculture as those jobs will not be sustainable long term due to the rise in automation and outsourcing to other nations. The reduce in subsidies will mean the government can use the money to fund new and growing industries such as driverless cars, which will create a jobs boom in the future. By preparing and investing in growing industries the employment rate won’t have as big of a drop during automation which will inevitably happen. Lower rates of unemployment mean the government doesn’t have to spend as much on social security and welfare which is currently the largest section of the federal budget. The Australian Stock Exchange surged by 1.7% the Monday after the election result, indicating that investors and businesses have confidence with the government to deliver an efficient economic plan. The government was reelected six weeks after the budget so it’s now time to deliver on the “Strong economy” promise, Australians elected them for.

 (Scott, 2018) – Bloomberg

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