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Fiscal Deficit On Economic Activity Last 4 Years In Australia

4684 words - 19 pages

Economic Context of Management

Name: Pradeep

Essay:
“The Australian government has been running with too large a fiscal
deficit during the past 4 years particularly in light of their projections for
the Australian economy which were made when the first stimulus
package was announced in 2008". Discuss this assertion and the
consequences of this fiscal deficit on economic activity during the past 4
years. What are the implications of your analysis for Australia's fiscal
policy during the next 3 years?

EXECUTIVE SUMMARY
Global Financial Crisis (GFC) evolved from its origin in subprime mortgage crisis of United States and affected almost every country in the world. Australia ...view middle of the document...

It shows that major projects like Building Education Revolution (BER) and Home Insulation Program (HIP) were implemented inefficiently and did not add any valuable asset to the nation. As per Keynes any government spending should be used efficiently and wisely in order to have the intended effect on the economy. So it is important for the government to do cost-benefit analysis and to have the plan in place before rolling out the projects of this kind. With the floating exchange rate, which was introduced in 1984, the stimulus package was ineffective for Australian economy. Therefore it was unnecessary. Historical evidence from the Asian crisis case provides us the great example of how the floating exchange rate in Australia provides insulation from overseas crisis.
The improvement in saving by the households and businesses, during GFC, did significantly reduce the Current Account Deficit (CAD), which otherwise would have been enormous. The current appreciation of Australian dollar, despite the fall of commodity prices is due to the reduction in savings. The data from retail sales which shows the increase and the drop in superannuation saving shows that we are not saving as much as we were during 2008-09. Consequently, Australian government need to take saving measures and also encourage households and business to save in order to minimise the current account deficit, there by reduced overseas borrowing and unpleasant appreciation of Australian dollar.
Government should put the revenue from mining tax into some savings fund, which can be used for useful cause in future (like education, medical research and developing work force etc.). This will not only assist Australia to develop alternative industries, when Australia run out of commodities, but also positively affect in pushing down exchange rate. Also, it should not implement the measure like reduction concessional superannuation cap for people, from $50000 to $25000, as this is one of the contributor for increased superannuation saving (KPMG, Superannuation Trends and Implications, November, 2011), which will lead to reduction in saving and that will not be good for the country from economic perspective.
Further, the domestic and economic outlook presented in Mid-Year Economic and Fiscal Outlook 2012-13, points to challenging times ahead, and will have to be dealt with disciplined actions, as the fall in commodity prices, slowdown in China’s growth and Euro zone and US, which will have a direct impact on China and that will put downward pressure on Australia’s terms of trade. In order to reduce the CAD and budget deficit in coming years, government should take measures for government saving by actions like savings fund for mining tax revenue public sector re-organisation, cost cutting in illegal immigration area, look at tax cut to increase tax revenue etc. as well as influencing business and household savings in a way that does not affect economic activities and also avoiding...

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