Budget at a Glance (2013 - 2014)

The Government has a clear path to return the budget to surplus while building a stronger economy, a smarter nation and a fairer society.
A stronger economy Australias economic fundamentals are strong. However, difficult global conditions and the sustained high dollar are weighing heavily on prices and profits across the board and reducing budget revenues. The hit to revenues will see a budget deficit of $18.0 billion in 2013-14. The Government has responded to these changing circumstances by setting a pathway to return the budget to balance in 2015-16 and to surplus by 2016-17. It is achieving this while continuing to invest in our economy to keep it strong. To boost our nations productivity, this Budget invests $24 billion over six years in public transport and roads, including regional highways. A smarter nation We are making historic investments in our children, schools and workforce to help drive productivity and a smarter nation. Our unprecedented investment in early childhood education, once in a generation school reforms, and additional higher education places will ensure our children have the education they need for the high-skilled, high wage jobs of the future. These reforms will provide more support in the classroom, more training for teachers and support for kids doing it tough. This investment will ensure every child has the opportunity to achieve their potential. A fairer society The government is committed to creating opportunities that provide a fairer future for all. This budget delivers permanent and enduring funding for DisabilityCare Australia, one of the biggest social policy reforms in our nations history. We have identified enduring savings to make room for our priorities and help achieve goals of our fiscal strategy. As a result of our sound fiscal management, we are able to sustainably make the vital investments needed to build a stronger economy, smarter nation and fairer society.

Actual 2010-11 Underlying cash balance ($b) (a) Per cent of GDP Fiscal balance ($b) Per cent of GDP
(a) Excludes expected Future Fund earnings.

Estimates 2012-13 -19.4 -1.3 -20.3 -1.3 2013-14 -18.0 -1.1 -13.5 -0.8 Forecasts 2012-13 2013-14 2 1 5 3 5 2014-15 3 1 5 2 5 2014-15 -10.9 -0.6 -6.3 -0.4

Projections 2015-16 0.8 0.0 6.0 0.3 Projections 2015-16 3 1 5 2 5 2016-17 3 1 5 2 5 2016-17 6.6 0.4 10.8 0.6

-43.4 -2.9 -44.5 -3.0

Real GDP Employment Unemployment rate Consumer Price Index Nominal GDP

3 1 5 1 3

(a) Real and nominal GDP are year average growth. Employment and CPI are throughtheyear growth to the June quarter. The unemployment rate is the rate in the June quarter.

Analyze the role and operation of Fiscal Policy in the policy mix in achieving governments ec onomic objectives. In your response, you should refer to the economic information provided.

The Australian government uses fiscal and monetary policy as tools in achieving its main economic objectives. These include sustained economic growth, external stability and equal income distribution. Monetary policy is a macroeconomic tool which involves the Reserve Bank of Australia selling and buying Commonwealth securities in the short term money market. Fiscal policy
is a macroeconomic policy which involves the government reducing or increasing spending, taxation and the overall budget outcome. While the policy mix is the combination of fiscal and monetary policy in order to achieve the above goals. An overview of the history of the policy mix over past decade reveals that it has achieved some of its objective such as an average inflation rate of 2-3 p.a %, sustainable economic growth at 3% p.a and a stable Gini coefficient of 0.304-0.32 at some periods while at the same time not achieving other objectives e.g. external stability as a result of the Global Financial Crisis(GFC).

Economic growth is the increase in real GDP over a period of time usually one year. Although economic growth is beneficial it must be kept at a sustainable level of 3-4% to avoid inflation. Therefore the government will change its fiscal stance to, Neutral, Expansionary or Contractionary fiscal policy. Expansionary fiscal policy involves having government spending supersede taxation therefore adding money to the cash flow stimulating economic growth. However this would increase the budget deficit and contradict the source material provided which states that they will return the budget to balance in 2015-16 and to surplus by 2016-17. Therefore to make up the 43.4 billion dollar deficit in 2011 the government must implement contractionary fiscal policy while involves taxation superseding government spending hampering economic growth. This is why the growth in real GDP will drop to 2% in 2014 and not rise above 3%. This is because as shown below government spending influences Aggregate Demand as now people have less money with which buy consumer goods and stimulate economic growth.

The equality of income is another objective of the Australian government. In general the government uses progressive income tax systems combined with social welfare such as unemployment benefits and education to redistribute income from higher income earners. In the 2006 Budget several policy decisions were introduced which damaged the pursuit of income equality. Such as cuts to income tax, the surcharge for high income superannuation funds and the disabled pensions. Many of these policies where over turned once Labour got into power but the gap between high income and low income is still large. A major reason of this is lack of education, without the funds to obtain higher levels of education they will not

be able to increase their standard of living and force their same life onto their children. Now the government has begun investment in early childhood education, once in a generation school reforms, and additional higher education places will ensure our children have the education they need for the high-skilled, high wage jobs of the future. This will close the education gap and therefore increase income equality. This is extremely important for governments because it reduces the unemployment rate and the strain of social welfare on the economy. The success of these policies will result in the unemployment rate dropping from 5% to 5% showing that the Australian government can use more of its labour resources in the economy. In order to achieve external stability, the government has set itself the target of achieving a budget surplus by 2016-17 of $10.8 billion dollars. Governments strive to achieve external stability through a budget surplus to reduce its consumption of domestic savings. Because the government is not using these savings domestic firms can use the funds meaning they have to borrow less from overseas. However the GFC destroyed investor confidence and caused many countries creating great external instability though protectionist policies and a drop in trade resulting in the slowing of cash flow in and out of countries. Going from a Budget deficit of 43.4 billion dollars to a forecast budget surplus of 10.8 billion in 2017 shows the governments determination to achieve external stability. Monetary policy is can change monthly with the RBAs meetings and therefore has a much more adaptable impact on Australias economic objectives. Externally the RBA has to judge the impacts of Chinas slowing growth as well as the stabilizing of Australias more traditional trading partners in Japan and the US. Internally however the high Australian dollar and low inflation has encouraged the RBA to cut interest rates to encourage spending and investment as people are getting less returns from their savings. The increased amount of cash in the financial flow increases economic growth. However with increased spending power consumers may now buy more imports increasing the CAD and therefore negatively affecting external stability. Monetary Policy must be carefully balanced otherwise one objective might be irrevocably damaged Generally the budget does aim to reach all the Australian governments objectives. The contractionary nature of the budget only destabilizes economic growth in the short term, because in 2015 a budget surplus will be reached and therefore the Australian budget will move to a more balanced stance. Comparing the planned outcomes to those actually achieved, we wont have a budget surplus in 2015 shows the Australian government has not been effective in achieving most of their economic objectives.