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Australia's Economic Growth from 2011 to 2017

1.Using data drawn from the Australian Bureau of Statistics (ABS), present diagrams showing Australia’s economic growth from 2011 to 2017. Describe the trend and examine the reasons behind the cyclical movements. You may use either quarterly figures or annual figures.

2.Discuss and critically analyse the fiscal and monetary policies employed between 2011 and 2017 and how they have affected Australia’s housing market and subsequently Australia's economic growth.

1.Australia has been experiencing the longest running economic growth for almost 26 years, which has set a record (Hatfield-Dodds et al., 2015). This trend is present during the period between 2011 and 2017 too. The graph below shows the quarterly original GDP data of Australia and the trend in GDP over the years 2011-2017.

Figure 1: GDP of Australia, Trend and Original, 2011 - 2017 ($ Million)

(Source: Abs.gov.au, 2018)

From the above graph, it is seen that the Australia has experienced economic growth during the years 2011 to 2017. The original as well as the trend line are upward rising. Cyclical movements in an economy refer to the periods of expansion and contraction. During expansion, aggregate demand in the economy increases and the GDP increases too (Gabisch & Lorenz, 2013). The opposite happens during the period of contraction. Every economy goes through the cyclical movements. The cyclical movement in the Australia’s economy comes from the structural shift over the years. The economy of Australia has gradually shifted from manufacturing and agriculture towards the service sector, with emphasis on the mining industry (Voigt et al., 2014). However, after the global financial crisis in 2008-09, the economy has experienced a fall in the mining sector growth and increasing growth in the service sector. The unemployment and inflation remained stable, with inflation being lower than 2% (Svensson, 2015). The changes in inflation are attributed to the changes in the resource prices, which is minimal. The wage rise was lower too, leading to a fall in demand for the consumer goods and fall in consumer expenditure. This led to a fall in aggregate demand in the economy, and consequently a contraction in GDP and economic growth in the first quarter of every year from 2011 to 2017 (As seen in the graph). On the other hand, demand from China has grown significantly during this period and export sector has grown, which resulted in increase in the GDP (Plumb, Kent & Bishop, 2013). Thus, the fall in domestic demand has been somewhat offset by the demand for exports from China and other countries. This resulted in a rise in the production and hence, expansion and positive economic growth.

Cyclical Movements in Australia's Economy

On the other hand, private investment on the housing sector has increased quite rapidly and the sky-high demand for housing has pushed the housing prices quite high. However, the nation is burdened with private debt from mortgages; 186% of the disposable income as the interest payments are 8.7% of the disposable income (Yates, 2014) and falling prices, which affects the aggregate demand, resulting in contraction in some quarters. During this period, the nominal GDP grew at a slower pace than the real GDP. Real GDP incorporates the price change in the economy (Mankiw, 2014). Hence, the economy feels weaker than what the production number imply. This is reflected in a low employment growth, lower wage growth and lower consumer spending on retail. It is found that after the global financial crisis, as the mining contribution in real output stared to fall, there is decline in real income growth (Ong, 2017).


2.Fiscal policy refers to the policy that allows the government to adjust its expenditure and tax rates to influence the economy of a nation (Mankiw, 2014). The government uses the fiscal policies to support the aggregate demand through increase in public spending and/or by cutting taxes. The Australian economy has been experiencing a housing bubble since the past decade. The continuous increase in housing demand has led to a significant increase in the housing prices, and consequently a rise in private debts. However, the housing market is favorably taxed. The fiscal policies include four types of taxes to handle this crisis situation. Negative gearing, capital gain tax, stamp duties and land taxes are used in the real estates.

Firstly, negative gearing tax on the rent allows the investors to earn cash against renting out the property owned, allowing them to invest more on properties. Secondly, capital gains tax is not paid on the primary residence and for the individuals’ investment properties; only half of the capital gain is taxed. These two taxes make the real estate attractive for investment. Thirdly, stamp duties, which are considered to be inefficient by the economists, are meant to discourage people from investing in the real estate, and lastly, two types of land taxes, state and territory, are levied on the real estate investment properties but not on owner-occupied housing (Smith, 2015).

The net effect of these tax policies coupled with generous tax subsidies have led people to invest more on the real estate. The government provides assistance to the home owners and buyers as first-home owners grants, family home's exemption from capital gains tax, stamp duty concessions, and land tax, along with the pension and other assets tests (Middleton, 2013). These help in wealth accumulation of the families and individuals, which has pushed the demand higher for the real estate. However, as the supply is limited, the higher demand has led to a big rise in the prices.

Fiscal Policies Employed in Australia's Housing Market

On the other hand, monetary policy is used by the government to control and influence the money supply in the economy. These decisions are implemented by changing the cash rate and the demand and supply forces of overnight funds in the market determine the cash rate (Mankiw, 2015). The government influences the interest rates by changing the cash rate. The interest rates in turn influences the savings and investment, expenditure, supply of credit, asset prices, exchange rate and demand in the economy. Depending on the demand level and inflation in the economy, the government applies expansionary or contractionary monetary policies.

A lower interest rate allows people to spend more on the housing, leading to more construction jobs and higher employment. The rise in disposable incomes of people leads to higher demand and hence, higher price of housing, as supply is limited. Along with that, the pressure of growing population has been pushing the prices up for housing. RBA has decreased the cash rate from 4.75% in 2011 to 1.50% in 2017 (Rba.gov.au, 2018). This has lowered the interest rate in the country and people were discouraged to save and encouraged to spend more. This has been reflected in rise in spending in other sectors. The aggregate demand increased in the economy leading to higher GDP (Costello, Fraser & MacDonald, 2015). Since, the government has been giving concessions on the real estate investments through expansionary fiscal policies, people were interested to invest more on the housing. This has resulted in increased demand as well as increased price in the housing market.

Figure 2: Aggregate demand and supply in the housing market

(Source: Author)

Economic growth depends on many factors and housing market alone cannot influence much of the growth. The Australian government increased the money supply in the economy by lowering the cash rate and expansionary fiscal policies. The spending in the economy has increased, leading to economic growth. However, the housing market also experienced excess demand. The demand for housing has been increasing at a higher rate than the supply, leading to increase in price. Moreover, there is less than expected inflation of 1.9% and stable unemployment of 5.6% in the economy, coupled with lower wage growth (Wadud, Bashar & Ahmed, 2012). Hence, other sectors in the economy have experienced growth due to the policies, while housing sector has been experiencing a bubble.

References

Abs.gov.au. (2018). 5206.0 - Australian National Accounts: National Income, Expenditure and Product, Dec 2017. Retrieved from: https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/5206.0Dec%202017?OpenDocument

Costello, G., Fraser, P. & MacDonald, G. (2015). "Monetary policy influences in Australian housing markets", International Journal of Housing Markets and Analysis, Vol. 8 Issue: 2, pp.265-286, DOI: https://doi.org/10.1108/IJHMA-08-2014-0032

Gabisch, G., & Lorenz, H. W. (2013). Business cycle theory: a survey of methods and concepts. Springer Science & Business Media.

Hatfield-Dodds, S., Schandl, H., Adams, P. D., Baynes, T. M., Brinsmead, T. S., Bryan, B. A., ... & McCallum, R. (2015). Australia is ‘free to choose’economic growth and falling environmental pressures. Nature, 527(7576), 49. DOI: 10.1038/nature16065

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.

Middleton, R. (2013). Towards the managed economy: Keynes, the Treasury and the fiscal policy debate of the 1930s. Routledge.

Ong, R. (2017). Governments trapped in a vicious cycle of housing policies and prices. ABC News. Retrieved from https://www.abc.net.au/news/2017-04-04/governments-trapped-in-vicious-cycle-of-housing-policies-prices/8414008

Plumb, M., Kent, C., & Bishop, J. (2013). Implications for the Australian economy of strong growth in Asia. Reserve Bank of Australia.

Rba.gov.au. (2018). Cash Rate. Reserve Bank of Australia. Retrieved from: https://www.rba.gov.au/statistics/cash-rate/

Smith, W. (2015). Four tax policies Australian house prices rest on. The Conversation. Retrieved from: https://theconversation.com/four-tax-policies-australian-house-prices-rest-on-44778

Svensson, L. E. (2015). The possible unemployment cost of average inflation below a credible target. American Economic Journal: Macroeconomics, 7(1), 258-96. DOI: 10.1257/mac.20130176

Voigt, S., De Cian, E., Schymura, M., & Verdolini, E. (2014). Energy intensity developments in 40 major economies: structural change or technology improvement?. Energy Economics, 41, 47-62. DOI: https://doi.org/10.1016/j.eneco.2013.10.015

Wadud, I. M., Bashar, O. H., & Ahmed, H. J. A. (2012). Monetary policy and the housing market in Australia. Journal of Policy Modeling, 34(6), 849-863. DOI: https://doi.org/10.1016/j.jpolmod.2012.06.002

Yates, J. (2014). Protecting housing and mortgage markets in times of crisis: a view from Australia. Journal of Housing and the Built Environment, 29(2), 361-382. DOI: https://doi.org/10.1007/s10901-013-9385-y

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