Government Policy And Its Impact On Australian Economy: An Essay.

Evaluation of Two Different Government Policies

Question:

Discuss the role government’s policy in controlling the economic balance of a nation.
 

Government’s Policy plays an important role in controlling the economic balance of a nation. It is a major economic tool for maintaining stability in the financial and societal growth of a country. It is important to note that there are several policies implemented by the government which has negative impact on the economic growth of the country. In other words, every policy has its own advantage and disadvantages (Snedden, 2010). Hence, it is important for the Commonwealth authorities to evaluate the impact of a policy before implementing them for the welfare of the nation. In this section, the study mainly focuses on evaluating two different policies of the Commonwealth Government and observes its effect on the economic position of Australia. Furthermore, the paper will discuss both aspects of the policies in terms of their positive impacts as well as negative impacts to recommend the suitable measures that can be taken by the Commonwealth government to maintain proper balance in the economy. Firstly, the discussion is made on the incentives provided by the government by reducing the company and income tax rates, in the context of a large budget deficit in the country. The second discussion is made on lowering the interest rate to promote economic activities, while moderating the housing price growth to improve housing affordability. These two major policy changes of the government will be analysed and evaluated to judge the success rate of the regulation and policy changes. Along with that, the discussion will provide proper evidence to support the justification using theories and arguments of other economists. 

The research and development tax incentives motivate and encourage entrepreneurs to promote their business activities and innovation that benefits the economy by increasing the productivity of the nation. By providing tax offsets for eligible innovation and technology development, the government of Australia supports the growth of businesses in the country. It further improves the income level and GDP of the country. Incentive for innovation and development through tax reduction leads to sustainable growth of business in the economy. The reduction in the tax rates leads to increase in the government spending (Walker, 2012). Hence, there is a need to consider the cost of promoting innovation and innovation of business in Australia before implementing this policy for the welfare of the economy. Hence, it is important for the government of Australia to considering the spending and budget deficits before using this policy for the betterment of the economy.

It can be seen through study that the Australia Economy has been facing a budget deficit since 2009. The main reason for the budget deficit is the financial downturn in the global economy. The global financial crisis in the year 2007 and 2008 led to the economic downfall in Australia that led to decrease in export and other foreign incomes. Furthermore, the impact of the economic downturn was felt over the Commonwealth budget in the year 2009 that continued till today (Kuhn, 2007). The budget deficit figure in the Australian economy has been presented with the help of a diagram given below:

Incentives for Innovation and Development through Tax Reduction

Figure: Australia Government Budget

Source: (Tradingeconomics.com, 2016)

It can be seen through the above figure that the Australian Government Budget deficit began in the year 2009 with -2.2 percent that increased to around -4.2 percent in the year 2010. In the previous year, the Australian government faced a budget deficit of -2.4 percent (Tradingeconomics.com, 2016). Hence, it can be understood that the government of Australia needs to implement necessary strategies to overcome the budget deficits and maintain an economic balance.

In order to maintain an economic balance and overcome the deficit in the government’s budget there are several strategies that can be used by the higher authorities. The strategies are discussed herein below:

• Increase Tax: The first and the foremost need for the Australian government are to increase the tax rate to reduce the deficit in the budget. Furthermore, to have a positive budget, increase in the tax rate can be helpful for the government (Suter, 2009).
• Cut government spending: Government spending should be cut to overcome the deficit in the budget. The government of Australia needs to reduce the subsidiaries allowed by the government to the common people to have a better balance in the budget.
• Promote economic growth: Promoting economic growth can be helpful in increasing the government’s earnings and overcome the deficit in the budget.

Now, considering the case of incentives for innovation and development by reducing company and income tax can have adverse impact on the budget of the country. Though this policy promotes growth of innovation through a sustainable way, the increased incentives may lead to increase in the government spending (Walker, 2010). Along with that, the reduction in the company and income tax leads to fall in the income of the government. Hence, in a situation of deficit in the government budget, this sort of policy that leads to further adverse situation for the economy. Hence, it can be said that a policy implemented by the government can have negative impact on the growth of the economy.

Interest rates play an active role in controlling the amount of money borrowed in the market. It is the only factor that controls the loan amount in the market as well as the amount deposited in the bank. For example, the lower the interest rate, the more amount of money will be borrowed from banks while the higher the interest rates, the lower will loan amount in the market (RBA, 2016). A diagram has been presented below for better understanding:

Figure: Effect of interest rate

Source: (Levy, 2008)

It can be seen from the above diagram that lowering the interest rates will decreases the savings and increase the new loan amounts and loan repayment capability of the borrowers. Furthermore, it will promote economic activity in the nation. Now, moderating the housing prices will lead to increased investment on real estate and increase the affordability of the people. This is because people of Australia will easily get money on lower interest that will increase the demand of real estate property in the market. Now, continuing the policy for a longer period will have some negative impact on the economy (Runcie, 2014). For example, the increased demand for the housing properties will lead to shortfall of supply of real estates in the market. Along with that, the higher the amount of loan taken from the market, the more difficult it will to recover the amount from the market.

If we take an example, it can be seen that the main reason for the global financial crisis in the year 2008 was the decrease in the interest rates that led to high amount of borrowing in the market. It can be estimated that the high demand in the housing market with limited supply will lead to increase in the price in the housing industry after a particular point of time. A lower interest rate will lead to increase in the government spending and decrease in the government funds (Keddie and Smith, 2009). Hence, if the policy keeps on continuing for a longer period, it will lead to financial crisis in the Australian market that we have already faced in the global economy in the year 2008. Hence, it can be seen that the policy has certain negative impacts if continued for a longer period. 

Conclusion

At the end of the discussion section, the setting of the macroeconomics policies must be identified to prevent any uncertain and undesirable consequences to the economy. For an emerging economy, growth must be recognised as one of the fundamental economic performance indicators. At the same time, budget deficit can play an adverse role in any economy sustainability. Therefore, in order to countervail adverse forces, effective policies and practices can be promoted so that the outcomes of the policies can work in favour of economic development. In context to the first situation, if the company tax and income tax have been reduced from the normal standards to promote industrial growth and innovation, it will create a negative impact on the government budget. Invariably, reduction in income tax and company tax can limit the income of the government. As a result of the consequences, the government can face a significant budget deficit that can create an adverse impact on economy’s progress. On the other hand, lowering interest rates can be instrumental for economic growth perspective. By reducing the rates of interest, the government can help to stimulate economic activity. Apart from that, moderating price growth of housing industry can effectively improve the economy condition as the house prices will be more affordable to the social people. But, continuing the second policy can lead to a financial crisis in the Australian market. Hence, it is important for the government to analyse and judge the impacts of economic policies to avoid negative consequences. 

References

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