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Government Of Industry : Innovation And Science

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Question:

Discuss about the Government of Industry for Innovation and Science.
 
 

Answer:

Introduction:

The 21st century mining boom has had a massive boost to the Australian economy. Creation of wealth to most Australians has been diversified such that an addition of consumption generated through an increment in the purchasing power of the consumers. It means production capacities received a major uplift in various industries. As a result employment is created not only through the mining sector but also other supporting industries as well. Investments have generally risen because opportunities to undertake capital accumulation have opened up in the entire economy. More so, it has been guided by an increased investor confidence in the future direction of the market. The availability of more skilled labor is also a testament of the significance of mining to the entire economy of Australia (Costello & Knights, 2013). With better prices, comes a better performance of the Australian Dollar in the market. It means that cheaper imports is possible while it enjoys expensive exports. Impressively, such expensive exports also involves direct mining products. In short, a favorable balance of trade has been realized such that a continuous growth of net exports is in place. In order to further expand the mining sector, government spending skyrocketed particularly centering on training labor as well as expanding mining supportive industries.

Perhaps the most influential macroeconomic variables in the face of the mining boom were the inflation rates, interest rates, employment and unemployment. With an increase in the consumer spending thanks to the income earned, the inflation fell to an all-time low of 1.9% immediately (George, 2016). The whole economy was cushioned from the global financial crisis that was severe especially in the US and the Euro Zone. Secondly, while it generated physical assets like rails and ports, it made exploitation of resources easier which further opened up the economy hence creating more jobs hence a reduction to the unemployment. With the economy performing this better, the interest rates witnessed a reduction owing to the fact that more income meant that loan facilities were further curtailed.

Mining boom can be conceptualized in terms of Keynesian Cross Model whereby the equilibrium level of national income can be determined. In this case, the aggregate demand is indicated by the vertical axis while the aggregate demand function is established by an upward sloping line (AD).

From the diagram, the aggregate demand is positively sloping as a result of an increase in the disposable income. An increase in the consumer spending means that there is a corresponding increase in the aggregate demand. as a result, there will be an increase in the real GDP in which transfer payments and taxes remain fixed while arise in the disposable incomes experienced.

Asset market and commodity market have also witnessed the influence of the 21st mining boom in Australia. For instance, since the economy saw building of ports, a path for exploitation of resources was created which further indicated that asset accumulation was a likely occurrence (Department of Mining Industry, 2017). On the same page, commodity market expansion stands on the same platform as well.

In the above diagram, a boom in the mining industry brings more disposable income to the consumers. Consumer spending on the available goods and services rises. This means that the interest rates will then fall leading to an increase in the investments as well as employment and income. Most importantly, the equilibrium output rises as shown in the diagram LM1 moving to LM2.

The boom witnessed in the mining industry is explained using a budget constraint that has the government expenditure rise from $50million to $100million generating more returns into the economy.in the budget line, consumers are able to choose from a higher price because the disposable income has risen as well. This implies that there is more output generated particularly through an increase in the disposable income (Poon et al, 2016). Consumers are able to spend more on the available good and services which further increases the surplus that is realized in the economy as shown by the shaded region

The diagram above takes into account the increasing level of investments, increasing consumer disposable income, reduced interest rates as well as employment levels rising. Remotely, a rise in the consumer disposable income through a booming mining industry is important in shifting the LRAS curve to the right. It means production efficiency creeps in because a massive reduction of cost is experienced as well as losses from surplus production that the market cannot contain. More income means consumers move to ensure that supply meets demand that is in the market. There is lesser room for overproduction. In the same sense, there is an increase in the overall output in the market which still indicates a falling rate of unemployment as well.

 

Taxation particularly reduces in output because the production cost rises as shown by the shift in the SRAS1 to SRAS2. Mining companies have to incur more expenses in the course of the production capacities. They are then transferred to the consumer in terms of recued earnings. This move has an effect of reducing the level of income in the entire economy which helps to fight inflation. However, it has a negative influence on employment.

The boom experienced in the mining industry posed and still does pose a huge threat to the economic stability in terms of the money supply in the economy as shown by increasing levels of consumer disposable income. In response to this, the government adopted a couple of fiscal policies. For example, the government imposed a 5% tax on all mining incomes (Mudd, 2007). This was particularly important in cutting down the massive levels of income that consumers getting and the investors as well. Doing this was also important in ensuring that inflation was kept at very low levels. More so, there was also the adoption of a policy that involved spending up to $100million on exploration meant to replace the funds scooped through interest rate increases.

On the monetary policy, it was adopted through setting of the base year inflation rates at under 2% in order to combat the increasing money supply that mining had brought in the economy. The achievement centered on capping the interest rates by the mining the companies. More so, according to Yeomans (2016), it is important to control investors which directly tackles the problem of over production. As more money streams into the economy, there are more concerns for the eventuality that is inflation. Consumers hence stand at the foot of destabilizing economy. While the government had to set higher interest rates of up to 5% on the mining incomes it meant that consumers were encouraged to save more, borrow less and ensure that there is less money supply in the economy which can as well stifle economic growth. Inflation is a bigger player in destabilizing the market based on this.

In the diagram, when interest rates are increased, the aggregate demand falls which basically indicates that consumer disposable income is reduced shown by the shift from AD1 to AD2. There is lesser money to spending on the available goods in the market. More so, there will be a fall in the real GDP as well because production capacities are cut down as a result.

The government policies adopted in the course of the market boom experienced through mining activities had a huge impact on the government deficit and debt with regard to the budget line. Essentially, a cyclical budget deficit takes into account the fluctuations in the spending in an economy as well as the level of fluctuations in the tax revenue. The boom in the mining industry in Australia actually did create a lot of revenue in the economy as a whole. This had a huge effect in easing government debt at the time. More so, theoretically, a boom in a particular sector has an effect of spreading in most parts of the economy with regard to growth particular of closely related sectors as well. Where the government. However, the fact that it is cyclical indicates that the economy will likely fall back into the same state that it was in before the boom was realized. This is not the case because the government made huge increase in the spending meant to diversify the industry with the chief reason of creating more employment opportunities. This alludes to the practicality of the structural deficit control.

From the above budget line, the original budget indicates the total expenditure before any changes were made by the government. Since, the economy experiences a boom in terms of the increasing returns, a both the structural and cyclical budget deficits take place. However, an addition of income in the economy means that they are in instead avenues of reducing the debt as well as the deficit. As a result, the new budget line will squeeze inwards showing that there is a more tendency for the budget to respond to the changes in the economic set up particularly the dynamism associated with it. Both the structural and cyclical debts/deficits have a similar impact with regard to taking the economy back to equilibrium by pointing to an increased revenue through the boom in the mining activities which eventually opens up the entire economy (Philips, 2017).

 

References

Mudd, G. M. (2007). The sustainability of mining in Australia: key production trends and their environmental implications. Department of Civil Engineering, Monash University and Mineral Policy Institute, Melbourne.

Poon, A., Raval, S., Banerjee, B. P., & Shamsoddini, A. (2015). Detection of Changes in the Wetland Conditions adjacent to a Longwall Mining Area in the Southern Coalfields, New South Wales Using Radar Satellite Data. Journal of Research Projects Review, 35.

Costello, C., & Knights, P. (2013). Grizzly Modifications at ridgeway deeps Block cave Mine. Mining Education Australia, 11.

Department of Mining industry (2017). Australia's Mineral Commodities. Australian Government of Industry, Innovation and Science. Retrieved from: https://industry.gov.au/resource/Mining/Pages/default.aspx

Philips, K. (2016). The mining boom that changed Australia. Australia Broadcasting Corporation. Retrieved from: https://www.abc.net.au/radionational/programs/rearvision/the-mining-boom-that-changed-australia/7319586

Yoemans, J. (2016). Australia's mining boom turns to dust as commodity prices collapse. The Telegraph. Retrieved from: https://www.telegraph.co.uk/finance/newsbysector/industry/mining/12142813/Australias-mining-boom-turns-to-dust-as-commodity-prices-collapse.html

 George, M.W. (2016). "Mineral Commodity Summaries 2016" (pdf). Reston, VA: U.S. Geological Survey. pp. 70–71.

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