Discuss about the Government Spending Allocated To Sectors Of Economy.
Fiscal performance of Australia
Government uses fiscal policy tool to stabilize the economy. Government spending are allocated to different sectors of the economy. Taxes are the source of government revenue. Fiscal budget depends on difference between government spending and its revenue (Daley, McGannon & Hunter, 2014). The figure below represents the fiscal balance of Australian government.
Figure 1: Fiscal Performance of Australia
The trend in government budget reveals that spending of Australian government has increased significantly in the past few years. Government spending has raised to $272.2 billion in 2007-08 from $176.9 billion in 2000-01. Government receipts in 2004-05 was 235,985 million. The government spending in that year was 222,407 million. As the government receipt exceeds payment, there remained a surplus in budget. Until 2007-08, both receipts and payments have increased. Receipts remain higher than payment keeping a positive balance in budget. The budget balance of 2008-09 revealed a negative balance in the budget. The fiscal balance in 2008 was -27013 (budget.gov.au, 2018). The budget condition was even worsening in the next year (Chohan, 2017). Government spending rose to 336,900 million dollars while receipts were 284,662 million dollars. The fiscal budget turned to -54,494 during that year. The principle factor contributing to an increase in government spending during this time was the hit of global financial crisis. In the next three years’ fiscal balance though remain negative but marks some improvement with a decline in budget deficit from 54,494 in 2009-10 to -18,834 in 2012-13. A drastic fall in budget deficit was observed in the fiscal year of 2012-13 when deficit declined from 43,360 million to 18,834 million (budget.gov.au, 2018).
The deficit aggravates in the next year where deficit jumped to 48,456 in 2013-14. Despite increases in receipts, Australian government is still running with s deficit budget. Estimated deficit in 2016-17 was 33,667.
Factors explaining trend in fiscal performance
Global financial crisis and impact on Australian economy
The trend in fiscal performance reveals that the economy is facing a deficit budget in the last few years. After experiencing a budget surplus until the financial year of 2007-08, government’s fiscal balance has turned negative (Cordes et al., 2015) This is the time when global economy experienced recessionary pressure of global financial crisis.
The sub-prime mortgage crisis developed in United States from the middle of 2007 led the financial institutions to lose their confidence of lending to each other. The resulted loss of confidence created a credit crunch throughout 2008. The interrupted supply of credit and liquidity to the financial institution weakened the financial market (Vlaicu et al., 2016). In response to the crisis, household and businesses were gradually drying up with a wide gap in interbank lending. During this time, the estimated spread, explaining differential between US bank rate, rate, which banks in US lend to each other, and the expected rate of federal fund reached to 400 basis points. Impact of financial crisis was comparatively less in Australia as compared to other countries. The financial market of Australia though was more resilient but still interest rate spread with US banks was increased dramatically (theconversation.com, 2018). Cost of funding had increased significantly.
Figure 2: Australian and United States interbank lending spread
(Source: budget.gov.au, 2017)
The obvious impact of global financial crisis was a sharp fall in equity prices. The ASX200 recoded a marked decline of 1000 basis points in between middle of September and middle of October. ASX200 from 5000 basis point to 4000 basis point. Following a fall in equity prices wealth of household had declined. Household wealth in Australian economy fell by around 10% by March 2009 (budget.gov.au, 2017). The local and financial market of Australia had not been immune to face the crisis. The economic growth had slowed down by 0.5 percent resulting in a rise in unemployment rate by two percentages point. The recorded unemployment rate by November 2009 was 5.75 percent. As the crisis intensified, the value of Australian deprecated considerably. The global financial crisis had a considerable impact on government budget (Debrun & Kinda, 2017). Because of global financial crisis and worsening condition in the global market, government revenue had been revised downward. Expenses rose particularly from 2009-2010. Expenses increased following a global slow-down.
The Australian policy responses to global financial crisis
Fiscal budget in the year 2008-09 was struck in a complex situation between controlling inflation and adjust the risk posed from global turmoil. Government in order to tackle perpetuating global risk initially strengthened its financial position using automatic stabilizers a building a buffer government surplus. The policy aimed to provide government a greater flexibility to undertake future policy action. Government extended its support to household by cutting tax or making payment to pensioners. The Reserve Bank of Australia had taken measures to stabilize economic growth along with achieving financial stability (Vanstone & Hahn, 2017). The drastic change in macroeconomic outlook required the government to undertake proactive policy measures to rescue the shield Australian economy from financial crisis. On 20th May, government announced the decision to raise government securities by an upper limit of $25 billion. The cash surplus of Australian government in 2008-09 was stood at $5.4 billion, a surplus lower by $16.3 billion of 2008-09 estimates. The fiscal outlook was severely impacted from global financial crisis and associated and weak state of global economy. In the phase of recession, the cash and fiscal balance reduced significantly. There was a downward revision in taxation during by $5 billion in 2008-09 and that of $12 billion in 2009-2010. The fiscal stimulus given to the economy resulted in a significant reduction in cash balance. Government receipts in 2009-10 was 284.662 million. As against this, spending was 336, 900 (budget.gov.au, 2018). The size of government deficit was 54,494, the highest deficit ever since the last twelve years.
Rise of China and implication for Australia
Rise of developing countries like China provides Australia an opportunity to exploit its comparative advantage over natural resources and other high-end goods and services. A complementary relation exists between net export of Australia and that of China. China exports manufacturing goods while import raw materials. The position of Australian trade is opposite for these two categories. The rising demand of resources from China improved terms of trade of Australia. The Australian economy has experienced a sharp in the relative price of its export. The strong demand growth from Chine significantly raised Australian export of steel, coking coal and other major inputs of steel production (Fukuda & Tanaka, 2017). Driven by China and growth from other emerging nation global trade of iron ore has recorded a rapid growth. The supply growth of Australia is likely to outstrip the global supply.
Figure 3: Growth of Australia’s Steel making export
(Source: theconversation.com, 2018)
The slow-down of China’s growth affects Australian economy. Production of crude steel in China has lowered this year as compared to that in the previous year. With this the terms of trade have been affected significantly. This has obvious implication for government revenue. The most direct channel is the company tax receipts. With China’s slow down, profitability of exporting companies has reduced. The reduces tax revenue collected through corporate profit tax and other forms of taxation. However, China has now entered to a new phase of economic growth known as new normal growth (Albinski, 2015). This is expected to recover the lost goods and service demand from Australia making a positive contribution to government budget.
End of mining boom and post mining transition
China has gradually shifted its growth rate towards a consume driven economic growth from earlier investment driven growth. The economic transition of China is likely to bring opportunities for Australia. The process of transition however is not smooth. The slower than expected growth rate imposes a potential risk for Australian economy. The direct channel is through the merchandise trade (Jain & McCarthy, 2016). The mining sector in Australia had hurt hard. In the phase of global headwind, the Australian economy has made its own transition. Terms of trade that reached to its peak in 2011, has fallen sharply by a third. This undermined the development of mining commodity prices.
Figure 4: Terms of trade in Australia
(Source: budget.gov.au, 2018)
The resource boom in Australia has come to a nasty adjustment. The exporters of commodities, faced a major downturn in the phase of underpinned resource boom. However, Australia has successfully managed the transition. The adjustment made through interest rate, exchange rate and moderate growth in wages resources are shifted from mining sector to other sectors especially to the service sectors. As the mining boom ends, Australian government despite a challenging position has taken responsibility to support economic growth. Government spending has been channeled to areas where it is necessary (treasury.gov.au, 2018). The new policy initiatives create a considerable pressure on government budget further weakening fiscal position.
Fiscal challenges faced by Australia
Both Commonwealth and State government in Australia are facing serious problem of ongoing budget deficit. The future challenges of the economy are likely to make the situation worsens than ever. The deteriorating terms of trade and a lower nominal growth is expected frags government revenue. Government expenditure on improving status of health and infrastructure is growing at a rate faster than GDP. Revenues of state government are affected from the decision of Commonwealth government regarding grants and other assistance. Short term and medium terms projection depends on the optimistic assumption towards organic growth of revenue and constraint on spending (rba.gov.au, 2014). At the current stage, a budget surplus seems unlikely to occur. In order to restore sustainability in budget Australian government needs to take some politically difficult decision. The focus towards restraining spending is though required but the strategy of budget repair and size of gap in budget implies that it is not possible to attain balance budget without stimulating revenues.
It is nine years since global financial crisis that Commonwealth government is running with a deficit in budget. The following years have been projected to be more difficult for the government in the phase of falling terms of trade and decline is commodity price following end of the resource boom. The resulted reduction of tax and other source of government revenue has made a significant reduction in government revenue. The demand for fund on the other hand has substantially increase in order to fund new policy initiatives taken to revitalize the economy. The government however has not acknowledged yet the size and scale of fiscal challenges. The major political parties are in hope that successful economic transition of Australia will improve economic resulting in a budget surplus (theguardian.com, 2018). Over the past few years, revenue growth is smaller than that has been projected. Severe pressures have also been realized in State budget. The major areas of spending for State budget are health and education. The revenues of state governments have been threatened as Commonwealth government in order to reduce some of its burden has reduced transfer of funds to the state government given for supporting spending on schools and hospitals.
Based upon the previous projection Australia is now moving on a track of systematic budget deficit till 2019. The persistent budget deficits have contributed towards economic activity with a minimization of unemployment rate. The structural deficit in Commonwealth budget is less defensible. The structural budget deficit has remained 2 percent of GDP in the past five years (treasury.gov.au, 2018). The headline and structural deficits resulted from prevalence of both lower revenue and higher spending.
Government revenue raises sharply after 2010-11. The rising trend in revenue however has not brought by fiscal policy changes. During this time a budget repair policy was designed by Abbott government though re-indexation of fuel exercise duty in line with inflation. The government at the same time lost some of the revenue stream because of elimination of mining and carbon taxes. The biggest contributor of a fiscal drag is the growth in collection of income tax. This has accounted for most part of the budget repair (Daley, McGannon & Hunter, 2014). The tough situation of Commonwealth Government is expected to continue if the sluggish economic growth persists in future. The government budget need to find new room for funding the new spending.
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