The economy of Australia is improving at a sustainable rate. Thus, this essay will further analyze the major economic indicators, such as economic growth, unemployment, inflation, external stability in order to clarify why Australia is able to gain sustainable economic improvements. In addition, it will evaluate the effects created by these indicators. Moreover, it will as well evaluate the current government outlook and policies in handling these economic issues, which has assist Australia in achieving those improvements.
Economic Growth
Australia has an economic growth of 3.3%1in March 2007; an increase of 15.15% if compared to last year's figure: 2.8%1 in 2006. However, Australia is recognized as one of the fastest growing industrialized countries. This may result from the introduction of The New Tax System in July 20002, which introduces a more narrow and simplified tax system. Due to the New Tax System, consumer expectations on inflation increases and thus are demonstrating for higher wages. As a result, consumers spend more and save less, contributing to an economic growth.
However, the gini index in January 2007 for Australia is 35.23, which shows a proportionally evenly distributed income, thus contributing to higher spending rates and thus higher demand for goods and services, resulting to higher economic activity as well as growth.
Nevertheless, in 2003-04, average mean disposable household income was $5494 per week and has risen by 5% since 2002-2003 ($5224). This increase has resulted from a $2.2 billion one-off payments4 to families and carers by the government, contributing to an increase in gross weekly household incomes. Additionally, those payments as well increase income for the lowest quintile by 9%4, 7%4 for the middle-income people and 3%4 for the low-income people between 2002 and 2004. Thus, since people are enjoying growth in their incomes, hence an upward in demand of goods and services and economic growth occurs.
In addition, since the 1st of May of 2007, John Howard has introduced the “Research and Development Tax Concession” 5. Companies will then receive support for R&D by being able to deduct 125-175% of their R&D expenditure. Australian business spend only 0.7% of GDP for R&D6. Thus through introducing this new tax concession, firms would be more encouraged to invest, thus resulting in higher economic growth. As well, quality of products may improve, contributing to higher consumer satisfaction and thus demand; creating a higher economic activity and growth.
Nevertheless, Westpac chief economist Bill Evans expect economic growth of 4.5% in 20087, which encourages entrepreneurs to invest, since risk of expanding business declines; resulting in higher economic growth.
Unemployment
In May 2007, Australia obtained an unemployment rate of 4.2%7; 0.6% lower than the previous May8. This decrease firstly has been achieved through higher economic growth. While growth occurs, since the labour market continuously become more decentralized and flexible, thus abolishing inefficient practices and high minimum wages, which has encouraged entrepreneurs to employ labour. Nevertheless, since April 2003 Australia continues to reduce its unemployment rate8, which might occur due to funding for education and training programs, which improves the skills of the structurally unemployed.
Inflation
Inflation rate in March 2007 was 2.5%9. Although improving by only 0.5%10from the previous March, Australia still possesses a high inflation rate since it is at the bottom of its target inflation rate of 2-3%11. This high inflation might be caused due to demand-pull inflation, where high economic growth occurs; thus aggregate demand is high and therefore consumers force prices up by bidding each other for the goods and services available. In turn, high economic growth encouraged employees to ask for higher wages, since workload increases. This would lead to a cost-push inflation, since then firms would transfer these costs by charging higher prices. Growth produces inflationary expectations and thus employees expect rising inflation and therefore ask for improved wages and employers familiar with this situation increased price in advance. Moreover, since the introduction of the Goods and Services Tax in 200012, prices and thus inflation accelerates.
External Stability
Australia's deficit on its current account in April 2007 was a deficit of 962 $million13, high compared to last April's deficit of 736 $million13. Furthermore, it has a deficit in its net foreign liabilities as a ratio of its GDP of 57.2%14 in March 2006, high if compared to previous March of a 56.4%15. Nevertheless, the Australian Dollar has appreciated between May 2006 (0.7636$ per A$16) and May 2007 (0.8244$ per A$16). As well, its Special Drawing Rights has increased from 0.5112 in May 200616 to 0.5453 in May 200716, which, means that the A$ has been increasingly used in international trade and finance, explaining the appreciation.
