Policy Impact

Sustainable Economic Growth

While the coalition was in power budgetary policy took on a slightly different focus. At that time the government was certain that regular surplus outcomes would add to the long term strength of the economy. They were also able to use the extra funds that were collected through the budget to pay down public debt.

The global financial crisis changed everything. All over the world, governments began to see budgetary policy as an effective way to manage aggregate demand, and therefore have a direct influence on a variety of economic goals. With the strong possibility of a recession occurring, the government in Australia decided to run a deficit budget in the hope of adding to aggregate demand. At this stage of your study you would be well aware of the outcome; aggregate demand in Australia increased, and the economy was able to avoid a technical recession. It is worth taking some time to understand the significance of the government’s actions during this period.

Economic growth is said to occur when there is an increase in the real value of goods and services produced in an economy from one year to the next. We also know that aggregate demand is made up of the combined spending by consumers, businesses, the government and the external sector. When spending by the other three groups is restrained, the government will increase their contribution. This is clearly reflected in the budget documentation that has been released over the last three years. Government spending will normally represent between 22% and 24% of GDP. In 2008/09 government spending was 25.8% of GDP, and in 2009/10 the government contributed 26.5%. By 2010/11 it was anticipated that the figure would fall to 25.2%, before eventually returning to 24% by 2012/13. These figures suggest that the increase in spending by the government was the main reason that the Australian economy was able to avoid a technical recession. In fact, even by mid-2010 the Australian economy would have been moving backwards if not for the extra stimulus that was provided by the federal government.

The government can also add to aggregate demand by reducing the revenue that they collect. In this case it won’t be an increase in government spending that helps to ensure that growth is positive. Instead, we should see that individuals and businesses are able to increase their own spending due to the fact that they are paying less in tax. During the same period identified above, government revenue (as a percentage of GDP) fell from 23.7% in 2008/09 to 22.7% in the following year. The impact of the automatic stabilisers is apparent; tax collections were lower when unemployment was increasing, and company profits were lower. This helped the government to achieve one of its prime roles as an economic manager – the fluctuations in the business cycle were stabilised, and economic growth returned sooner than had been predicted.

It is also worth remembering that the government does have the option of being flexible with their use of budgetary policy, and in recent years they have used this option. Although the budget is handed down in May each year, during unusual economic events it is possible to introduce an interim budget. For example, in late 2008 and again in early 2009, the federal government acted to introduce stimulus packages that were designed to boost economic growth. The second of these packages was worth $42 billion. It included:

1. $16.2 billion over three years for the “Building an Education Revolution” plan.

2. $2.3 billion to improve road and rail connections.

3. A social housing initiative worth over $5.2 billion.

4. Rebates for installing solar hot water or insulation.

5. One off payments of $900 to most people who had paid tax in the Australian economy in the previous year.

These actions combined to provide for a significant increase in aggregate demand. The impact of the stimulus package is very clear. In the December quarter of 2008, GDP recorded a negative figure. At that time, private consumption was close to $164 billion for the quarter, a figure that was largely consistent with every quarter for the previous year. The stimulus package was announced in the first quarter of 2009, and by June of that year consumption spending had increased by over $3 billion – an increase of 1.26% in just one quarter. This was the largest increase in consumption spending that had been seen since the last quarter of 2006, and it came at a time of great global uncertainty. Government spending had directly increased GDP in the March quarter, but it was the increase in consumption that helped to ensure that the June quarter was positive. Both came as a result of aggressive budgetary policy.

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