Policy Impact

Full Employment

In a strict Keynesian sense, the budget outcome should have a direct impact on the rate of unemployment. In general the government will choose to run one of two different budget options. Either the budget will be in surplus, or it will be in deficit.

A surplus budget suggests that the government is collecting more in revenue than they are paying in expenditure. When this happens it is likely that aggregate demand will fall. The direct link of this change is the fall in government expenditure (G1 and G2). You may be tempted to try and make an indirect link, but be careful! For example, it is true to say that the government is collecting more in income tax, but it would certainly not be true to say that this would result in a fall in consumption expenditure. The only reason for the increased income tax collections is because of the increase in economic activity; people are working more, and so they must pay more in tax. It would be unrealistic to try and argue that an increase in employment could cause an increase in unemployment. The fall in government spending is the best approach to take here.

On the other hand, a deficit budget can help to reduce the rate of unemployment. At this time government expenditure will exceed government revenue, which will add to the level of aggregate demand. This could be because of increased government spending, or it could also be due to decreased government revenue (such as a cut in income tax rates). Both will add to aggregate demand, and therefore help to create jobs.

The impact of this approach can be seen in actions that have been taken by the government in recent years. When the global financial crisis struck, both the federal government and the International Monetary Fund predicted that unemployment would increase significantly. In the end the IMF was right about Europe and the USA; unemployment in those regions increased to above 10%, and it remained there for some time (although the impact was not uniform across all of Europe). On the other hand, unemployment in this country peaked at 5.8% in May 2009, and it remained at that figure until October of the same year. After that, it began to fall, and by mid-2010 it was back down to 5.2%. This was completely contrary to the global trend, and so we need to look closely to see how this goal was achieved.

It is true that there were some external factors involved. Strong stimulus spending from the government in China helped to ensure that country remained strong, and as a result our exports to China (and other parts of Asia) were maintained at that time. Also, many employers in Australia chose to keep people employed on a part time or casual basis, rather than terminating their employment. This decision to hoard labour in this way meant that the unemployment rate did not increase as much as might otherwise have been the case. But there is no doubt that a strong change to the budgetary policy stance also helped to ensure that the labour market in this country remained strong.

When the budget was announced in May 2008, the treasurer expected a surplus outcome. By October of that year it was apparent that global forces could push the size of the deficit down. Soon after, the need for a deficit was clear; an interim budget was announced, and two stimulus packages were handed down. Payments for the second package began appearing in March of 2009, and so it is not surprising that unemployment peaked (rather than continuing to increase) soon after. The government was able to use this package to achieve a number of goals. In particular, those sectors of the economy most likely to see an increase in unemployment (such as the construction sector) were targeted. The decision to fund the school building project known as the Education Revolution and the increase to the first home builders grant helped to ensure that employment in the construction sector was solid at this time.

The Australian labour market has been one of the strongest in the developed world, and there is no doubt that budgetary policy has played an important role in this outcome.

The government has also recognised that the budget can do a lot to try and increase the participation rate. For example, changes to the way in which superannuation is taxed mean that it is now advantageous for a person to remain in the workforce until they are 60. After that time, they will pay no tax at all on their accumulated superannuation benefits. In reducing the number of early retirements, the government has ensured that the labour force will remain strong. More controversially, in the 2005/06 budget the coalition government also acted to ensure that people receiving welfare were only doing so if they were actually unable to work. For example, young mothers whose children had reached school age are now required to look for work, rather than continuing to receive benefits. This was part of the Welfare To Work package that was announced in that year. Despite the controversy surrounding this initiative, it is true to say that the participation rate has certainly increased as a result of the changes made in the budget over the last few years.

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