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What will happen to Australian house prices in 2012?

They will increase by 10%
They will increase by a small amount
They will stay about the same
House prices will fall during 2012

External Stability

Between 1996 and 2008, the federal government used fiscal policy to try and maintain stability in the external sector for Australia. Despite the fact that the current government has published quite different goals for the Budget, the changes that they make will still have a strong impact on our external position.  As such, it is important that you are able to assess the success that the government has had in pursuing this goal.

In the budget speech for 2010/11, treasurer Wayne Swan said that the government would aim to achieve"the most rapid fiscal consolidation since at least the 1960s".  This is the process of trying to balance surplus and deficit outcomes over the course of the business cycle.  In theory, the process of fiscal consolidation should assist the achievement of external stability in the following ways:

1. Increased Savings: With no net call on national savings, and measures (such as superannuation) in place to ensure an increase in the overall savings pool, the need for foreign savings to supplement our own should be diminished. This should result in an improvement in the CAD.
2. Deficits only used when essential: Fiscal consolidation requires that deficit budgets happen only when the economy is performing below expectations. As we know between 2008 and 2010 the government ran significant deficits. This has acted to make the process of fiscal consolidation more difficult.

While the Howard government was in power, they used consecutive surplus budgets to retire a significant amount of public debt.  Although net foreign debt continued to increase, the government's contribution fell.  Since that time, budgetary policy has continued to have a significant impact on all of our external measures.

Net Foreign Debt: As the global financial crisis began, the Australian government was in a strong position to increase their debt.  They used this to provide a strong budgetary stimulus to the Australian economy.  In the budget speech for 2010/11, the treasurer announced that public debt would peak at 6.1% of GDP.  By comparison, the Japanese government is currently maintaining a debt in excess of 100% of the annual GDP of the entire economy. The Greek economy moved to the brink of collapse, and only survived because of intervention by other EU states. In the United Kingdom, budget austerity measures were introduced, including increasing the VAT (their equivalent of the GST) to 20%.  This does not leave them well placed for any future uncertainty.

The Current Account Deficit: The balance on current account will generally follow the business cycle. During strong domestic economic conditions, demand for imports will be high, and the CAD will expand.  The government has implemented some strategies through the budget to increase national savings, which will help to reduce the cyclical lows that have been seen in the past. To achieve this goal, the government has:

1. Superannuation: After the introduction of compulsory superannuation in the early 1990’s, the rate payable has steadily increased.  In 2010 the treasurer announced that by 2020 employers would be asked to pay 12% into superannuation for most employees. 
2. Matched Payments: In the 2004/5 budget, Peter Costello introduced the concept of matched superannuation payments for low income earners, and this policy remains in place today.  If a low income earner makes a voluntary contribution to their superannuation, the government will match it (up to $1,000). 
3. The Tax on Savings: For a long time, the Australian taxation system encouraged spending over saving.  In 2010 the treasurer announced a 50% discount on the tax payable on the first $1,000 earned from savings. 

Combined, these initiatives will work to increase national savings in Australia. While it is impossible to analyse the impact of these policies at this stage, we can see that the CAD contracted during the global financial crisis despite the increase in government debt that occurred.

These results suggest that the government has had some success with its goal of improving our external stability through the budget, but there is more work that needs to be done. Ongoing microeconomic reforms will further assist in this process.

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