Policy Impact

Efficiency in Resource Allocation

The federal government contributes just over 20% of the total spending in the Australian economy each year. As such, the money that is allocated as part of the federal budget will have a significant impact on where and how resources are allocated.

With the shift to fiscal consolidation, the size of the government sector has been minimised to some extent. This has encouraged participation by the private sector. As the private sector is generally more efficient when allocating resources than the public sector, this has resulted in some improvements. When coupled with low interest rates that have been possible in recent years, the opportunity for improved resource allocation due to private sector involvement has been present. This is an indirect way in which fiscal policy can assist in improving resource allocation.

However, in each budget, the federal government will implement a series of discretionary stabilisers. Each of these spending options will force the allocation of certain resources into some areas, and therefore they will be removed from other areas. For example, in the 2008/9 budget, the federal government allocated $2.3 billion to tackle climate change. In doing so, they were ensuring that Australian resources would be allocated in the fight against climate change. This will help us to achieve both allocative efficiency and inter-temporal efficiency.

Another relatively recent change which has affected the way in which resources in Australia are allocated is the introduction of a tax on consumption – the GST. In particular, many services (such as hairdressing, tutoring and gardening) increased in price by the full 10%. This undoubtedly had some impact on the way resources were allocated in these industries. For example, some people may now choose not to get their car serviced as often as they had in the past. As a result, some people may choose not to become mechanics. In other words, we will not use as many productive resources in the production of these service based businesses.

Some specific fiscal measures have also been used in recent years to help improve the efficiency with which resources are allocated. Some of these measures include:

Restructuring the Public Sector: Several microeconomic reforms, such as the privatisation of many government business enterprises, were implemented through the budget.
Encouraging Investment: The tax system has been restructured to encourage investment by the private sector. For example, the 125% tax concession for research and development, the lowering of the rate of capital gains tax and changes to the rules regarding the way in which assets can be depreciated for taxation purposes.
Overcoming Market Failure: By now you should be aware that in certain instances the market system will fail. Certain goods and services seen as “needs” will not be provided by the market, because they are seen as public goods. The government is able to provide these things, including street lights and public roads.

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