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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 Rudd 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 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. Small, Infrequent Deficits: Fiscal consolidation requires that deficit budgets happen only when the economy is performing below expectations. Further, at these times we would expect the deficit to be relatively small. This means that the government will not add unnecessarily to our net foreign debt.
3. Restructuring the Taxation System: Australia has now come to terms with the fact that we are a small country in a global economy. The process of globalisation has meant that our exports must be competitive. Through the budget, the federal government has been able to assist in this process. For example, any items sold overseas do not attract the GST. This helps to keep the price of our exports low, adding to their international competitiveness.

Prior to the election of the Howard government, consecutive budget deficits resulted in a large increase in net foreign debt (especially the government component), a devaluation of the currency and a blowout in the size of the current account deficit (-6% of GDP). Since that time, we can see the following changes as a direct result of fiscal initiatives:

Net Foreign Debt: As a percentage of GDP, our net foreign debt has continued to increase since 1996. However, it is significant to note that the percentage of government debt has fallen – considerably. These repayments have been possible due to the use of surplus budgets. The excess funds have been used to retire debt. Economists are divided over the level of debt that a government can comfortably maintain, but the fact remains that the Australian government is well placed to borrow should they need to in the future. By comparison, the Japanese government is currently maintaining a debt in excess of 90% of the annual GDP of the entire economy. This does not leave them well placed for any future uncertainty. (It is worth noting that the increase in net foreign debt since 1996 is predominantly due to the increasing use of foreign funds by financial institutions due to the deregulation of the financial sector. This now accounts for over 70% of out net foreign debt.)

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 increase.  Today the government hopes that although this cycle will continue, it will do so without reaching the lows that occurred prior to 1996. There are several measures that the government has used to help increase savings to achieve this goal:

1. Superannuation: After the introduction of compulsory superannuation in the early 1990’s, the rate payable has steadily increased during the last decade.
2. Matched Payments: In the 2004/5 budget, Peter Costello announced that the federal government will not only match contributions to superannuation by low income earners, but will pay 150% up to $1500. In other words, if a person on a low income makes a voluntary contribution of $1000, the government will add an extra $1500 to their superannuation.
3. The GST: For a long time, the Australian government was criticised for taxing savings. This still occurs, however the introduction of the GST has slightly shifted the taxation burden away from savings, and on to consumption.
4. Progressive Income Tax: Changes to the brackets for marginal tax rates will allow those on higher incomes to have a higher disposable income.

Combined, these initiatives have worked to increase national savings in Australia. As a result, we can see that the cyclical low for the CAD in 1994/5 was -6%, while during the next period the CAD only fell to -5.7% of GDP (1998/9). Similarly, in 1992/3 the CAD recorded a “good” result of -3.6% of GDP, but in 2000/2001 the CAD was recorded at -2.7% of GDP. Strong economic conditions since that time have meant that the demand for imports is exceptionally strong, and as a result the CAD/GDP ratio has increased; the figure is now much "worse" than it was in the early 1990s.

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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