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Contemporary Fiscal Policy

Economics (Year 12) - Fiscal Policy

Christian Bien

Graph sourced from the Reserve Bank of Australia Chart Pack as of the 7 December 2016 In the last 3 years, the Australian Government has run a persistent budget deficit. This is expected as it is in line with the current position of the business cycle which is at the end of a trough and the start of an upswing. The Government predicts deficit budgets will reduce to an eventual surplus in 2020.

Why were we in a Deficit in the last 3 years?

The budget deficit rose significantly in the 2013/2014 financial year to just over 3% of GDP due to the eventual downturn of the mining investment boom. The transition to the Australian economy from a mining country to more diversified industries has resulted in high unemployment which peaked at 6.3% in November 2014 (ABS - 6202.0 Labour Force Nov 2014). The high unemployment would have seen automatic stabilisers taken into effect with lower income tax revenues and higher welfare expenditure. In addition, signs of a weaker economy with economic growth slowing to a low of 2% in June 2015 (ABS - 5206.0) from a loss in business investment. This would result in lower tax revenues from expenditure and lower business profitability resulting in lower company tax revenues. The mining downturn also saw major losses in resource tax revenues. Wage prices are also slowing with the September 2016 figures (ABS - 6345.0) showing wages only increasing by 1.9%. The slow increase in wages means there is a lower increase in income tax revenues and lower susceptibility to bracket creep.

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