Analysis Of The Likely Impacts Of The 2003 04 Australian Federal Budget On Australia's Economic Growth, Unemployment And Inflation.

1240 words - 5 pages

1. IntroductionThe government implements its macroeconomic policy using two main tools; fiscal policy and monetary policy. Government macroeconomic management is designed to minimise fluctuations in the business cycle so we can experience good growth, low rates inflation and relatively stable unemployment (Sloman, J. and Norris, K. 2002; . Fiscal policy refers to the government's choices regarding the overall level of government purchases or taxes (Gans, J. et al, 2000; 721). This paper will focus on the government's fiscal policy, namely the 2003-04 Commonwealth Budget, and its effects on Australia's growth, unemployment and inflation.On May 13th, federal treasurer Peter Costello announced the 2003-04 federal budget, which included policies which came as a surprise to many economists and market analysts. As Saul Eslake, chief economist at ANZ stated;It contained at least two surprises for market analysts, who had been conditioned by pre-Budget chatter and leaks to believe that the Government was facing a fairly tight financial position; and that, as a result, there was little room for major policy initiatives beyond meeting the need for additional defence spending and funding changes in higher education. (2003)The budget displayed a departure from the pattern seen under the Howard government in recent years. At first glance the most notable change is a reduced budget surplus, which has fallen from 3.9bn AUD in 2002-03 to 2.2bn AUD in the 2003-04, with even smaller surpluses forecast for the next two years.Figure 1.1Source: 2003-04 Budget ReviewFigure 1.1 shows the trend of budget surpluses in recent years. Budget surplus peaked in 1999-00 at 13.5bn dollars and running into slight deficit in 2001-02 when domestic and global economic conditions were at their worst (Commonwealth Budget overview, 2003). The federal treasury states that the objective of the budget balance is to ensure that the government is not "living beyond its means", and not to pass the burden of expenditure on to the tax payer, but instead approach expenditure in a disciplined and prioritized fashion (Budget: Paper One, 2003).The budget's key areas of increased spending are the following:*Security and Defense: $1.1bn over five years*Education: $1.5bn over four years*Health: $910mn over four yearsThe full allocation of budget funds is shown in figure 1.2. Perhaps the most surprising feature of the 2003-04 federal budget is a $2.4bn tax cut, which is to rise to $2.9bn by 2006-07. This is coupled with a major international tax agreements reform over the next 4 years, reducing tax on foreign earned income (Commonwealth Budget overview, 2003).Figure 1.2Source: 2003-04 Budget Review2. GrowthBudgets resulting in a surplus are traditionally seen as a tightening of fiscal policy to contract economic growth. The small surplus on the current budget however should have a slight expansionary effect, merely "supporting" growth. The governments current budget has the characteristics of a...

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