The Australian Macroeconomic Environment Analysis

This report discusses the current Australian macroeconomic environment and the role of its macroeconomic policies, especially fiscal policy, in stabilizing economic growth. It explores factors such as government spending and tax cuts. The report also provides an overview of macroeconomic indicators such as unemployment, interest rates, and inflation.

Running head: AUSTRALIAN MACRO-ECONOMY 1
THE AUSTRALIAN MACROECONOMIC ENVIRONMENT ANALYSIS
Student Name
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“Discuss the current macroeconomic environment in Australia whilst critically evaluating the
role of fiscal policy as a stabilization tool”
Introduction
Australia is not only among the richest vast economies in the region of Asia-Pacific but
also in the world at large. The nation has enjoyed economic expansion for more than two
decades and even during the global financial crisis which happened during the year 2008/2009,
Australia was able to post a positive economic growth contrary to many countries (Lowe, 2013).
The nation has been able to maintain its better economic performance through adoption of sound
micro and macroeconomic policies which enable it to remain resilient towards various economic
changes.
This report discusses the current Australian macroeconomic environment and the role of
its macroeconomic policies especially the fiscal policy in stabilizing the nation’s economic
growth and its weaknesses as an economic stabilization tool. Various factors associated with
fiscal policy especially the Australian government spending in infrastructure improvement and
tax cuts have also been discussed. An overview of the Australian macroeconomic environment
has discussed various macroeconomic indicators such as unemployment, interest and inflation
rates as well as the gross domestic product. It is of paramount importance to assess a nation’s
macroeconomic environment and its macroeconomic policies, especially the monetary and fiscal
policies as future economic performance can be predicted based on the assessment done. Also,
based on the assessed macroeconomic indicators, businesses, individuals and government can
plan for their future operations such as budgeting for future expenditure with great certainty.
Investors also both domestically and internationally can make viable decisions on whether or not

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to invest in an economy based on information revealed by its macroeconomic assessment. It is
therefore of paramount importance to assess a nation’s macroeconomic environment in order to
predict the future outcomes and make sound macroeconomic goals with great certainty.
The Current Australian Economic Environment Overview
A strong economy shows better economic growth. Australia is categorized among the
richest nations with better economic growth in the world. The nation has undergone economic
expansion for the last 27 years uninterrupted. For this period, Australia has shown a positive
economic growth though at different growth rates for different years. Among the OECD nations,
Australia was the only nation which showed resilience to the great 2008/2009 great recession by
posting a positive economic growth though at a reduced growth rate. Australia embraces free
trade and it has almost opened up its economic sectors to foreign competition. The 2019 Index
has ranked Australia position five in terms of economic freedom having 80.9 as its economic
freedom score. The nation’s economic performance is above the expected average both at the
regional and world levels. In the Asia-Pacific region, Australia is ranked position 4 out of the 43
nations in the region while at the world level the nation is ranked position 14 in terms of
economic performance which is measured by the gross domestic product in accordance with the
International Monetary Fund Outlook during the year 2018, April.
Currently, Australia has an estimated gross domestic product of $1.4 trillion. The nation’s
economic growth rate which is measured by the rate at which its gross domestic product
increases is approximately 2.4 percent. This is quite an excellent economic growth rate though
it’s a decrease as compared to the 2018 overall growth rate which was 3.2 percent. The economy
continues to grow as the government increases its spending especially in improving the nation’s

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infrastructure and business investment continues to increase to the nation’s favourable conducive
business environment. The current unemployment rate in Australia has been maintained low at
5.1 percent with the estimated unemployed persons being 689000 according to the latest
Australian Bureau of Statistics Labor Force Current Data. Underemployment defined as less
labour-hours employment continues to affect the nation’s as the percentage of employees who
wish to work for more hours continues to rise. According to the Australian Bureau of Statistics,
the underemployment percentage currently stands at 8.3 percent with underemployed persons
being estimated to be 1.1 million. Inflation rate in Australia is currently low at 1.3 percent. This
is a favourable inflation rate but it is still below the targeted inflation rate of between 2 to 3
percent by the Reserve Bank of Australia. The inflation rate is expected to rise to the targeted
rate of 2.0 percent by the year 2020 as this will enable the nation to reduce its deficit and
moderate the public debt whereby the current government gross debt stands at 40.5 percent of the
gross domestic. The Reserve Bank of Australia has continued to maintain interest rates low by
keeping the cash rates undisturbed at 1.5 percent. This has fostered investment in the nation as
funds’ borrowing costs remain low. As a result business activity in Australia has increased by a
great margin and has significantly contributed towards the nation’s better economic performance.
In a nutshell, the current economic environment of Australia is good and better results are
anticipated in future.
The Australian Current Business Cycle
A business cycle refers to fluctuations in an economy’s level of production, trade and the
economic activity in general. It results from an economy’s gross domestic product fluctuation.
There are four major phases of business cycle namely the expansion, peak, contraction and
trough (Eusepi & Preston, 2011). An expansion phase involves a decrease in unemployment,

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significant economic growth and an upward trend of the economy’s general prices. During this
phase, the economic growth rate which is measured by the gross domestic product growth rate
averages between 2 to 3 percent. The peak phase is the highest point of business cycle where an
economy produces maximum output, full employment is attained or exceeded and inflation is
significant. During this phase, the economic growth rate is above 3.0 percent. The contraction
phase involves an increase in the unemployment rate, sluggish economic growth and decline in
the inflation rate. The trough phase is the worst business cycle point whereby the economy
contracts towards a recession.
Based on the latest Australian economic indicators, the Australian economy is in its
expansion business cycle phase (Gilchrist & Zakrajšek, 2012). This is because the current
economic growth rate is estimated to be 2.4 percent. Also, the nation’s gross domestic product
which measures economic performance has been increasing with the current estimates showing
that it stands at $1.4 trillion. The Australian level of unemployment has also decreased
significantly as the economy is expanding especially due to increased government spending
much of which is dedicated to improving the nation’s infrastructure and increased business
activity in the nation. The unemployment rate has been kept low at 5.1 percent with only
unemployed persons being estimated to be 689000 which is a significant decrease from the
previous period during the year 2018 when the unemployed persons were 725000. Therefore
from the above current economic indicators, Australia is at its expansion phase of the business
cycle and better results are anticipated in future.
Macroeconomic Goals Description

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Every nation has its own set macroeconomic goals which it works towards achieving.
The set goals ensure economic growth in the long-term period which is stable (Fukuda-Parr,
2011). The five major macroeconomic goals have been discussed.
“Non-inflationary economic growth”: one of the major macroeconomic goals for
countries is long-term sustainable economic growth which is stable. Economic growth can be
assessed using two different ways namely the production possibility curve shift outwards and a
nation’s total output or rather gross domestic product increase. The nation’s macroeconomic
policies are tailored to achieve high economic growth which is not coupled with a rise in
inflation rate as part of the nation’s macroeconomic goal.
“Low inflation”: Inflation rate shows the rate at which a nation’s general prices increase
over a given period of time. Nation’s through their central banks have the macroeconomic goal
of keeping inflation rates low so as to avoid the depreciation of their currencies since higher
inflation lowers the value of a currency.
“Full employment or low unemployment”: Full employment is attained if a nation’s
labour force is fully engaged productive jobs. Unemployment results when those willing and
actively searching for jobs end up not getting them. Low unemployment rate indicates a healthy
economy whose productivity is significant enough to produce jobs for its people. This
macroeconomic goal aims at providing jobs for those who are unemployed and wish to be
absorbed into the job market.
“Balance of payments equilibrium”: Balance of payments shows the difference between a
nation’s exports and imports. A deficit in the balance of payments indicates that a nation’s level
of imports exceed its exports while a surplus in the balance of payments indicates that a nation’s

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level of exports exceeds its imports. The goal of every nation to maintain a deficit or surplus
balance of payments which are not huge as the vast balance of payments don’t benefit an
economy.
“Equity in income distribution”: Equitable income distribution indicates a smaller gap
exists between the poor and the rich in a nation. It is the goal of every nation to have income
distributed fairly across its regions but not concentrated within a small group of individuals in
the economy.
Fiscal Policy
Fiscal policy refers to the government use of fiscal tools namely the government
expenditure and taxation to achieve the desired economic goals and objectives (Alesina &
Ardagna, 2010). The objectives of the fiscal policy differ across nations but the common ones
have been explained as follows.
“Economic stability”: The fiscal policy aims at maintaining a stable economic growth
with limited or no fluctuations at all in the total output and the level of employment. “To attain
full employment”: The fiscal policy aims at creating enough jobs for those willing to work but
are not engaged in any productive activity. “Economic growth”: Fiscal policy aims at fostering a
nation’s economic growth to improve economic performance. “Price stability”: Fiscal policy
aims at keeping price fluctuations at medium rates. “Equity in income and wealth distribution”:
Fiscal policy aims at distributing income fairly among citizens. This can be achieved by highly
taxing the rich and using the obtained revenue to develop the poor sectors among others.
Fiscal Policy Types

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Expansionary Fiscal Policy
This type of fiscal policy aims at stimulating or rather fostering economic growth. The
policy involves an increment in government expenditure and reduction of taxes (Baker, 2010).
The consumer level of income increases as a result and hence consumers increase their demand.
The nation’s aggregate demand increases shifting the aggregate demand curve towards the right
direction from AD to AD’. The economy’s total output increases from Y1 to Y2 as the general
prices increase P1 to P2 as illustrated in the below diagram. This policy reduces the
unemployment rate as more workers are employed to produce more goods and services to meet
the increased aggregate demand which leads to economic expansion.
Contractionary Fiscal Policy

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This policy reduces economic growth by increasing taxation and reducing government
expenditure (DeLong et al, 2012). Its major aim is to reduce inflation since it can highly affect an
economy in the long-run by reducing the living standards of consumers. An application of this
policy reduces consumer level of income and as a result, they reduce their demand for goods and
services. The aggregate demand is consequently reduced making the aggregate demand curve to
shift leftwards from AD0 to AD1. The nation’s total output decreases from Q0 to Q1 as the general
prices decrease from P0 to P1 as illustrated in the below diagram. Unemployment actually
increases as businesses lay off workers due to decreased productivity which reduces the nation’s
economic growth.
The Multiplier Process and the Proposed Australian Infrastructure Spending
The multiplier process is explained by a closer look at the multiplier effect. A multiplier
effect occurs when the income circular flow is injected with the new demand (Chien, Cole &

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Lustig, 2011). An increment in income leads to more expenditure which creates more income.
The final income increases due to new spending injection.
Currently, the Australian has proposed an expenditure of $100 billion towards improving
the nation’s infrastructure. The government aims at improving roads and railways as well as
freight routes to ease congestion and create road safety in transportation. This will create job
opportunities as people will be employed to participate in the construction activities, businesses
will reduce their supply chain costs and this will help make the Australian exports more
competitive in the international market. As a result, the Australian businesses will increase their
productivity as they make more sales from selling their products at affordable costs as
transportation costs which could hike prices are reduced. More workers will be employed to
participate in increased production. This means that consumers will have more income and hence
they will spend more hence increasing the Australian aggregate demand which will improve the
nation’s real gross domestic product as illustrated.

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From the above graph, the Australian increment in infrastructure spending to $100 billion
will shift the aggregate demand curve towards the right direction from AD1 to AD2. But as
various sectors benefit from the injection, the aggregate demand curve will shift further to AD3
as expenditure by one person provides income for another person and hence the nation’s total
output will increase. This is the multiplier process which will occur due to an injection of $100
billion in infrastructure expenditure.
Proposed Tax Cuts and Supply-side Effects
The Australian government has proposed various tax cuts which will take effect from
July 2019 as discussed. Individuals earning up to $18200 are not subjects to tax, earnings
between $18201 and $37000 have a tax cut of $55 per year, earnings between $37001 and
$48000 have a yearly tax cut of $190, earnings between $48001 and $90000 have an annual tax
cut of $550 and earnings between $90001 and $126000 have a tax cut of $550 with the tax cut
decreasing gradually up to zero for those earning $126000. Any amount above $126000 is
classified as a high-income earner and no tax cut has been proposed for such caliber (Spiro,
2018). Small and medium businesses will receive a tax cut of 25 percent and their asset write-off
increased to a threshold of $30000. Such businesses should have an annual turn-over of $50
million and below.
The proposed tax cuts will leave consumers with leave consumers with more income and
hence they will increase their demand which will make firms to increase their productivity in
order to supply enough products to counter the increased demand. Also, small and medium
businesses’ tax cuts will enable small and medium businesses to expand their operations and
employ more Australians to produce more goods and services. The Australian aggregate supply

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will increase and hence the aggregate supply curve will shift towards the right direction as
indicated in the below graph from AS0 to AS1. As a result, the nation’s total output will increase
from Q0 to Q1 due to increased productivity.
Federal Government Forecasted Budget Surplus and its Macroeconomic Influence
A budget surplus occurs when the government raised revenue exceeds its expenditure.
The Australian government has forecasted a budget surplus of $7.1 billion which approximately
accounts for 0.4 percent of the nation’s gross domestic product. This is expected to be achieved
through the governments’ sound fiscal policy which involves increased government spending
and reduced taxes. The sound fiscal policy is expected to improve the nation’s macro-economy.
The unemployment rate is anticipated to decrease as small businesses expand their operations
from the introduced tax cuts and employ more people. Economic growth is anticipated to grow at
a rate of 2.3 percent as businesses increase their productivity due to increased spending by
consumers as the introduced tax cuts leave them with more income to improve their living

AUSTRALIAN MACRO-ECONOMY 13
standards. Exports are expected to increase as they remain competitive due to reduced supply
chain costs which will result from improved infrastructure and hence the cost of exports will
decrease and their sales will increase. Inflation is expected to rise to 2 to 3 percent targeted rate
by the Reserve Bank of Australia. In a nutshell, the forecasted budget surplus is expected to
positively impact the nation’s macro-economy.
Fiscal Policy Limitations in Economy Stabilization
Fiscal policy faces various limitations. Firstly, it is highly affected by time lags. This
means that fiscal policy may take quite a long time for its impact to be felt in the economy and
hence if applied late, the economy may continue to suffer for a longer period of time. Secondly,
fiscal policy may cause the crowding out effect whereby the private sector is reduced. Increased
government spending causes competition with the private sector for resources which are limited
such as loans and hence some players in the private sector may be definitely competed out
reducing the private sector size. Thirdly, incorrect forecasting about the future economic
conditions may make the applied fiscal policy to adversely affect the economy. For instance, an
economy may be anticipated to undergo a recession. In this scenario, the government will apply
expansionary fiscal policy but in future, the economy may instead be at its boom. The applied
fiscal policy will adversely affect the economy by causing inflation. Fourthly, if a fiscal policy is
to be financed by borrowing, this will increase the nation’s gross debt which has to be financed
in future through high taxes. Also, fiscal policy especially the contractionary one which is made
to reduce inflation may result to work disincentives where employees and businesses reduce
productivity leading to a decline in the nation’s total output and consequently economic growth
declines also (Kolb, 2010). For these limitations and many others, fiscal policy should be applied
keenly to avoid its severe impacts on a nation’s economic growth.

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Conclusion
The Australian economy is categorized among the best performing economies in the
world having been ranked position 14 in terms of economic performance in the world. Based on
the analyzed current Australian macroeconomic environment, the nation is at its expansion
business cycle. The Australian sound fiscal policy has enabled the nation to maintain its
excellent economic growth and a budget surplus is expected for the next financial year. The
proposed Australian infrastructure expenditure, tax cuts and forecasted budget surplus will have
positive impacts on the nation’s macro-economy and hence its economic growth is anticipated to
increase.

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References
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DeLong, J. B., Summers, L. H., Feldstein, M., & Ramey, V. A. (2012). Fiscal policy in a
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