Australian Economy Improvement: Federal Budget and RBA Strategies

This report provides an analysis of the Australian economy, focusing on weaknesses identified in the 2018 federal budget and factors considered by the Reserve Bank of Australia (RBA) when determining cash rates. The report scrutinizes elements such as unemployment rates, wage growth, househ...Read More

IMPROVING ECONOMY OF AUSTRALIA
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Introduction
• Australian economy has some overarching weaknesses. For instance, the high quality of life by many citizens is
unsustainable
• This paper first analysis the Australian federal budget for the year 2018 to reveal some of the weaknesses in the economy
and
• scrutinizes some of the factors which are considered by the RBA when determining the cash rates and which can also be
regulated by the federal government to enable the RBA increase the cash rate and improve the economy at the same time.
• The factors identified include unemployment rates, wage growth, household debt, consumer confidence index and Australian
dollar

Analysis of Australian Federal Budget 2018
• The centerpiece for this year’s Australian federal budget is the government’s personal income tax plan
• The plan has provided an immediate tax relief for both low and middle-income earners in a targeted non-refundable offset on top of low-income tax
offset
• The government also announced its expectation to push back the economy to surplus by the next budget, creating an opportunity to make changes
that target financial goals of tax revenues (Ali et al, 2014)
• The unemployment rate although has gradually fallen from the 5.6% where it stood in the last financial year to 5.3% currently
• The public net debt which touches on household debt, the statistics have shown that the debt is on a rising phase (19.1-19.2%)
• The consumer price index has also indicated an increasing phase from the previous year 2017 (André, 2016)

Factors Considered when Setting RBA Cash Rates
• When it comes to setting RBA cash rates, there are a number of factors which are considered
• Such factors will include but not limited to: unemployment rates, the household debt, inflation, wage growth, Australian
Dollar value, and consumer confidence index (Apergis, 2014, p.80)
• By putting in measures to reduce the rates of unemployment within the country, the RBA will be in a position to increase the
cash rate and improve the economy
• Wage growth is the second factor which must be looked into before the cash rate can be increased. The wage growth in
Australia has been slow in the recent quarters, approximately at a rate of 2% (Bonoli, 2017)

• Considering the fact that household debt has been growing rapidly while wage growth stagnating, adjustments by the federal government
to balance the two will both strengthen the economy and also allow the RBA to increase the cash rate (Bishop and Cassidy, 2017, p.15)
• When the household debts are very high, the RBA is constrained from raising the cash rate
• Adopting the measures which can reduce the household debts will not only play a role in improving the economy but also will make it
possible for the RBA to increase the cash rate (Dosi et al, 2015)
• The performance of the Australian dollar in terms of the exchange rate is another factor taken into consideration by the RBA when setting
the cash rate

• A well-performing exchange rate depicts that the economy is improving and this can be achieved through measures
which enhance the performance of Australian dollar (Esposito, 2018, p.5)
• The consumer confidence index is another factor considered by the RBA when setting the cash rate.
• RBA considers this index as an indicator of the optimal level of consumers towards their financial status
• To improve both the economy and enable the RBA to increase the cash rate, the federal government will have to put
into place some of the measures which increase consumer confidence (Flodén et al, 2017).

Recommendations to Improve the Australian Economy and Increase the
Cash Rate
• To be able to improve the economy and at the same time facilitate an increase in the cash rate within the next few
months, the federal government will have to consider eliminating some of the factors which hinder RBA from
increasing the cash rate while facilitating economic growth at the same time (Gray and Tesfaghiorghis, 2018)
• Factors like high unemployment rates within the country hinder the RBA from increasing the cash rate
• Efforts by the federal government to reduce unemployment rates will not only improve the country’s economy but also
enable the RBA to increase the cash rate within the next few months (Howell and Rodger, 2018)
• The same case will apply to all the other factors like the wage growth, household debt, the Australian dollar, and
consumer confidence index.

Reducing Unemployment Rates
• The primary approach by the federal government to reduce the current 5.6% unemployment rate will be the use of the expansionary
monetary policy
• In this approach, the Federal Reserve will have to change its monetary policy through the reduction of fed fund rates (Esposito, 2018, p.10)
• overall interest rates will be lowered and businesses spurred to borrow money and buy capital equipment hence hiring more workers
• The second main approach by the federal government to reduce unemployment rates will be through the expansionary fiscal policy
• This will entail the government creation of jobs directly by increasing its spending on government projects (Esposito, 2018, p.15)
• The federal government can also reduce unemployment rates by lowering employment taxes like national insurance contributions to
increase labor demand

Promoting Wage Growth
• Modernizing the labor market institutions is one of the major approaches which the federal government can use to ensure that wage growth is
achieved
• It will achieve this by restoring real values of minimum wages and overtime thresholds as well as protection of union rights (Jacobs and Rush, 2015,
p.15)
• Through this approach, institutions will be forced to compensate their workers as per their expertise and skills hence promoting the wage growth.
• Wage growth can also be achieved by the federal government by enforcing education and training programs which match the demands of the labor
market
• In addition, Measures to eliminate non-compete contracts for low wage employees backed up with banning the agreements that prevent franchisees
from hiring each other’s employees will work better to promote wage growth and enable the RBA to increase the cash rate while improving the
economy at the same time (Jacobs and Rush, 2015, p.15)

Reducing Household Debt
• In order to reduce this debt, the federal government will have to tweak some policies touching on the property to ensure that Australians do not “securitize” all their life
• By ensuring that all the property curbs are upheld until the economy is restructured and the targets set have been achieved satisfactory ( Lowe, 2017, p.125)
• Secondly, the federal government may opt to compel foreigners with local property to resell to locals only
• This will prevent foreign speculations and excessive rates of asset appreciation rendering property prices unaffordable to the ordinary Australians and have long-term
economic consequences (Lowe, 2017, p.130)
• The local Australians will be able to acquire property at affordable prices which can be met through normal earnings without having to take loans.
• Also the federal government may opt to refine total debt servicing ratio to restrict total loan repayment contract for property purchases to a maximum of a certain period
• This ensures that Australians pay all their outstanding mortgages first property and adhere to Central Provident Fund minimum sum requirements before envisaging
another property (Lowe, 2017, p.131)

Promoting the Australian Dollar
• The federal government can promote the dollar value by promoting the terms of trade within the country
• To promote the terms of trade within the country, the federal government should ensure that the country’s exports
and imports closely balance
• Export sector has been lagging behind and hence the government should enact measures like entering into trade
agreements which will open wider markets for its exports (Howell and Rodger, 2018)

Promoting Consumer Confidence Index
• Some of the factors that affect consumer confidence index are high unemployment rates, inflation, debt levels, and
economic growth
• The expansionary fiscal policy will help reduce the unemployment rates and increase consumer confidence index
(Esposito, 2018, p.20)
• This will entail the government creation of jobs directly by increasing its spending on government projects
• Also, In order to reduce this household debt, the federal government can tweak policies touching on the property to
ensure that Australians do not “securitize” all their life (Esposito, 2018, p.6)

Conclusion
• From the above discussion, it is clear that the RBA regulates the cash rate in consideration to several factors
• Such factors include unemployment rates, inflation, wage growth, household debt, dollar value, and the consumer
confidence index
• Since the federal government aspires to improve the economy as well as increasing the cash rate, the paper has
looked at measures which can be regulated to not only enable the RBA to increase the cash rate but also improve the
economy of the country generally
• Such measures include; compacting the high rates of unemployment, promoting wage growth, promoting consumer
confidence index, promoting the Australian dollar value and reducing the household debt

References
• Ali, P., Anderson, M.E., McRae, C.H. and Ramsay, I., 2014. The financial literacy of young Australians: An empirical study
and implications for consumer protection and ASIC's National Financial Literacy Strategy.
• André, C., 2016. Household debt in OECD countries: Stylised facts and policy issues.
• Apergis, N., 2014. Can gold prices forecast the Australian dollar movements?. International Review of Economics &
Finance, 29, pp.75-82.
• Bonoli, G., 2017. Labor market and social protection reforms in international perspective: parallel or converging tracks?.
Taylor & Francis.
• Bishop, J. and Cassidy, N., 2017. Insights into low wage growth in Australia. RBA Bulletin, March, pp.13-20.

• Dosi, G., Pereira, M.C., Roventini, A., and Virgillito, M.E., 2016. The effects of labor market reforms on unemployment and income inequalities: an agent-based model. Socio-
Economic Review.
• Esposito, M., 2018. From the editor: Federal Budget fails to deliver for the justice system. Bulletin (Law Society of South Australia), 40(5), p.5.
• Flodén, M., Kilström, M., Sigurdsson, J. and Vestman, R., 2017. Household debt and monetary policy: Revealing the cash-flow channel.
• Gray, A. and Tesfaghiorghis, H., 2018. Social indicators of the Aboriginal population of Australia.
• Howell, L.G. and Rodger, J.C., 2018. An examination of funding for terrestrial vertebrate fauna research from Australian federal government sources. Pacific Conservation Biology.
• Jacobs, D. and Rush, A., 2015. Why is wage growth so low?. RBA Bulletin, June, pp.9-18.
• Lowe, P., 2017. Household debt, housing prices, and resilience. Economic Analysis and Policy, 55, pp.124-131.