Fiscal Policy and Interest Rates: Australian Construction Impact

This report examines the impact of fiscal policy and interest rates on the Australian construction industry. It discusses how fiscal stimulus packages, implemented in response to the global financial crisis, positively affected output, employment, and revenue within the sector. The report analyzes the effects of tax cuts, corporate taxes, and carbon taxes on construction firms' profit margins and operational costs. Additionally, it explores how interest rates influence mortgage rates, housing demand, and, consequently, the performance of the construction industry. The analysis includes the effects of high and low-interest rates, influencing borrowing and housing production. The report references multiple sources and provides a comprehensive overview of these economic factors' influence on the construction sector.

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Effects of fiscal policy on the Australian construction industry
Notably, fiscal stimulus has positively impacted Australia’s construction industry.
Worth noting, the Australian construction sector is among the top employers of the working
population hence its significant contribution to the country’s gross domestic product. Essentially,
the fiscal policy comes in the form of increased government expenditure and taxes. Specifically,
the period between July 2008 and 2009 experienced an economic downturn due to the global
financial crisis. The crisis affected all sectors of the economy, the construction sector included as
illustrated in the graph below (Bill 2010). This downturn prompted the Australian government to
inject a financial stimulus package to the construction sector which leads to an increase in output
and increased employment and revenue from the sector between the years 2009 February to May
2010. The first stimulus package was implemented in October the year 2008 under the Economic
security strategy.
Worth noting, the Australian government introduced the Tax Cuts and Jobs Act in the year
2017. According to the Associated Equipment manufacturer and equipment dealers association,
the current tax reforms will boost investment in the construction sector. This means increased
revenue and employment opportunities in the construction sector due to increased investment
flows. The reduction of corporate tax encourages investment thus leading the creation of more
employment opportunities. However, there is an increased cost of purchasing heavy building
equipment owing to the current tax reforms. This might negatively affect the construction
industry output because expensive machinery might reduce the output of construction companies

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due to high operating costs. Directly or indirectly taxes affect the operation costs of construction
companies through taxes on building equipment and machinery and taxation on the construction
firm’s profits. Overall, financial policies affect the performance of all sectors of the economy and
the construction sector in Australia is no exception.
(Bill 2010)
According to some economists, the imposition of a carbon tax on the industry will
negatively affect the revenue. From the standpoint of construction operators, the tax will lead to

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neutral revenue (Wong, Laccarruba & Bray 2013). Essentially, increased corporate tax codes
reduce the profit margin for firms in the construction industry. However, lower tax codes
increase the profit margin of construction firms hence boosting the expansion of construction
firms and profit margin. The fact that carbon tax affects the construction process will eventually
affect the outcome of the Australian construction industry. Construction companies might seek to
under-producing their products so as to avoid the carbon tax limitations. Following the global
financial downturn, employment opportunities were salvaged due to the injection of fiscal
stimulus packages on the construction sector among other sectors. Based on Treasury statistics
fiscal stimulus was responsible for saving two hundred thousand employment opportunities
(Makin 2016).In a way, fiscal stimulus implies increased government expenditure.
Effect of interest rates on the construction industry
The recent housing pricing in Sydney and Melbourne in recent years has affected the
construction sector outcomes. Primarily, interest rates affect mortgage rates repayments thus
allowing borrowers to borrow more thus increasing the demand for housing facilities. The
demand to own houses has been facilitated by low-interest rates on mortgage packages.
Undoubtedly, interest rates affect demand for housing thus affecting the performance of the
Australian construction industry (Rahman N..d). Usually, low-interest rates increase the demand
for houses thus more output for the construction industry (Yiang, 2018). Essentially, low-interest
rates encourage borrowing thus increasing the demand for housing and buildings. With an
increase in demand for housing, the revenue of construction companies increase and hence the

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supply of housing facilities. The fact that high-interest rates discourage borrowing means that the
demand for mortgage facilities reduces thus reducing the output of the construction companies.
Noteworthy, high-interest rates discourage borrowing hence limited production of housing
thus unemployment in the construction industry reduces. Essentially, interest rates affect the
demand and supply of goods and services such as the housing market which comes about due to
construction. Basically, price influence the price of building materials and prices of houses
which in turn influence the behavior of construction firms. Usually, high prices of houses are
influenced by high-interest rates on credit financial facilities such as loans, mortgage. When
interest rates of mortgage facilities are high, few borrowers approach construction firms hence
there is a downturn in the performance of construction firms. Essentially, interest rates affect the
price of goods and services thus affecting the overall housing prices. For construction firms to
make a profit in the case of high-interest rates they charge high prices for finished buildings
hence the rising price houses.

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References
Bill. (2010).Fiscal stimulus and the construction sector. Economic Outlook.[Online].Available at
http://bilbo.economicoutlook.net/blog/?p=11270[Accessed 20 May 2019]
Fean, S. (2019).How raising interest rates will impact the construction
industry.Watchdogpm.com. [Online].Available at http://watchdogpm.com/blog/how-raising-
interest-rates-will-impact-the-construction-industry/[Accessed 20 May 2019]
Rahman, M.M. (N .d).Australian housing market: Causes and effects of rising price. The
University of Southern Queensland. [Online].Available at
https://eprints.usq.edu.au/4614/2/Rahman_2008.pdf[Accessed 20 May 2019]
Wong , P .S. Laccarruba ,N & Bray, A.(2013). Can a Carbon Tax Push the Australian
Construction Sector toward Self-Regulation? Lessons Learned from European Union
Experiences. Journal of Legal Affairs and dispute resolution in engineering and construction,
Vol 5 Issue 4
Yiang, Y. (2018).Effects of bank lending on urban housing prices.[Online].Available at
https://www.mdpi.com/2071-1050/10/3/642/pdf[Accessed 20 May 2019]