This week in economics (as with every week of course!) has been filled with fascinating new government priorities, a brand new budget and a variety of implications for the Australian economy at large. The 2021-2022 Federal government budget has come off the heels of an Australian economy in one of the world’s most extraordinary recoveries. Last year alone we watched as rates of economic growth fell below -7% and deflation occurred for one of the first times in Australian history. As the government looks to supercharge our growth, the role of resource allocation, the current account deficit and our key economic issues have come into the fore, circumstances essential for this year’s HSC.
1. Fiscal Policy
Fiscal policy plays a variety of essential roles in our economy, helping not only to achieve economic objectives but also to reallocate essential resources throughout the economy. Despite the enormity of the health costs, the government has been focused on economic stimulus in both the 2020 and 2021 budgets. As the Guardian reports “The government has committed to spend a total of $311bn to fight Covid-19, including $20bn on health support and $290bn in economic stimulus”, making the health response only 7% of the economic reply. While the employment boosting Jobkeeper scheme has concluded, the government continues to incentivise investment and Aggregate demand through a massive tax write off. This write off should help firms in the economy invest in essential capital, reallocating resources towards instruments for long term growth.
A full breakdown next week.
HSC Application:
- Fiscal policy works in a counter cyclical manner, helping to limit the impacts of the Business cycle
- This particular budget has been an unprecedented increase in successful government spending within the economy, demonstrated by the 4% better growth statistics than predicted
2. Income inequality
https://www.abc.net.au/news/2021-05-11/federal-budget-women/13339300
As we know, different groups in the economy experience the impacts of income inequality vastly differently. Thus, in attempting to diminish the impacts of inequality the government often focuses on specific groups, such as those in the lowest income brackets or in this budget, Women. Before we engage with the current changes to the income system we need to acknowledge how income distribution and employment has shifted across the last few decades. As the ABS notes “The main factor in the long-term rise in the labour force participation rate has been an increase in female participation, from 44.7% in 1983 to 55.9% in 2003.” This particular trend recognises two important ideas:
Firstly, women have increasingly taken on more work and responsibility in the economy, improving the share of income they receive.
Secondly, when compared to the 71% male participation rate, we can continue to acknowledge the increasing development needed to fairly share income between the groups.
In terms of income across the economy, we can also acknowledge the increasingly unequal nature of income overall, denoted by the fact that the top 20% of households earn 6 times more income, on average, than the bottom 20%. Such a gulf between our income brackets is recognised in our shift from a 0.28 Gini in the early 80s to an average well above the 0.3 mark. Thus, in minimising the impacts of income inequality on both society and the economy, the government has many areas in which to work.
In their attempt to move the Lorenz curve towards equality the government has reduced the tax payable for many mid-income Australians, while projecting future taxes on Australia’s wealthiest people to repay our national debt. Remember that a progressive taxation system serves not only to take a larger total sum of tax from the highest income earners, but a distinct larger proportion of their total earnings. In doing so, the government directly shifts the income earned by each quintile. Moreover, the expenditure we have seen throughout this pandemic, especially the direct flow of income through Jobkeeper has helped to place more income in the hands of the poorest Australians. Secondly, the government is trying to support women throughout the economy, who often experience lower income due to historical discrimination, maternal leave and patriarchal business environments. As the ABC notes those workers getting help are largely “workers in aged care and child care. And that’s significant because both these sectors have around 90 per cent female workforces.” In the long run, this support should help place more income in the hands of women, again improving income inequality.
HSC application:
- The progressive taxation system in action, helping to reduce the effects of inequality
- The dimensions of income inequality and the ongoing differences that exist between groups in the economy
- The unprecedented $200B role of Fiscal policy and its strategic role in reaching economic objectives
