Australian Inflation, Distribution of Income & Wealth, Environmental Sustainability and the 2015 Budget


  • Inflation 

Over the years, Australia’s inflation rate has been relatively high, reaching over 12% in the early 1980’s. Gradually however, Australia’s inflation rate fell to a more sustainable rate only dipping lower once, just under 0% in the late 1990’s. Several reasons have caused this fall in inflation within Australia from its trend of volatility to a more stable and manageable inflation rate of about 2-3% - with both the headline and underlying inflation rate averaging over the period of 1996-13 of around 2.7% and 2.8% (Dixon, 2014). One such measure that has led to stable inflation is the Reserve Bank of Australia making it a goal of its monetary policy in 1996 in a deal with the Treasurer of Australia (Dixon, 2014). Such macroeconomic reforms can be seen through the manipulation of the RBA in the market through the changing of the cash rate.

Microeconomic reforms such as trade liberalisation policy have also meant increased competition in domestic markets from imported goods which has lowered prices and thus reduced inflationary pressure.

However, inflation rates within Australia have not been immune to the domestic business cycle nor the international market with inflation rates increasing to 5.0% in between 2005-08 due to high demand for global commodities leading to high prices as well as a global food crisis causing high prices for food. Domestically, this high inflation rate was affected by the domestic business cycle, which was experiencing an upswing and subsequently a boom due to the mining boom with the economy reaching the production possibility frontier and full capacity increasing the costs of production leading to cost-push inflation.

A significant reduction in inflation can be seen from the diagram above around 2009. This was caused by the GFC which saw inflationary pressures ease as consumer confidence fell and global demand fell, reducing demand-pull inflation.

As seen below, the inflation rate currently is at 1.3% which is below trend. This has been due to many domestic market issues such as the fall in Australia’s ToT, as well as a fall in Australia’s exchange rate leading to high import costs.

  • Distribution of Income & Wealth
The distribution of income is generally measured through the Gini co-efficient and the Lorenz curve. In Australia, income distribution has been relatively average in comparison to other similarly advanced economies. As seen in the diagram below the Gini co-efficient has increased over the years between 1982 and 2012, with an overall increasing trend, suggesting that income inequality has worsened in Australia. 

   

The distribution of wealth is harder to measure and in Australia on average wealth inequality has been far greater than income inequality. As seen in the diagram below, there is an asymmetrical distribution of wealth meaning that there is a larger percentage of households with lower net wealth – 65% with less than $700 thousand (Dixon, 2014) – and a smaller percentage of households with a larger net worth, suggesting that wealth inequality in Australia is largely unequal.

The distribution of income and wealth is also unequal between different groups apart from just socio-economic percentiles. For example, women on average earn lower incomes than men, both historically and also in current times. Over the past 20 years, on average the gender wage gap has been between 15-18% for full-time workers (NATSEM, 2010), with over 60% of these differences being attributed solely to gender (NATSEM, 2013).  This has been due to historical views towards female workers and occupational gender roles which not only have led to historically lower education for women – meaning generally lower future incomes and wealth – but also traditional gender roles which saw many women in non-paying roles or lower-paying occupations.

This also can be seen in race with those from Aboriginal or Torres-Strait Islander backgrounds earning less than those from non-Indigenous backgrounds. This pay gap is large with household income of indigenous to non-indigenous household income being 0.65 (Productivity Commission, 2009). This has been due to several reasons including certain communities living in remote or low-socio economic areas meaning lower accessibility to services, as well as cultural barriers in the workplace.
  • Environmental Sustainability 

Australia is one of the highest carbon emitters, per-capita, amongst other advanced economies with CO2 emissions per capita of 16.9 metric tons (World Bank, 2010). Over recent years however, environmental sustainability as a section of economic growth has increased in importance. This can be seen through the introduction of the mining tax and the carbon tax which both aimed to tackle high amounts of environmental pollution and degradation.


In recent times greenhouse gas emissions have fallen in Australia. Over the 2013/14 financial year greenhouse gas emissions fell by 1.4% and in the 2012/13 financial year emissions fell by 0.8% (Australia’s National Greenhouse Gas Inventory, 2014).
This can be attributed to several different reasons although it is linked heavily to falling growth within Australia. The decrease in manufacturing, particularly car manufacturing has partly led to this decline with several companies such as Ford and Holden and Toyota all indicating a cease of production in the near future with a decrease in production partially leading to a fall in emissions.
  • 2015 Budget

The 2015 budget has a contractionary stance, with less spending overall, with some concessions particularly towards small businesses and families. These two main areas have been of focus with the small businesses package and the families/childcare package being two large spending areas. Most measures in the budget have been reactionary solutions to the intergenerational report in order to reduce high unemployment level and to raise economic growth from its currently below trend rate of 2.3% p.a. (ABS, 2015), and to also raise investment in the economy.


-        Jobs and Small Business Package
One measure is a tax write-off/deduction of individual assets that a small business will buy that is priced under $20,000 an increase from its previous limit of $1000. This is to help increase spending in the economy, particularly on capital goods for small businesses. In turn this should increase economic growth due to the multiplier effect.

There will also be further tax cuts with businesses of annual revenue less than $2 million being able to reduce their tax rate, by 1.5% for incorporated businesses and 5% for unincorporated businesses. This is aimed to reduce the bottom line for businesses which should increase cash flow and stimulate job growth, subsequently reducing unemployment and increasing economic growth.
Removal of “red tape” is another key measure which aims to allow exemptions in the fringe benefits tax to cover “work-related portable electronic devices” as well as Capital Gains Tax relief for small businesses which are restructuring. This aims to increase productivity by allowing businesses to equip their employees with more technology and also to support businesses to improve their production capacity and resource allocation through restructuring, which in turn should support economic growth.

Other measures in this package such as a $1.2 billion wage subsidies pool for employers who employ long-term unemployed job seekers as well as the $330 million Youth Employment Strategy aim to further reduce unemployment and thus support economic growth. This is particularly necessary due to Australia’s high youth unemployment rate of over 13% (ABS, 2015). Other measures to reduce youth unemployment include $18 million in income support for the young unemployed to undertake work experience and thus support their transition into the workforce.

-        Families 
Currently there are over 165,000 people who are underemployed due to not being able to access adequate amounts of childcare (Budget Speech, 2015). This has seen the budget try to reduce this underemployment by increasing spending on childcare by $3.5 billion over 5 years, which includes a “Nannies Trial”, in order to allow these parents to work and thus in turn increase the amount of goods and services produced and increase GDP.

This increase in spending includes a childcare subsidy for families earning less than $65,000 receiving 85% of their fees subsidised with an hourly cap as well as a Child Care Safety Net which aims to support disadvantaged children, particularly those whom are disabled or come from non-English speaking backgrounds, receive childcare and support services.

-        Budget Stance and impact on economy
The budget has a net deficit of $35.1 billion as planned over the 2015/16 financial year. The net debt of the budget is 18% of the GDP which is a relatively low percentage of debt-to-gdp ratio compared to other major economies. There is a projected surplus in 2019/20.

All the budget measures, if passed, should increase economic growth to trend level over the 2016/17 financial year, due to measures that reduce unemployment and increase productivity. This is particularly targeted to non-mining sectors in an effort to broaden the growth base of the economy increasing non-mining sectors to contribute to economic growth as a larger percentage.

Sources:

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