Thursday, July 12, 2012

Collect information and review material from the media about the details of the Budget. Also investigate the likely impact of this Budget on the Australian economy for the next financial year and beyond.

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Australia¡¦s Budget 00-04 has started on 1st July 00 effectively. It is broadly divided into a number of categories.

¡P Economic outlook

¡P Fiscal outlook

¡P Personal income tax

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¡P Defence

¡P Education

¡P Health service

¡P The disadvantage

¡P Research and development

¡P Support for rural and regional Australia

¡P Energy reform for the future

Economic outlook

¡P The Australian economy is expected to enjoy solid growth despite the global economy is slowing down, in particular the US economy.

¡P Growth in 00-04 is forecast to be solid at .5%

¡P A moderate inflation of .5%

¡P The unemployment rate should be steady at around 6%

Effect on economy

As of rd July 00, US has cut their interest rate and it is expected that Australia may follow suit. With a low interest rate environment, businesses and homebuyers can continue to access to cheap finance. Therefore business should experience a solid growth. The continuing expansion of property market has a significant contribution to the strong economy of Australia and in the future years to come.

Property boom has occurred widely in Australia, although Reserve Bank has warned several times to property buyers of a bubble burst, the warnings has not been realised and the property market remains solid. There is some evidence that Melbourne apartment price started dropping due to oversupply.

Treasury¡¦s comments

The Treasury predicts rising house values, low interest rates and a tax cut should keep consumers shopping and the economy growing despite the grim international outlook.

On the downside, the Treasury warns there are considerable risks that could leave the economy weaker than expected.

Troubles on the Korean peninsula, and the spread of severe acute respiratory syndrome, have compounded the problems of weak growth in the US and Europe, the vulnerability of banks and insurance companies in Japan and Europe, excessive home prices in some countries and the dangers of deflation.

While the end of the Iraq conflict has cut international oil prices, Treasury warns The full impact of the high price of oil over recent months has not yet been seen.

For Australia, the risks are not as great, but Treasury warns the drought may continue and inflation may drift higher, which will mean interest rates rising from the official rate of 4.75 per cent. The outlook presumes interest rates will remain relatively low.

Exports are predicted to grow at 6 per cent but the exchange rate is assumed to stay at an average of US60c, 5c below this weeks high.

With the weakening of US dollar and increase in strength of Australian dollars, it will reduce the competitiveness of Australian exports.

Consumption remains robust, but any sustained deterioration in sentiment or a protracted period of slower growth in income or wealth could cause spending growth to slow as households move to consolidate their financial position, Treasury says.

Dwelling investment could decline more sharply than expected if the economic climate deteriorates and investors adopt a more conservative position.

While worried about soaring house prices overseas, Treasury is banking on moderate rises to continue to encourage consumers to keep shopping. If inflation and low interest rates are further capitalised into house prices, wealth accumulation could provide a further support for consumption.

But on investor-driven apartment buying, Treasury shares the alarm of the Reserve Bank at the rush into the market, and predicts a looming crisis, with the possibility of substantial oversupply and a sharp correction in prices and building activity.

Fiscal outlook

¡P This Budget will continue a sound fiscal management, as the Government is committed to maintain its good record.

¡P The 00-04 Budget provides a cash surplus of $. billion while delivering personal income tax cuts.

Effect on economy

With a cash surplus of $. billion, the government has enough money to operate efficiently and to achieve goals. This will help the economy in the short to medium term to perform as expected; provided that it is not affected by external factors such as interest rate cut in US.

Personal income tax reductions

¡P Australian taxpayers will share in personal income tax cuts worth $10.7 billion over the next four years.

¡P Personal income tax thresholds will be raised and additional assistance for low income earners will be provided through an increase in the low income tax offset from $150 to $5 per year and an increase in the income level from which the offset is reduced. For example, a taxpayer earning $5,000 per year will have a reduction in the tax they pay of $08 per year, a taxpayer earning $55,000 per year will save $448 per year; and a taxpayer earning $75,000 per year will save $57 per year.

Comments

With the cut in personal income tax, it is expected that Australians will have more money to be saved. However, some economists criticised that the small reduction in income tax is offset by the increase in bill payments.

Effect on economy

Peter Costello gave PAYE tax cuts of a mere $.4 billion. But PAYE collections have been rising at an enormous rate as Australians move quickly into high-income territory. A lot of Australians are reluctant to pay 47 per cent tax (plus a Medicare levy) on incomes above $6,500. More than half the new home loans in Australia are now investor loans led by negative gearing exercises aimed at reducing personal income tax and achieving capital gains taxed at half income tax rates. Therefore dwelling construction for last year has skyrocketed by 18 per cent and was a key driver of the economy.

In 000-01, PAYE collections were $75 billion. In 006-07, they are forecast to be $10 million ¡V a rise of $4 million, or 45 per cent, in five years. The $.4 billion cut represents only 7 per cent of the haul.

If dwelling investment keeps rising, and rates rise, the tax debate will intensify.

About 18 months ago, Reserve Bank governor Ian Macfarlane warned Australian houses were becoming the most expensive in the world in relation to income. But the surge of negatively geared buying (plus a large number of Australians returning home from abroad buying very expensive homes) pushed home values to new highs and maintained interest in new units.

If the US economy does well, then the pressure to lift Australian interest rates early next year will be intensified, unless the local dwelling market goes into a nosedive. Australians have substantially increased their debt so small rises will have a dramatic effect.

Stronger defence

¡P Increased spending on defence of $.1 billion over 5 years.

¡P $1.1 billion over 5 years to support funding for ships, aircraft and land-based specialist military equipment.

¡P $645 million over years for Australia¡¦s contribution to disarming Iraq and reconstruction activities.

¡P $157 million over the next 4 years for a Special Operations Command to enhance Australia¡¦s capacity to respond to threats to national security.

¡P $411 million to further upgrade Australia¡¦s existing domestic security arrangements

Comments

The budget suggests a shift away from the defence of Australia to supporting international operations in the war on terrorism. The favoured view is for a better investment in counter-terrorism in our intelligence and police agencies, rather than the special forces that performed so superbly in the Iraq war.

Effect on economy

The increase in spending on anti-terrorism on an international level can be viewed as strengthening the relationship with United States and UK. It also helps indirectly on improving the economic relation with United States and UK. With the increase in spending on security in Australia to protect Australians from terrorist attack, it helps to protect the economy from being disrupted. The World Trade Centre incident shows that the financial market could be disrupted temporarily and dragging down US share prices.

Education spending

¡P $1.5 billion over 4 years growing to an extra $870 million each year to strengthen Australia¡¦s higher education institutions.

¡P $775 million over three years from 005 will increase baseline funding. From 005 universities will able to set their course fees lower, as well as up to a maximum of 0% above standard HECS rates.

¡P A new Higher Education Loans Programme from 005 to improve access to higher education.

Effect on economy

The budget on education can be viewed as maintaining the current standard of education, if not improving on it. It affects the longer term of Australia¡¦s economy as the quality of human capital is always considered to be the key factor of success.

Comments

We have finally set universities free by allowing them to set their own fees, Education Minister Brendan Nelson commented. Universities will have the freedom to choose to be good at what they need to be good at and also what society wants them to be good at.

A changed university experience awaits new students. HECS fees can rise by up to 0 per cent for students beginning their courses in 005 and full-fee places for local undergraduates in public universities will double.

The flip side is that universities will enter a new world of competition by being free to draw maximum economic return from their academic strengths.

Sustaining first rate health services

¡P $4 billion to the State and Territory governments for public hospitals under the new Australian Health Care Agreements.

¡P $17 million over 5 years to make health care more affordable, particularly for concession cardholders and veterans.

Effect on economy

Although the budget is trying to maintain the current standard of health care system, it become more and more difficult to maintain the current standard in the future because of the aging population of Australia. Government can¡¦t continue forever to keep on allocating a higher and higher proportion of money into the health care system, otherwise it could disrupt the normal operation of the economy. In light of this, the government is trying to encourage private medical insurance by subsidising taxpayers on insurance premium.

Participation to address disadvantage

¡P $160 million over 4 years to provide better employment outcomes for people with disabilities.

Effect on economy

The budget takes the view that those who are disabled or disadvantaged are encouraged to be placed in the workforce. It helps partially to reduce the reliance on welfare benefit payments and also help Australia¡¦s economy to some extent.

Developing industry and innovation

¡P $150 million over 5 years to encourage additional investment in R&D in the pharmaceutical industry.

¡P $7 million in 006-07 to facilitate forward planning for longer-term research and development projects.

Effect on economy

The amount of budget spends on research and development is in no way compared to that of United States. In addition, for quite a lot of years, ¡§brain drain¡¨ has been happening. A lot of talented Australians scientists have moved to United States in search of better job prospect. Therefore the current level of budget could be viewed as maintaining the current level of progression in technology and pharmaceutical research. The impact on economy is minimal unless there is substantial breakthrough research.

Support for rural and regional Australia

¡P $740 million over years in the drought relief to provide direct financial assistance, personal counselling, employment services, as well as tax relief.

Effect on economy

The budget on drought relief is to restore back the international competitiveness on crop production. It may take a few years for the farmers to restore their full capacity of production and help Australia¡¦s export and contribute to the balance of payments.

Energy reform for the future

¡P Reforms to the fuel excise system

¡P To promote long-term sustainability and support production of cleaner fuels.

Effect on economy

Since the reforms promote long-term sustainability, it will help to maintain the stability of the economy in the medium to long term.



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