Fiscal Policy

Forecasted trend: Tightening of fiscal policy, increase taxes and reduction in government spending to reduce deficit. Australia reported a budget deficit equivalent to 4.3 percent of the Gross Domestic Product (GDP) in 2009/10 fiscal year. This indicates the government spends more money than it took. The 2011/12 Commonwealth budget represents a tightening of fiscal policy of 2.1%/pts of GDP over the year. From a deficit of $A54.75bn, 4.3% of GDP in 2009/10 to a projected surplus of $A3.5bn, 0.2%, in 2012/13, fiscal policy will be tightened by 4.5%/pts of GDP. However, this aggressive fiscal policy tightening follows on from the GFC-related fiscal policy easing of a massive 6%/pts of GDP over 2008/09 and 2009/10. For 2011/12 the budget deficit is estimated at $A22.6bn, or 1.5% of GDP, down from the 2009/10 deficit of $A49.4bn, 3.6% of GDP. These budget deficit estimates are far higher than the previous forecasts of $A12.3bn, 0.8% of GDP for 2011/12 and $A41.5bn, 3.0%, in 2010/11, with most of this deterioration due to the cost of the natural disasters and lower-than-expected revenue collections. Over 2011/12 the tightening of fiscal policy will come via an array of savings worth $A22bn over 4 years, including changes to family payments, cuts in defence spending, the introduction of the flood levy, tighter concessions around private health insurance, changes to tertiary education fee discounts and general efficiency savings across the public sector. This will be partly offset by increased spending measures worth $A19bn on skills and training, workforce participation policies, and infrastructure and health spending, especially in the regional areas. Conclusion: This tightening of fiscal policy will result in a reduction of interest rates. Since the government deficit will reduce, the government can borrow at a lower cost and thus interest rates will reduce.

Unemployment

Forecasted trend: Relatively stable Australia's unemployment decreased 5,700 (0.9%) to 630,800. The number of persons looking for parttime work decreased 15,400 to 165,800 and the number of persons looking for full-time work increased 9,800 to 465,000. Employment increased 10,100 (0.1%) to 11,462,300. Full-time employment increased 20,000 persons to 8,067,500 and part-time employment decreased 9,900 persons to 3,394,800. The male unemployment rate increased 0.1 pts to 5.3% and the female unemployment rate decreased 0.2 pts to 5.2%. The participation rate decreased 0.1 pts to 65.6%. Aggregate monthly hours worked increased 10.4 million hours to 1,626.0 million hours. Conclusion: Unemployment will not have a significant impact on interest rate as it is expected to be stable at around 5%.