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Australia, along with virtually every other global economy, experienced the effects of the global finance crisis

( GFC ) a worldwide economic downturn brought on by a complex set of interrelated cause-and-effect circumstances originating predominantly in the United States. The GFC caused significant negative effects throughout the vast majority of world economies. Australia experienced contractionary economic conditions, falls in real GDP, consumption spending, and rises in unemployment amongst other effects. However, Australia has weathered the crisis stronger than all of the major developed world economics (Australian Bureau of Statistics, 2010), and has been described in the media as the strongest economy in the developed world (The Australian, 2009). Along with this speedy recovery however, a number of challenges in the short to medium term have been identified through various economic commentators. The 2011 Budget was presented by Federal Treasurer Wayne Swan on the 10thMay, and contained specific measures that will be discussed in this paper, in terms of their implications for Australia s economy with respect to the post-GFC environment. Recommendations for government fiscal and monetary policies key initiatives that have a pronounced effect on factors such as inflation, interest rates and unemployment (McTaggart, Findlay, & Parkin, 2010, p. 635) are discussed following this with the view of continuing economic growth, and maintaining low unemployment and low inflation into the future.

The 2011 Budget was delivered following a post-GFC environment, with the balance being in deficit approximately $54 billion dollars, or 4.3% of GDP at the time of the 2009-10 budget(Australian Government, 2011). This was largely contributed to by stimulus measures the Australian Government undertook in order to kick-start the economy and potentially avoid a technical recession - two periods of negative GDP growth(Heffes, 2009). The stimulus package however did have two key benefits it encouraged consumer spending as well as increasing government expenditure, both of which have a positive effect on GDP growth.

In terms of the measures undertaken in the 2011 Budget, the main focus was on returning the budget to a surplus position in 2012-13 of approximately $3.5 billion dollars (0.2% of GDP) (Australian Government, 2011). This included reducing government expenditure with $22 billion identified in savings, as well as limiting any real growth in spending across all areas. Other significant measures included incentives and programs designed to boost workforce participation, maintaining momentum for the mining boom (described as Mining Boom Mark II ) and selected spending on workforce training, such as $558 million to establish a National Workforce Development Fund designed to deliver quality training places.

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Having Australia return to surplus faster than any other major economy could be seen as a testament to the Australian economy having recorded markedly better growth outcomes than most other developed economies Australian Bureau of Statistics. has not returned to pre GF levels (Cleary. increase in imports and decrease in exports the situation currently facing Australia with reduced government spending in the budget. with decreases in government e penditure (G) and net e ports (X). Legend I = investment e penditure. if the $22 billion dollars of identified savings is analysed in terms of reducing government e penditure (as well as taking into account the high e change rate and subsequent higher imports/lower e ports discussed later in paper). G = government e penditure.0 1. as well as the high e change rate (causing reduced e ports and higher imports). with only Germany slightly less than Australia. Indeed. and therefore reducing Real GDP. 2010 . whilst higher. X = net e ports (e ports imports) and C = consumption e penditure. In this e ample.outlines other major world economies budget positions: Current Budget Positions of Selected World Economies Percentage of GDP 0 -2 Australia Germany Italy Canada France Japan UK US -4 -6 -8 -10 -12 The chart clearly shows that all of the listed major world economies are currently in deficit. the following scenario whereby aggregate e penditure and hence real GDP falls could very possibly occur: Reduction in Aggregate Planned Expenditure because of fall in government expenditure. aggregate e penditure falls from AE to AE1. I+G+X+C Price Level (GDP Deflator) 90 100 110 I+G+X I+G Real GDP (trillions) 0. Decreases are shown by the dotted lines. Business confidence.5   I       AE AE1          ©¢©¨ ¤  ©¦ ¨ ¦ § ¦ ¤ ¦¥ ¡ ¤ ¤ £¢¡   s e ve c s e g the budget to surplus would appear a valid and prudent objective it is worth comparing Australia s position to other world economies The following chart       Page 2 .51. however the question should be asked as to whether moving into a saving mentality so soon after the GF is actually the correct decision. 2010 and as such is still not at a level that could suggest that the GFC has been forgotten. could cause aggregate e penditure to fall.

aggregate supply in both the short term and long term increases. An area of concern identified by economic commentators relates to the possible major skills shortage resulting from the historically low unemployment rate. In this example. a nd firms will have greater costs and so won t supply the same level of output without increasing price (potential GDP does not change). i e Level (G 90 100 110 Specific measures in the budget that were designed to combat this skills shortage concern include establishing a National Workforce Development Fund to provide quality training places. This could result in a situation whereby the wage level rises significantly in order for businesses to attract skilled employees who are in limited supply.e.This could indicate that it may be in the government s best interests to continue with spending and other stimulus measures (though smaller than the 2009-10 package) in order to keep aggregate expenditure as high as possible. an increase in the full -employment quantity of labour causes short-run aggregate supply (SAS1) to shift right to SAS2. currently at 4. short-run aggregate supply will shift left from SAS1 to SAS2(as the wage rate increases. as does potential GDP. causing net exports to fall. Price level remains unchanged in this example at 100.9%). providing wage subsidies for the very long-term unemployed amongst others. # 0 91 0 11 Real GDP (trillions 2  short-term and long-term aggregate supply increase. In terms of the effect on potential GDP. These measures if successful will boost the workforce participation rate as well as expanding the total full-employment quantity of labour. introducing new requirements for some groups unemployed. for example those currently long-term unemployed find work or people return to work. to LAS1. A 1 In the short term. 2011). inflation of 10% in this example). w ithout wages increasing. an automatic stabiliser. In the long-run aggregate supply (LAS) andreal GDP does not change but the price level has increased from 100 to 110 (i. Long-run aggregate supply (LAS) also shifts to the right. and also reducing transfer payments. and the subsequent effect on LA Deflato A 2 Employer skills shortage because of very low unemployment (4. a large majority of skilled people are already employed and therefore labour needed for new private public projects is difficult to source. The situation is outlined in the economic model below 1 %% $ $ $ $ $ %% % '0 (' ( &) & . it will increase as both LAS LAS1 Pri e Level (GDP Deflator) SAS1 90 100 110 SAS2 Change in Potential GDP due to in rease in the quantity of labour if the full-employment quantity of labour increases.9% (Australian Bureau of Statistics. This is outlined below # "!  $ 0 51 0 Real G 15 t illions  Page 3 inflation and the price level rising. especially with the fall in exports and rise in imports due to the exchange rate.

the combination could cause net exports to fall contributing to a reduction in real GDP. is very important coming from the end of the GFC and given business confidence is still not at pre-GFC levels. and reductions in taxation will increase disposable income. 2008). a large level of exports has continued throughout. the RBA can then more aggressively target their inflation level of between 2 and 3% by way of contractionary monetary policy. in particular mining and minerals exports. The 2011-12 Budget makes specific mention of this. In terms of fiscal policy. noting that a Mining Boom Mark II is occurring. A rise in the exchange rate decreases aggregate demand (McTaggart. currency pressures the dollar is currently above parity with the US dollar. albeit slowing) (Yongsheng Zhang. Once confidence is running at pre-GFC levels. it could cause a sharp decline in aggregate demand and therefore drive the economy back into a period of contraction especially as consumers could still be weary of the GFC and also with business confidence still lagging somewhat. there is a risk that it could in due course. it is important that government spending does not rapidly fall in order to aggressively pursue the budget target of being in surplus by 2012-13. it is imperative that the RBA refrain from rapidly increasing interest rates through contractionary monetary policy in order to slow down the economy. Page 4 . has meant that the price of exports is significantly more expensive. such as coal. Findlay. In order to keep the economy growing as it currently is. however it is reasonable to assume inflation will grow higher as the economy moves into a period of growth as well as from the skills shortage pressures. mining boom contribution and increased consumer spending in the short-term. continuing the high demand and record prices for the raw materials. especially to China (which itself was experiencing a booming economy. and that the net terms of trade continued to hold strong and grow up to now(Australian Bureau of Statistics. However. Government spending of all kinds will continue to stimulate aggregate demand. steel and other goods. If interest rates are raised too high. Whilst the GFC significantly reduced commodity prices from near record highs beforehand. 2010). This significant level ensured that exports overall remained high. a number of important considerations must be taken into account by the RBA as well as the Government. which. In terms of future fiscal and monetary policies. 2010) and as such. as stated in the monetary policy paragraph above.The RBA continues to have a 23% goal level for inflation. Imports have also grown by more than 10% (Australian Bureau of Statistics. 2010) as now exports will be substantially more expensive and thus will likely be demanded in lower quantities.An area that has played a significant factor in Australia s economic growth as has been the makeup of Australia s export market. & Parkin. While this has not had an effect on the mining boom and demand for raw materials.

The mining boom demand for minerals has contributed towards Australia growing post GFC.Australia s economy has weathered the GFC well and its budget has been in the best position of many major economies around the world. For continued economy growth now and into the future. government monetary and fiscal policy decisions are of critical importance. concerns have been raised around the low unemployment levels causing skills shortages. and subsequent inflationary pressures. However. Page 5 .

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