The current global financial crisis has hit hard the economies of many countries. However the Australian government is doing much better than many other economies. What specifically should this be attributed to? How has Australia responded to the global financial crisis? The report below will try and explain some of these questions that economists have been trying to find out. The Reserve bank of Australia has made policies in response to the financial global crisis in a bid to solve the effects of the global recession. Due to the trade between the Australian and the Asian economies, particularly with China, the Australian economy has benefitted greatly from the growth that is being experienced in China. The Australian governments decision to put in place policies to correct the property bubble has had outstanding results. Restricting citizens from purchasing multiple homes, adjusting the bank reserve ratio to a higher value and increasing interest rates are some of the policies that have lowered the Australian real estate index consecutively for the past two months. This has been a good step that has cushioned its citizens from the effects of the global crisis. Sound management of the banking system in Australia has also ensured the Australian economy remains in good shape irrespective of the ongoing global crisis (Kennedy, 2009).
The Australian economy is mainly engaged in the delivery of services. Contrary to the belief of many people that the Australian economy is mainly an agricultural and mining economy, the service sector makes up the largest portion of the economy. This is clearly evident by the fact that about 1.2 million people work in the retail sector alone. This shows that the single largest employer of the Australian citizens is the retail sector. There are about 11.4 million people who are involved in the labor force. The annual Australian GDP in the current market exchange rate stands at around 1 trillion US dollars making the Australian economy the 14th largest economy in the world on the basis of exchange rates (Kennedy, 2009).
Australia and the global crisis
The global crisis affected the prices of real estate in Australia eventually making the real estates to be valued more than they are worth. This property bubble can be viewed as a type of economic bubble that is usually experienced in global or even local real estate. The valuations of housing may increase rapidly to levels that are considered unsustainable before they later decline. In the 1990s the Australian property market had been on the rise with prices increasing steadily at a rate of about 6% per year. In the recent years, the housing prices in Australia as compared to the average income of the citizens have been among the highest in the world (Kennedy, 2009).
A research done by the Reserve Bank of Australia (RBA) in 2009 discovered that investors had a tax advantage compared to people who were saving and being taxed up to 70% on the income they had generated from banks bonds and interests. The RBA discovered that in some areas in Australia, taxation treatment had been very favorable to investors as compared to other investors in other countries. Inflation was about 36% in the years between 1998 and 2000 with an increase in property prices increased by about 300% in all the major cities. A study by the Economist realized that Australian property as compared to the 20 countries they investigated was the most overvalued. In May 2010, a report in the Australian newspaper found out that house prices had increased to 20% in the 12 months to march. This financial crisis in Australia came about due to the change in the global economy that was largely experienced by many countries in mid-September 2008.The financial crisis that was being experienced globally intensified with the declaration of bankruptcy by the Lehman Brothers. The credit that was being provided dried up around the world causing business confidence to plunge. Many people were shocked by how fast the financial crisis had intensified rapidly affecting the real economy (Kennedy, 2009). The world economies all around beginning from US to Europe began to contract with businesses in Australia running down their stocks by approximately 3.4 billion dollars in the December quarter of 2008.
How the Australian government and Reserve Bank of Australia have performed
The Australian government introduced key economic reforms that turned their trade from the western market to the Asian region. This strategy has caused Australias economy to be ranked among the fastest growing economies when compared to other advanced economies. The government has also enhanced the strength of the resources and services industry leading to a well diversified economy. Most of Australias resources are exported to China. The exportation of iron ore to China has recorded a 45.2% increase in the last two years up from 266.2 million tonnes that were exported in 2009. China has also become the largest import market for Australia with major imports including sporting goods, furniture, toys, communications equipment, and televisions. This trade partnership with China has been the cause of the huge investments by Chinese firms in Australia. The mineral exports from Australia to China have also increased in the recent past due to the robust economic performance by China leading to some of the Chinese firms leasing land to undertake mining on their own (Kennedy, 2009).
The Rudd government in a move to respond to the financial crisis guaranteed bank deposits with payments to families, carers, and seniors. The government made these payments in December 2008 just before Christmas. This led to strong sales being experienced by retailers at around this time due to the increase in spending. The government also helped the automotive industry when it realized that most of the major lenders were withdrawing from the market. This left the banks to fill the remaining gaps in lending. In February 2009, the Australian government released $47 billion to help boost the economy. This money was allocated to various departments with $6.6 billion going to the construction of 20,000 homes, $3.9 billion for the insulation of 2.7 million homes, 14.7 billion dollars went to the schools, 890 million dollars for the repair of roads and infrastructure, small businesses receiving 2.7 billion dollars with every Australian earning less than 80,000 dollars to be paid $950 done in March and April 2009. These strategies taken by the government have really been helpful in dealing with the effects of the financial crisis (Congressional Budget Office, 2009).
The Australian government also legislate a financial claims scheme. The reserve bank of Australia intervened in the foreign exchange market by its decision to float the Australian dollar allowing the value of its currency to be determined by market forces with occasional intervention being done by the authorities. The RBA has also taken part in covering the governments foreign exchange needs together with correcting reserve holdings when they are affected by interventions. Due to this constant involvement with the foreign exchange market, the RBA is able to gather the information related to the functioning of the market (www.rba.gov.au).The government and the Reserve bank of Australia can be considered to have been successful in the last two years in dealing with the economic crisis.
There are three main objectives that the Australian government always aims to achieve. These objectives are economic growth, external balance, and internal balance within the economy (Nguyen, pg 1). The government aims that these three objectives should keep the inflation at a minimum value while in the process sustaining the economic growth of the nation. Foreign liabilities and debts are also limited by these objectives. The government influences demand whenever the fluctuations in the global economies threaten to affect Australias economy. This usually has the effect of maintaining sustained economic growth in a bid to keep unemployment and inflation low (www.rba.gov.au).
There are monetary and fiscal policies that are used to influence demand in the economy. In implementation of the fiscal policy, the government varied the amount of revenue and spending in the governments budget. The economic activities were also altered with a fiscal deficit, a balanced diet, or a fiscal surplus. Economic stabilizers are put in place such as tax receipts including transfer payments that come as a result of government spending which adjust with the economic state. The government also proposes reduced spending by its citizens as a measure to alter the economic activity deliberately. The stabilizers which are automatic play a counter-cyclical role within the budget but they cannot be depended on entirely to correct the full effects brought about by the cycle. To ensure that the effects of the cycle are fully countered, the government relies heavily on the discretionary fiscal policy. This is usually achieved when the government stimulates growth by increasing government spending while reducing taxation resulting in increased investment and consumption. In case the government needs to slow down the economy and in the process limit current account deficit as well as foreign liabilities, it undertakes a contractionary fiscal policy (Nguyen, pg2).
On the other hand monetary policy is undertaken by the Reserve Bank of Australia with the aim of influencing the availability of money and cost together with credit within the economy. Over time the objective of the monetary policy has always been to influence the interest rates to achieve internal balance. The purchase and sale of government bonds was done to correct a surplus or shortage of funds as a short-term measure in the money market. The RBA bought bonds to create excess liquidity relieving pressures on interest rates, investment spending, and allowing consumer boost with the end result of lowering unemployment. In case there are inflationary pressures, tightening monetary policy induces the sale of bonds by the RBA increasing interest rates dampening expenditure while soaking up funds (www.economywatch.com).
In the last two years the RBA has at times influenced the exchange rate as a way of maintaining stability keeping the monetary policy stance constant. The RBA sells and buys bonds equal to the Australian dollars that have been sold or bought as a sterilized intervention to maintain a constant flow of cash realizing a monetary policy stance that is constant. The dominant role to control unemployment and inflation while stabilizing aggregate demand has been played by the monetary policy in the last two years. Macro policy is now depended on to achieve internal balance. The success of the monetary policy has largely been helpful to keep inflation levels low, within the target range made by the RBA. Successful monetary policy has raised the growth with the result of reducing unemployment (Nguyen, pg 2). However, microeconomic reform is also used to help macro policies to deal with the supply-side barriers that aid the competitiveness of Australia internationally. But more effectively, the government has increased the strength of the Australias economy by encouraging healthy spending by consumers and business investment.
As seen in the report above, the Australian government together with the reserve bank of Australia was able to deal with the adverse effects of inflation by reacting quick enough and setting up policies that ensured the country maintained a sustainable economic growth. These measures cushioned its citizens from the bad effects of the global crisis such as inflation and rise in unemployment. The RBA followed the exchange rate market very closely and was always ready to react any time the market was moving in such a way as to hurt the Australian economy (www.rba.gov.au). These adjustments ensured that Australia survived most of the effects of the global crisis.
The government reacted positively by allocating some of the money in its budget to help out especially for citizens in the low income bracket. The money injected in the economy helped stabilize the economy leading to reduced inflation and unemployment. For this reasons Reserve Bank of Australia together with the government can be said to have successfully dealt with the global financial crisis in the last two years. Australias economy has grown to be one of the leading among the advanced economies and this happening at the same time the global crisis was being experienced serves as a strong indicator that the government and the RBA have been largely successful in the last two years.
The macroeconomic policies put in place by the government and the RBA have completely maintained internal as well as the external balance. A countrys internal balance goes a long way in boosting consumer confidence and lowering unemployment while reducing the prices of housing (Nguyen, pg 2). Direct trade with China which has a high economic growth was also a good strategy that impacted positively on the Australian economy. This was a timely measure that couldnt have a come at a better time than when the government needed to resolve the economic crisis.
Congressional Budget Office. 2009. Did the 2008 Tax Rebates Stimulate Short-Term Growth? Economic and Budget Issue Brief, 10 June 2009.
Economy Watch. The Australia economic growth. Retrieved November 8, 2011 from www.economywatch.com
Kennedy. S. 2009. Australias response to the global financial crisis. Retrieved November 8, 2011 from: http://www.treasury.gov.au/documents/1576/HTML/docshell.asp?URL=Australia_Israel_Leadership_Forum_by_Steven_Kennedy.htm
Nguyen, D. Macroeconomic policy in Australia. Retrieved November 8, 2011 from www.kewpid.net/notes/macro_reform.pdf
Reserve Bank of Australia. Foreign Exchange Market. Retrieved November 8, 2011 from www.rba.gov.au
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