The government expects economic growth to be rising from 2.5% in 2006-0717 to 3.75% in 2007-0817, as shown in the graph. This might occur due to an expected increase in mining production, which has added $55 billion17 into the Australian economy during the last five years. High wages is also expected to occur, rising consumption levels to an expected 3.5% in 2007-0817, and thus economic growth. In addition, business investment is also expected to increase by 7.5% in 2007-0817. As well, world economy is expected to grow by 5% in 2007-0817. If the global economy grows, hence global consumers would enjoy higher disposable income, allowing them to purchase more Australian exports; leading to the domestic economic growth.
Having high economic growth leads to higher real GDP per capita (US$ 32,220, 14th rank18, 2.8%18 real GDP per capita growth per year) and thus contributing to a well-established Human Development Index (0.957, 3rd rank19). In addition, it has as well reduced unemployment rate by 0.6%20 between May 2006 and May 2007. As a result, transfer payments given would be reduced; contributing to a improved budget deficit and thus prevent a worsened “crowding-out effect”, in which the government is forced to borrow from the domestic sector. As a result funds availability would be limited, pushing interest rates up and discouraging investment and economic growth. Nevertheless, demand-pull inflation also tends to rise. The RBA expect inflation rate to be 2.5%21, which is the bottom of its inflation target rate of 2-3%, which may worsen inequality in the long term. Moreover, since people are enjoying higher income, hence demand for imports increases, leading to a worsened balance on goods and services and thus worsen the CAD as well. In April 2007 the CAD was -962 $ million22, resulting from higher imports (19041$million22) than exports (18079$million22). Furthermore, the environment is as well suffering from higher level of pollution due to increased production. In New Zealand 900 people are dying each year due to air pollution23, which will reduce Australia's standard of living and increase welfare payments for those unable to work due to having diseases caused by pollution, contributing to a higher budget deficit and may lead to an “crowding-out effect”.
Unemployment
Since high economic growth is expected, hence low unemployment is expected to occur. The government also expects participation rate to reach record levels (65%) in 2007-0821, maybe due to the provision of the Disability Support Pension and the Parenting Payments recipients21.
High employment means higher living standards, since employees are able to enjoy higher wages and thus are better able to satisfy their needs and wants. This would in turn producing economic growth and inflation, since demand for goods and services increases. Nevertheless, the government is not required to pay large transfer payments, thus improving the government budget balance, which reduces the possibility of the “crowding-out” effect. In addition, income inequality might be improved for the short term, since incomes for low-income earners increases; but in the long run revenue for high-income earners would increase due to higher demand of its products and thus producers would charge higher prices. As a result, inflation occurs and inequality might be worsened.
Inflation
The government is expecting inflation to fall from 2.75%24 in 2006-07 to 2.5%24 in
2007-08; as shown in the graph. This might occur, since products which have caused inflation, is expected to stabilize. However, the falling inflation might occur due to improved productivity, thus reducing labor costs. Nevertheless, inflation still tends to be high, since the RBA targets inflation rate between 2-3%.
Having high rates of inflation discourage investment, since producers are uncertain about future prices and costs, thus reducing economic growth and rising unemployment. However, consumers will then spend more than save, since their purchasing power parity is reduces over time. As a result, low national saving levels would be worsened, hence forcing Australia to borrow from overseas, leading to a higher CAD, the “crowding out” effect and thus reduce international credit rating, depreciating its exchange rate; worsening its external stability. Additionally, if its purchasing power is reduced, hence they are less able to purchase their needs and wants, contributing to a lower standard of living.
Moreover, it might experience a wage-inflationary spiral, since at high inflation, employees demand higher wages which firms transfer the costs by charging higher prices and so on. As well, it would worsen income distribution, since wages of low income earners does not rise as fast as prices and they also face higher interest rates on borrowings.
External Stability
The CAD is expected to increase by 6%25, as shown in the graph. This is caused due to expecting import to rise25, outpacing growth of exports volumes. As well, export prices are expected to fall25. This might occur, since Australia has an export base consisting of primary goods, which incorporates fluctuative prices due to natural disasters as well as low prices, since low value is added. While Australia has to import advanced goods, such as technology, which is highly priced. Thus, since inflow in the current account tend to be low, while outflow tend to be high, hence creating a higher CAD. As CAD is expected to rise, hence net foreign liabilities would as well increase, since Australia has to finance its CAD. However, since export is expected to grow, thus leading to an appreciation.
