Economy of Australia

Australia has a prosperous, Western-style market economy, with a per capita GDP slightly lower than those of the UK, France and Germany in nominal terms, but thanks to the lower cost of living, slightly higher in terms of Purchasing Power Parity. The Australian economy is dominated by its services sector (68% of GDP), yet it is the agricultural and mining sectors (8% of GDP combined) that account for 65% of its exports. Rich in natural resources, Australia is a major exporter of agricultural products, particularly grains and wool, and minerals, including various metals, coal, and natural gas. A downturn in world commodity prices can thus have a large impact on the economy.

Australia’s competitive advantage in primary products is a reflection of the natural wealth of the Australian continent and its small domestic market; 20.3 million people occupy a continent the size of the contiguous United States. Service industries have expanded in recent decades at the expense of the manufacturing sector, which now accounts for just under 12 percent of GDP.

Australia’s emphasis on reforms is a key factor behind the continuing strength of the economy. In the 1980s, the Australian Labor Party, led by Prime Minister Bob Hawke and Treasurer Paul Keating, commenced the modernisation of the Australlian economy by floating the Australian dollar in 1983, leading to full financial deregulation.

Current areas of concern to some economists include Australia’s chronically high current account deficit and also the high levels of net foreign debt owed by the private sector.

The Australian economy has not suffered a recession since the early 1990s. As of January 2006, unemployment was 5.3% with 10,034,500 persons employed. The service sector of the economy, including tourism, education, and financial services, comprises 69% of GDP. Agriculture and natural resources comprise 3% and 5% of GDP but contribute substantially to Australia’s export performance. Australia’s largest export markets include Japan, China, the United States, South Korea and New Zealand. Areas of concern to some economists include the high current account deficit and also high levels of net foreign debt.

Microeconomic reform

Other key reforms include unilaterally reducing high tariffs and other protective barriers; floating the Australian dollar exchange rate; deregulating the financial services sector– including a decision in late 1992 to allow liberal access for foreign bank branches; rationalizing and reducing the number of trade unions; efforts to restructure the highly centralized system of industrial relations and labour bargaining; better integrating the State economies into a national federal system; improving and standardizing the national infrastructure; and privatizing many government-owned services and public utilities.

Since 1996, the Coalition government, led by Prime Minister John Howard, continued to implement microeconomic reform policies. The microeconomic reforms of the Howard government have focussed on the labour market, and has attempted to reduce union power and involvement in the workplace. The Coalition government deregulated numerous other industries, including the telecommunications sector, and privatised many of the pre-existing monopolies. Since the recession of the early 1990s, the Australian economy has not suffered a recession in over 14 years. As of September 2005, unemployment had fallen to a level of 5.0 per cent, the lowest level since the late 1970s. The price of shares listed on the Australian Stock Exchange has also grown significantly since the early 1990s.

Many raw materials (including resources postulated to exist but yet to be discovered) remain mostly unexploited. Economists often refer to Australia as the “world’s farm”. The agriculture and natural resources sectors contribute significantly to GDP, both directly and indirectly, through associated services like road and rail transport networks, which in some areas exist entirely based on an industrial need, and supporting rural economies. In recent years the Australian government has been focusing on the development of the tourism, education and technology markets. The Australian government funds scientific research and development through universities, the Commonwealth Scientific and Industrial Research Organisation (CSIRO), and through joint ventures between the public and private sectors called Cooperative Research Centres.

Economic growth

The ultimate goal is for Australia to become a competitive producer and exporter, not just of traditional farm and mineral commodities, but of a diversified mix of value added manufactured products, services, and technologies. While progress has been made on this economic reform agenda–such as in opening the telecommunications market to competition–much remains to be done, particularly in the domestic arena.

While the near-term outlook is for continued economic expansion, Australia’s longer term prospects depend heavily on continued fundamental economic reform. There is a general consensus among the major political parties, management, and labour on the necessary features of this reform but significant divergence of views on the methods, pace, and degree of change required.

The influence of China’s economic growth has also fuelled Australia’s export growth in mineral and energy resources, with the recent Western Australian Liquified Natural Gas contract worth potentially $25 billion over the life of the project . China’s industrialisation has resulted in an export boom for resource corporations, and thus contributed to increasing the Australian Federal Government’s revenue stream from increased Company Tax takings. Australia’s trade with China is currently the fastest growing in the past decade, to become the third largest trading partner overall.

Recent changes by the Coalition Government on industrial reform, with particular regards to new laws for liberalising workplace contracts for small businesses under 100 employees, has resulted in some discontent among union groups and employee advocates. Critics argue that the laws will result in reduced worker entitlements in return for nominal financial compensation, which will thus impact on the social needs of individuals. Furthermore, it is argued that there is no economic evidence to support the government’s claims that the changes will stimulate productivity and raise wages. Nevertheless, businesses welcome attempts to improve productivity, and believe such reforms will benefit the Australian economic output as a whole.

The privatisation of Telstra will also be a major agenda for the government, potentially worth AUD$30 billion, as it seeks to retire public debt and build upon successive federal surpluses for a future capital reserve. Telstra’s privatisation is undergoing numerous consultations with various lobby groups, particularly rural areas which expect funds to be allocated for improving rural telecommunications infrastructure. Various proposals for privatisation to improve competition of Telstra’s natural monopoly over fixed lines, including the separation of Telstra’s wholesale communications and its retail division, have been seen as unsatisfactory by the current Telstra board for maximising the final share price.

Taxation

As a Federation, the political power between Commonwealth and State Governments is evenly spread out. This is why both the Commonwealth and the States have their own taxes. Obviously, taxes vary from State to State due to their different needs, populations, economics and budgetary position. However the majority of income for State Governments remains the Federal Government, for which the largest sources of revenue is income tax and business tax.

State taxation

States also have their own taxes so that they can fund the services they offer. For obvious reasons, tax rates vary from State/Territory to State/Territory. Certain States and Territories may not even levy certain taxes that are mentioned below.
Payroll Tax: tax levied on businesses.
Pokies Tax: tax levied on businesses who offer gambling services.
Land Tax: tax levied on people and businesses who own land.
Capital Gains Tax (CGT): tax levied on people/businesses who sell the following assets: cars, properties (there are more)
Vendor’s Tax: tax which is levied on people/businesses who sell property. It has been labelled as the world’s dumbest tax by some economist, since people alreay pay CGT when selling a property.
Fuel excise: all States impose a fuel excise of 4c per $1 of petrol sold.

Muncipal taxation

Local Governments, or as they are known in Australia, councils, have their own taxes so that they can provide garbage collection, park maintenance services, libraries and museums, etc.

Foreign trade

Weak foreign demand and strong import demand pushed Australia’s trade deficit up from US$8 billion in 2002, to US$18 billion in 2003, US$13 billion in 2004, and US$16 billion in 2005. The government is pushing for increased exports of manufactured goods, but competition in international markets continues to be severe.