Statement 1: Budget Overview Economic and Fiscal Outlook The Australian economy has proved remarkably resilient to the ongoing impacts of the pandemic, consistently outperforming expectations and exceeding pre-pandemic levels of activity by more than the major advanced economies. A strong economic recovery is well underway, notwithstanding the pandemic and new shocks, such as the recent floods in Queensland and New South Wales and the Russian invasion of Ukraine. Economic growth forecasts have been revised upwards, driven by stronger-than-expected momentum in the labour market and consumer spending. Real GDP is expected to grow by 4% per cent in 2021-22, 3½ per cent in 2022-23 and 2½ per cent in 2023-24. The unemployment rate reached 4.0 per cent and the participation rate reached a record high of 66.4 per cent in February 2022. The continued recovery in economic activity is expected to see the unemployment rate reach 3% per cent in the September quarter of 2022, nearly 3 percentage points below the Budget forecast from 2 years ago and the lowest level in close to 50 years. The strong labour market is expected to see wages growth accelerate to its fastest pace in almost a decade with growth in the Wage Price Index forecast to increase from 2% per cent in 2021-22 to 3% per cent in 2022-23. Broader and more representative wage measures are picking up more quickly as workers take advantage of the tight labour market, with average earnings per hour expected to increase by 5 per cent through the year to the June quarter of 2022. Australia has been affected by global inflationary pressures such as elevated oil prices and supply chain disruptions, but domestic inflationary pressures are more moderate than in many other advanced economies. Headline inflation in Australia picked up in 2021 to be 3.5 per cent to the December quarter. Australia's inflation is expected to moderate from 4½ per cent in 2021-22 to 3 per cent in 2022-23 and 2% per cent in 2023-24.
Fiscal policy and managing government budgets
The Budget reported that the Government is forecasting an economic growth rate of 4.5 per cent for a 2021-22 financial year. It noted that the unemployment had fallen to a low of 4.0 per cent, and is forecast to fall to 3.5 per cent in the September quarter of 2022. The Budget also noted that the Australian economy had been affected by global inflationary pressures.
See excerpt from the Budget Statement below:
a) Your Policy Brief needs to provide some background information on the role of fiscal policy in the economy and to explain what is meant by the ‘fiscal multiplier effect’. One of your colleagues have drafted some content (see the two paragraphs below) but your task is to check this content for accuracy. In the following two paragraphs, identify any content that is inconsistent with the concepts that we have learnt in this course, and provide a fully corrected version.
"There are three levers of fiscal policy: (1) government production of goods and services, (2) taxes, and (3) budgets. In relation to expansionary policy, the fiscal multiplier effect refers to the increase in overall GDP that results from an increase in an autonomous component of aggregate demand (such as government expenditure), minus the impact of the initial expenditure on the government’s budget. There is a risk that expansionary fiscal policy will crowd out some private investment, because government spending creates extra competition for limited inputs. Expansionary fiscal policy puts pressure on the economy’s price level, leading to rise in interest rates which can discourage investment and also net exports. However, crowding out is only likely to be a concern when the economy is in a deep contraction phase of the business cycle and operating far below productive capacity. "
