Economy of Australia

Throughout this article, the unqualified term "dollar" and the $ symbol refer to the Australian dollar.

The economy of Australia is a prosperous, free market economy dominated by its services sector, representing 68% of Australian GDP. The agricultural and mining sectors (10% of GDP combined)^[1] account for 57% of the nation's exports.^[2]

The Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos (Keeling) Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu. The Australian Securities Exchange is the largest stock exchange in Australia.

Before Australia moved to the metric system, it had the old British system of money, weights and measures, including pounds, shillings, pence, half-pence and quarter-pence.

Overview

Australia is one of the most laissez-faire capitalist economies according to indices of economic freedom. Australia's per-capita GDP is slightly higher than that of the UK, Germany, and France in terms of purchasing power parity. The country was ranked second in the United Nations 2009 Human Development Index and sixth in The Economist worldwide quality-of-life index 2005.

The emphasis on exporting commodities rather than manufactures has underpinned a significant increase in Australia's terms of trade during the rise in commodity prices since 2000. Australia's current account is more than 7% of GDP negative: Australia has had persistently large current account deficits for more than 50 years.^[3] Australia has grown at an average annual rate of 3.6% for over 15 years, well above the OECD average of 2.5%.^[3] Australia's average GDP growth rate for the period 1901-2000 is at 3.4% annually.

As of September 2009, there were 10,770,200 people employed, with an unemployment rate of 5.8%.^[4] Over the past decade, inflation has typically been 2–3% and the base interest rate 5–6%. The service sector of the economy, including tourism, education and financial services, constitutes 69% of GDP.^[5]

Although Agriculture and natural resources constitute only 3% and 5% of GDP, respectively, they contribute substantially to export performance. Australia's largest export markets are Japan, China, the US, South Korea and New Zealand.^[6]

Rich in natural resources, Australia is a major exporter of agricultural products, particularly wheat and wool, minerals such as iron-ore and gold, and energy in the forms of liqufied natural gas and coal. Australia has a labour force of about ten million people.^[7]

In the past decade, one of the most significant sectoral trends experienced by the economy has been the growth (in relative terms) of the mining sector (including petroleum). In terms of contribution to GDP, this sector grew from around 4.5% in 1993-94, to almost 8% in 2006-07.

Growth in the services sector has also grown considerably, with property and business services in particular growing from 10% to 14.5% of GDP over the same period, making it the largest single component of GDP (in sectoral terms). This growth has largely been at the expense of the manufacturing sector, which in 2006-07 accounted for around 12% of GDP. A decade earlier, it was the largest sector in the economy, accounting for just over 15% of GDP.^[1]

Economic liberalisation

From the early 1980s onwards, the Australian economy has undergone a continuing economic liberalisation. In 1983, under Prime Minister Bob Hawke, the Australian dollar was floated and prudent financial deregulation was undertaken.

In 2000, the introduction of a goods and services tax (GST) sought to encourage the level of saving amongst lower income earners. To combat the consequential reduction in consumption for low income earners, income taxes were lowered as a trade-off for the introduction of the GST. The overall level of taxation in Australia has since been consistently reduced to encourage private consumption and investment, as opposed to higher government expenditure.

Current areas of concern to some economists include Australia's large current account deficit, Australia’s current account deficit for the 2007- 2008 financial year was up 4% to $19.49 billion (according to the Australian Bureau of Statistics), the absence of a successful export-oriented manufacturing industry, a real estate bubble, and high levels of net foreign debt owed by the private sector.

History

Taxation

Taxation in Australia is levied at the federal, state and local government levels. Taxes vary from state to state due to their different needs, populations, economics and budgetary positions.

The Commonwealth raises revenue from personal income taxes and business taxes. Other taxes include the goods and services tax (GST), excise and customs duties. The Commonwealth is the main source of income for state governments. As a result of state dependence on federal taxation revenue to meet decentralised expenditure responsibilities, Australia is said to suffer from a vertical fiscal imbalance.

State taxation

Besides receipts of funds from the Commonwealth, states and territories also have their own taxes to enable them to fund the services they provide. The types and tax rates vary from state/territory to state/territory. State taxes commonly include payroll tax levied on businesses, a poker machine tax levied on businesses who offer gambling services, land tax levied on people and businesses who own land and most significantly, stamp duty levied on sales of land (in every state) and other items (chattels in some states, unlisted shares in others, and even sales of contracts in some states).

Federal-state financial arrangements

The states effectively lost the ability to raise income tax during the Second World War. In 1942, the Commonwealth invoked its Constitutional taxation power (s.51 (ii)) and enacted the Income Tax Act and three other statutes to levy a uniform income tax across the Commonwealth. These Acts sought to raise the funds necessary to meet burgeoning wartime expenses and reduce the unequal tax burden between the states by replacing state income taxes with a centralised tax system. The legislation could not expressly prohibit state income taxes (s.51(ii) does not curtail the power of states to levy taxes) but the Commonwealth's proposal made localised income tax both practically impossible and politically poisonous. The Commonwealth offered instead compensatory grants authorised by s.96 of the Constitution for the loss of state income (State Grants (Income Tax Reimbursement) Act 1942)).

The states rejected the Commonwealth's regime and challenged the legislation's validity in the First Uniform Tax Case ([[South Australia v Commonwealth]]) of 1942. The High Court of Australia held that each of the statutes establishing Commonwealth income tax was a valid use of the s.51(ii) power, with Latham CJ noting that the system did not undermine essential state functions and imposed only economic and political pressure upon them.

The Second Uniform Tax Case (Victoria v Commonwealth (1957)) reaffirmed the Court's earlier decision and confirmed the power of the Commonwealth to make s.96 grants conditionally (in this case, a grant made on the condition that the recipient state does not levy income tax).

Since the Second Uniform Tax Case, a number of other political and legal decisions have centralised fiscal power with the Commonwealth. In Ha vs. New South Wales (1997), the High Court found that the Business Franchise Licences (Tobacco) Act 1987 (NSW) was invalid because it levied a customs duty, a power exercisable only by the Commonwealth (s.90). This decision effectively invalidated state taxes on cigarettes, alcohol and petrol. Similarly, the imposition of a Commonwealth goods and services tax (GST) in 2000 transferred another revenue base to the Commonwealth.

Consequently, Australia has one of the most pronounced vertical fiscal imbalances in the world, with states collecting just 18% of all governmental revenues but responsible for almost 50% of the spending and policy areas. Furthermore, the centralisation of revenue collection has allowed the Commonwealth to force state policy in areas well beyond the scope of its Constitutional powers by using the grants power (s.96) to mandate the terms on which the states spend money in areas over which the Commonwealth has no power (such as spending on education, health and policing).

Municipal taxation

Local governments (called councils in Australia) have their own taxes (called rates) to enable them to provide rubbish collection, park maintenance services, libraries and museums, etc.

Trade and economic performance

Australian exports in 2006

In the second half of the twentieth century, Australian trade shifted away from Europe and North America to Japan and other East Asian markets. Regional franchising businesses, now a $128 billion sector, have been operating co-branded sites overseas for years with new investors coming from Western Australia and Queensland.^[8]

The Australian economy has been performing nominally better than other economies of the OECD and has supported economic growth for 16 consecutive years.^[9] According to the Reserve Bank of Australia, Australian per capita GDP growth is higher than that of New Zealand, US, Canada and The Netherlands.^[10] The past performance of the Australian economy has been heavily influenced by US, Japanese and Chinese economic growth.

Despite high global demand for Australian mineral commodities, export growth has remained flat in comparison to strong import growth. Even though Australia enjoys high commodity prices, economists have warned that structural change is needed in order to increase the size of manufacturing sector.

Chinese investment

There is substantial export to China of iron ore, wool, and other raw materials and over 120,000 Chinese students study in Australian schools and universities. China is a major purchaser of Australian debt. In 2009, offers were made by state-owned Chinese companies to invest 22 billion dollars in Australia's resource extraction industry.^[11]

Australia's balance of payments

In trade terms, the Australian economy has had persistently large current account deficits for more than 50 years.^[12] One single factor that undermines balance of payments is Australia's narrow export base.

Dependent upon commodities, the Australian government has endeavoured to redevelop the Australian manufacturing sector. This initiative, also known as microeconomic reform, has helped Australian manufacturing to grow from 10.1% in 1983-1984 to 17.8% in 2003-2004.^[13]

There are other factors that have contributed to the extremely high current account deficit that Australia has today. Lack of international competitiveness and heavy reliance on capital goods from overseas might increase Australia's current account deficit in the future.

See also

• Australian federal budget
• Australian Securities Exchange
• Median household income in Australia and New Zealand
• List of Australian states and territories by gross state product

Federal entities:

• Austrade
• Reserve Bank of Australia
• Productivity Commission

Major sectors:

• Agriculture in Australia
• Media of Australia
• Mining in Australia
• National Electricity Market
• Telecommunications in Australia
• Tertiary education exports
• Tourism in Australia
• Transportation in Australia

By state:

• Economy of Western Australia
• Economy of Tasmania
• Economy of New South Wales
• Economy of Queensland

Notes

References

• Macfarlane, I. J. (1998). "Australian Monetary Policy in the Last Quarter of the Twentieth Century". Reserve Bank of Australia Bulletin, October 1998 (Adobe Acrobat *.PDF document)
• Parham, Dean. (2002). "Microeconomic reforms and the revival in Australia’s growth in productivity and living standards". Assistant Commissioner - Productivity Commission, Canberra Conference of Economists Adelaide, 1 October 2002 (Adobe Acrobat *.PDF document)
• Some statistics on this page have been drawn from publications of the Australian Bureau of Statistics.
• OCED Factbook 2006 (Gini coeffcients) OCED Factbook 2006 pdf

External links

• Australia Economy
• Australia page @ Organisation for Economic Co-Operation & Development (OECD)
• Economic Survey of Australia @ OECD
• Monthly Economic and Social Indicators (Australian Parliamentary Library)
• Quick Reference Tables for the World Bank's 2005 data
• Harcourt, Tim. (2005). "Introducing the twenty five billion dollar man: how the LNG deal was won". Chief Economist - Australian Trade Commission - Sydney - 26 March 2003
•  This article incorporates public domain material from the CIA World Factbook document "2005 edition".

• - "Australian Country Information" @ the Australian Department of Foreign Affairs & Trade
• Invest in Australia

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