The Australian Economy – How Does It Work?

A Guideline into the Australian Economy

Australia is an important country among the Asia Pacific nations, in terms of wealth it is one of the wealthiest nations in the Asia Pacific region, which has had a relatively stable economy compared to rest of the world economies. The stability of the Australian economy comes from a few basic factors that have allowed the Australian economy to expand at a steady rate over two decades.

In this article we shall try to briefly look at the Australian economy, its strengths and weaknesses and see how it works.

1. Economic Freedom and Stability

The economic freedom index was set up in 1995 to measure the degree of economic freedom in any economy. Economic freedom looks at factors such as fairness and uniformity in policies and economic stability.

Australia’s current economic freedom score is 82.6 that puts it in the 4^th spot for the freest economy in 2020. The economic freedom score of Australia has improved since last year on account of the fiscal policy and increase in political stability in the country. Australia’s economic freedom score is significantly higher than rest of the Asia Pacific economies. Australia has been highly rated in terms of economic freedom since 1995 and this fact alone is a testament to the reality that the secret to the economic freedom of Australia has been its economic and political stability.

Read More: The Economy of Australia

The Australian government is focusing now to promote investments in local infrastructure, finance sector areas such as digital payments, crypto currency and tokenisation and cyber security. The government is also pondering upon revamping its local regulatory framework to accommodate cryptocurrencies and asset tokenisation. These moves are expected to democratise Australian economy even more and thus

Without any doubt, the secret behind the success of any country lies in its political and economic stability. Countries need long term stable policies to foster a healthy and incubative environment for their industries and Australia has had just that. The current growth rate of Australia is 0.5%, while this may seem low but if we look at the past 20 years then we see that on average the growth rate of Australia has hovered between 0.5% to 2.5% steadily. This shows that the Australian economy has had plenty of time to grow at a steady rate. The growth and development of the economy has been sustained and gradual.

Figure 1(GDP)

Figure 1 shown above, shows the GDP of Australia over the last five decades. It can be seen that the GDP started rising exponentially in the new millennium and after a brief period of the slump in 2013-2015 it is now recovering and on an upward trajectory.

Steady Growth Rate

The thing about having a steady growth rate, instead of an incremental growth rate is that it allows all sectors of the economy to develop at their natural pace and this in the long term stabilises the economy. In order to understand this, if we look at China, China pursued an aggressive trade based expansionary policy in the last decade and this allowed the country to achieve a very high growth rate however in the last couple of years the focus in China has shifted to a more consumption based economy and this has resulted in a reduction in the growth rate because the local consumption means that the focus from the export sector is shifting to local demand. This doesn’t mean that China is going to lose its economic prowess, no but it shows us that when you go for high growth you cannot take all the sectors together in a sustained manner.

Australia on the other hand has had gradual growth and this has allowed all sectors to develop at their natural pace therefore making the economy far more stable than its international competitors. If we have a look at the international competitiveness of Australia then we can see that Australia is internationally competitive in

• Financial and insurance services
• Technology
• High value manufactured goods
• Mining
• Agriculture

These are the five most internationally competitive sectors of Australia. In light of Ricardo’s competitive advantage theory, these are the sectors that Australia exports to the world because Australia has competitive advantage in them. As you can see, these sectors cover all three basic sectors of the economy namely primary, secondary and tertiary sectors. Thus, it proves that Australia has got a very well balanced economy that is not overly dependent on any single sector.

In order to facilitate trade, Australia has entered into Free Trade Agreements with countries such as U.S, China, South Korea, Japan and the association fo South East Asian nations. These FTA`s allow Australia access to these international markets and this has further helped the growth of Australian export sector.

Read More: China and its impact on Australia

2. Judicial System

The strength of any economy comes from economic and political stability as we have just discussed and stability in turn comes from a robust justice system. The legal frameworks in Australia as very strong when it comes to property rights, corruption, expropriation, and contracts. The just legal system of Australia ensures that the system runs smoothly without any inconvenience and this results in stability that leads to economic growth.

The judicial system is also supported by the political set up of Australia which has made the judicial system of Australia independent and impartial. These two factors indeed are the key for any good judicial system and as far as Australia is concerned the judicial system is fulfilling its role in an amicable manner.

3. Revenue Generation

When it comes to income tax rates, Australia has a top income tax rate of 45% and a flat rate of 30%. The tax burden on an average Australian is around 27.8% of their total domestic income which means that the personal disposable income in Australia is around 72% which is better than world average.

Figure 2 (Fiscal Expenditure)

Figure 2 shown above shows the fiscal expenditure which refers to spending in the public sector in Australia. The graph shows that fiscal expenditure has gradually increased over the years and this signifies that there has been a constant move to increase expenditure on the public sector on public welfare works, social security and unemployment benefits.

In the wake of the Covid-19 pandemic the Australian government was one of the first one in the world to introduce a package to support the people who would get affected by the pandemic in any manner.

4. Regulatory Framework

Australian services sector is quite robust and strong and this can be seen by the fact that the Australian financial and services sector is one of the major exporters of Australia and recently Australian financial firms have also been allowed entry into Chinese markets. This shows that the regulatory framework in Australia is one of the world’s most transparent regulatory frameworks and the regulatory environment in Australia is also very efficient. The process of decision making when it comes to regulations is an inclusive one where all relevant parties are consulted before any decision is made and this makes Australian regulations so effective and efficient.

Conclusion

To conclude this discussion it can be summarised that the real power of the Australian economy comes from its internal and external stability. The socio economic and political stability in Australia has allowed the country to progress at a steady rate and build a well balanced and diversified economy that is a major player in world trade. Australia makes a good case study for economies that are struggling to progress, Australia shows that in order to grow sustainably countries need to focus on socio economic stability, sound and just judicial system and transparent and open regulatory framework to support market activity.

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