4.12 The transmission mechanisms of monetary policy and their influence on the level of aggregate demand

TABLE 4.6 Three stages in cutting personal income tax rates passed by the parliament, after modifications to stage 2 in 2020

Stage 1:

Covering 2018–19, 2019–20

Taxable income Tax rate Stage 2: Covering 2020–21 and 2023–24 Stage 3: Covering 2024–25 onwards

Taxable income Tax rate Taxable income Tax rate

$0–$18 200 Nil $0–$18 200 Nil $0–$18 200 Nil

$18 201–$37 000 19% for amounts over $18 200 $18 201–

$45 000

19% for amounts over $18 200 $18 201–

$45 000

19% for amounts over $18 200

$37 001–

$90 000

$3572 + 32.5% for amounts over $37 000 $45 001–

$120 000

$5092 + 32.5% for amounts over $45

000

$45 001–

$200 000

$5092 + 30% for amounts over

$45 000

$90 001–$180 000 $20 797 + 37% for amounts over $90 000 $120 001–$180 000 $29 467 + 37% for amounts over $120 000

$180 001 and over $54 097 + 45% for amounts over $180 000 $180 001 and over $51 666 + 45% for amounts over $180 000

$200 001

and over

$51 592 + 45% for amounts over $200 000 Note: Key tax changes at each stage are shown in bold. Source: Source: Australian Taxation Office, ‘Individual income tax rates’. Recent increased government investment spending on building national infrastructure Each of the 2019–20, 2020–21 and 2021–22 budgets announced huge increases in government capital spending to help improve and build national infrastructure projects. As an aggregate demand budgetary policy initiative, increasing government investment spending (G2) helps to strengthen AD, and cause more orders and falling levels of unsold stocks of goods. Firms should then be encouraged to lift production, boosting economic growth and the employment of resources, helping to create more job opportunities and lowering unemployment, especially in the long-term. • The 2019–20 budget committed an additional $25 billion to the rolling Ten-Year Infrastructure Plan or pipeline, taking the total government spend to $100 billion. This included an extra $3 billion for the Urban Congestion Fund to help cut urban travel times and to provide for improved parking at railway stations, $2 billion for the Geelong-Melbourne fast train project to halve the journey and $100 million for regional airports. • The 2020–21 budget promised a rise of $14 billion for building national infrastructure, over and above that previously committed to the rolling 10-year plan, thereby bringing the total to $110 billion. The current flow of projects include the Melbourne to Brisbane Inland Rail, the $5 billion Western Sydney International Airport and the $10 billion Bruce Highway Upgrade (Qld). These projects represent a rise in G2 spending to support AD, and help create an extra 40 000 jobs around Australia. There is an additional $3 billion for accelerating the start of shovel ready, small-scale projects creating a further 10 000 jobs. • The 2021–22 budget added an extra $15.2 billion to funds available for the rolling Ten-Year Infrastructure Plan, restoring the total to $110 billion. This hopes to create up to 30 000 new jobs. For example, in Victoria, $2 billion is set aside for the Melbourne Intermodal Terminal, and the Pakenham and Monash Road Upgrades. In NSW, there is $2 billion for the Great Western Highway. In addition, there is also $3.5 UNCORRECTED PAGE PROOFS billion for the National Water Grid Fund to build water infrastructure and dams designed to help prepare for future droughts and grow export capacity. Figure 4.15 shows some of the Australian government’s major projects already under way in Victoria and new commitments in 2021–22.

FIGURE 4.15 Australian government infrastructure spending in Victoria as part of the Ten-Year Infrastructure Plan to improve transport, reduce congestion and create jobs

Victorian infrastructure As part of the 10-year infrastructure pipeline, the Commonwealth Government is committing an additional $3.4 billion towards Victorian infrastructure projects, helping support jobs and livelihoods across the State.

Melbourne Intermodal Terminal — $2 billion Pakenham Roads Upgrade — $380 million Monash Roads Upgrade — $250 million

Hall Road Upgrade — $56.8 million $203.5 million for local road and community infrastructure projects Western Port Highway Upgrade — $30.4 million $170 million for road safety projects

Princes Highway East, between Rosedale and the New South Wales border — $51.1 million • Melbourne Airport Rail Link — $5 billion • Geelong Fast Rail — $2 billion • North-East Link — $1.8 billion • Suburban Roads Upgrades — South-Eastern Roads and Northern Roads — $1.1 billion 2021–22: $3.4 billion in new commitments Major projects underway Source: Above material copied directly from The Australian Government, 2021–22 Budget, Creating Jobs and Rebuilding our Economy, see https://budget.gov.au/2021–22/content/jobs.htm21. 4.8.2 The effect of budgetary measures on the achievement of domestic macroeconomic goals and living standards Overall, the pace of economic activity has not been optimal over the last few years for achieving Australia’s domestic macroeconomic goals and improving living standards. Nevertheless, without the operation of automatic and discretionary budgetary stabilisers, things almost certainly would have been worse. In this section, we will quickly review examples of specific budget measures that recently attempted to improve each of the three macroeconomic goals and living standards. Budgetary measures to help strengthen economic growth Following the recession in 2020, the budget introduced measures to maintain spending, production and economic growth. These included the following: • The operation of automatic stabilisers in 2020–21 meant reduced receipts decreased and increased welfareUNCORRECTED PAGE PROOFS outlays, helping to support C, I and G spending, AD and GDP. More recently in 2021–22, the operation of automatic stabilisers slowly reduced the budget deficit and withdrew some of the stimulus. Measures included: • The temporary JobKeeper wage subsidy payments helped to maintain C spending. • Ongoing instant tax write-offs for capital items boosted I spending.

• The temporary doubling in the generosity of JobSeeker allowances helped to maintain disposable incomes and retain C spending. • Reductions in the rates of company tax and personal tax continued to help boost I and C spending, and hence AD. • The temporary early access to superannuation helped to lift C spending. • Special financial support for hard hit sectors and industries (like aviation, tourism, education and home building) gave a temporary lift to C and I spending. • The ongoing boost to G capital spending on building national infrastructure (e.g. NBN, airports, rail, road and power) helped to lift G2 and maintain AD. Budgetary measures to help reduce unemployment With high cyclical unemployment starting in early2020, budgetary initiatives were needed to stimulate AD and production. For example, we might think of the following: • In a general way, recent large budget deficits were able to limit the rise in cyclical unemployment through the quick and effective operation of expansionary automatic stabilisers. These slowed receipts relative to welfare outlays, helped to maintain AD, GDP and employment. • The temporary JobKeeper wage subsidy scheme was very important in keeping people employed, who otherwise would have been dismissed. This kept the unemployment rate to a monthly high of 7.5 per cent, rather than around 11.4 per cent had the scheme not been used. • The $1 billion JobTrainer scheme provided cheap or free training courses to the unemployed, making them more employable and more likely to earn income. • Some ongoing reductions in company and personal tax rates helped to stimulate C and I spending, AD, production and employment. • Increased government outlays on building national infrastructure projects helped to create jobs and increase the demand for labour. • The temporary industry financial support payments in hospitality, tourism, education and aviation, all helped to maintain the viability of businesses and employment. Budgetary measures to help reduce cost of living pressures Although overall, inflation has been quite low, there was a jump recently during 2020–21 and early 2021–22. Given that some individuals had been unemployed and others had reduced incomes, recent budgets made some attempt to ease cost of living pressures: • A temporary increase in the generosity of welfare payments and reductions in some tax rates helped by increasing disposable incomes. • The introduction of the First Home Loan Deposit Scheme, with a deposit of as little as 5 per cent, helped to make home ownership more achievable. • There was increased assistance to cover childcare costs. Budgetary measures to help support living standards Living standards are affected by both income and non-material elements. All the budget initiatives already mentioned in this review section directly or indirectly help to improve our wellbeing. However, in addition, we might also think of the following measures that sought to promote our quality of life: • The massive COVID-19 vaccination and testing program, costing over $5 billion in the budget, has helped to keep us safer. It has increased our material wellbeing by allowing the economy to reopen faster, so people could return to work and earn incomes. It has also reduced fatalities and the proportion of people suffering serious illness.UNCORRECTED PAGE PROOFS • There is an almost $2 billion support package for promoting low-emissions technologies, administered by the Clean Energy Finance Corporation and the Australian Renewable Energy Agency. • Increased spending on education to $44 billion a year should not only help to increase labour productivity and incomes, but also improve the prospects or finding satisfying jobs.