Australia will have to face the consequences of its education gap


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Australia has experienced growth in its education sector, which has seen billions of dollars to Australian human capital over the past decade. More student are staying in high school later, with the national year 12 retention rate increasing to 87% from 74.7% over the past decade. The proportion of Australians aged 20 – 64 who have a Certificate III qualification or a bachelor degree has risen from 47% in 2005 to 60% and 21% to 30% respectively. However, a large proportion of voters still do not have any post-school education which creates a large gap education gap. Employment in highly skilled industries has grown faster than low skilled workers who face competition from new migrants, offshoring and robots. This gap presents a significant economic and political challenge to Australia in the future.

How does this relate to the HSC syllabus?

  • Increasing education levels of employees and potential employees in Australia represents improving human capital. Given human capital is a factor of production, an improvement in human capital will lead to a more productive economy and an increase in aggregate supply (Preliminary Topic 4 – Labour Markets; HSC Topic 3 – Economic Issues). This increase in aggregate supply will lead to an increase in economic growth in the long term without inflationary pressure (HSC Topic 3 – Economic Issues).
  • An education gap can lead to an entrenchment of unemployment for unskilled workers. Given that the economy is becoming more service based, Australia requires more skilled workers. Since labour is a derived demand, decreasing demand for unskilled workers will see unemployment rise in this segment (Preliminary Topic 4 – Labour Markets; HSC Topic 3 – Economic Issues). Demand for unskilled workers is further expected to decrease as businesses increasingly offshore their processes, or substitute labour for capital.
  • A large education and skill gap will most likely lead to a more inequitable distribution of income (HSC Topic 3 – Economic Issues). Since higher skilled workers tend to earn more income than low skilled workers, an increasing gap will see the wage gap between these workers increase. Furthermore, Australia’s growing services sector will see more funds allocated towards this sector than unskilled work, causing a greater gap in income.
  • In the long term, the education gap can be closed by the government through implementation of microeconomic policy aimed at educating unskilled workers (HSC Topic 4 – Economic Policies and Management).

IMF chief Christine Lagarde warns time is running out to revive the global economy


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The IMF is expected to reduce its growth forecasts for the global economy, citing sources of uncertainty such as China’s shifting economic model, low commodity prices and the prospect of a ‘Brexit’ as a reason for slowing growth. In the face of these challenges, the IMF has called for coordinated policies to bring on positive effects on global confidence. The IMF advised the US to raise its minimum wage, Europe to improve job training and emerging economies to reduce fuel subsidies and increase social spending. Increased structural reform bolstered by a 40% increase in R&D spending in developed economies and increased fiscal support to already loosened monetary policy has been suggested.

How does this relate to the HSC syllabus?

  • Given the increasingly globalised nature of the economy, uncertainty and slowing growth in economies such as China can affect Australia’s economic growth and global economic growth in general (HSC Topic 1 – The Global Economy). China’s slower than expected transition from a manufacturing economy to a consumption and services based economy is adding uncertainty to global economic growth as China has tended to support economic growth in the past. Australia in particular is dependent on China for economic growth as China buys approximately 30% of Australia’s exports.
  • So far, macroeconomic policy globally has generally been uncoordinated. While monetary policy has been loosened significantly, most economies have been undergoing fiscal consolidation as governments are concerned about their debt levels. This means that while growth is being stimulated by low interest rates from monetary policy, decreased government spending has impeded growth, leading to slower economic growth overall (HSC Topic 4 – Economic Policies and Management).
  • The IMF is calling for increased structural change in the world economy as growth has been consistently slow. Structural change is intended to be driven by increased spending in R&D. Investment in R&D has the potential to increase developments in technology in the long term, increasing the productivity of the global economy (HSC Topic 4 – Economic Policies and Management). However, since microeconomic policy has a long time lag, the effects of increased investment into R&D may not be observed in the near future.
  • An increase in the minimum wage in the US can help boost inflation within the economy. Since wages are a reward for the provision of labour which is a factor of production, these costs will get passed onto consumers in the form of high prices (Preliminary Topic 2 – Consumers and Business; HSC Topic 3 – Economic Issues). Given that the US inflation rate is currently still under its target of 2%, increasing minimum wages can be beneficial to the economy.
    • However, an increase in the minimum wage can cause unemployment in the US economy. Since businesses are paying more for labour, they would attempt to reduce costs by reducing labour and make the remaining employees more productive or invest in capital.

Monetary policy remains stable at 2% in April


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The RBA has left the cash rate unchanged at 2% in April after its Tuesday meeting this week. The RBA acknowledged that while emerging market growth, including China, has been uncertain, it has begun to stabilise. Furthermore, Australia’s terms of trade has declined as a result of lower commodity prices. However, economic data shows that Australia’s rebalancing has been generally successful after the mining boom with growth increasing in 2015 while a contraction was experienced in mining investment. Inflation remains low as growth in labour costs have been cut. Investor sentiment in financial markets has improved, with funding costs remaining low as monetary policy around the world remains accommodative. Therefore, monetary policy remains at 2% to be accommodative to changes in the economy going forward.

How does this relate to the HSC syllabus?

  • The RBA meets on the first Tuesday of every month (except January) to determine the cash rate. In doing so, it takes into account indicators such as economic growth, inflation, employment and external stability to achieve its economic objectives when using macroeconomic policy (HSC Topic 4 – Economic Policies and Management).
  • Advanced economies have shown greater strength over the past year while emerging economies have suffered from lower growth due to the volatility in commodity prices. Australia has experienced better than expected growth as it transitions from a mining driven economy to a services driven economy. Low interest rates are supporting demand as consumers and businesses have cheaper access to credit to invest in property or capital goods. As such, the RBA concluded that growth in Australia did not require stimulus, leaving the cash rate at 2% (HSC Topic 4 – Economic Policies and Management).
  • While headline inflation remains at 1.7%, under the RBA’s target of 2-3%, underlying (core) inflation is 2.15% which places it within target (HSC Topic 3 – Economic Issues). As such, high inflation is not a significant issue in the Australian economy, nor is the risk of deflation which other economies such as Europe are facing.

Australia’s foreign debt tops $1 trillion


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Before Christmas last year, Australia’s net foreign debt rose above $1 trillion as both government and household debt increased. Of the $1 trillion debt, one quarter is owed by the public sector and the remainder by the private sector. Although none of the household debt is foreign sourced, Australia’s high level of household debt exposes it to economic vulnerability which makes the effects of any downturn or upturn steeper. However, it is posited that Australia should not be concerned about its rising debt as debt is growing more slowly recently and a lot of debt is denominated in Australian dollars. Debt is becoming longer term which is leaving Australia less prone to refinancing risks.

How does this relate to the HSC syllabus?

  • Australia’s net foreign debt of $1 trillion represents its liabilities to foreign economies, reflecting its external stability (HSC Topic 3 – Economic Issues). However, nominal debt figures do not adequately reflect debt levels between different economies since they are different sizes. It is better to compare debt levels between economies relative to GDP, net foreign debt / GDP.
  • Australia’s net foreign debt is traditionally high since Australia is a net capital importer due to its nature of being an investment heavy economy (HSC Topic 2 – Australia in the Global Economy). Although Australia is required to pay interest in debt borrowed from the overseas sector, returns from jobs and incomes have generally been higher than the cost, creating value for the economy.
  • Given that only a quarter of this debt is public debt, it is unlikely that Australia faces a sovereign debt problem. This means that unlike Greece, it is highly likely that the Australian government will be able to repay its loans. Therefore there is less risk in Australia not paying back its loans, resulting in a high credit rating (HSC Topic 3 – Economic Issues). Currently, Australia retains a AAA credit rating.
  • Although the $1 trillion nominal net debt appears detrimental to the economy, it is contended that it should not cause concern:
    • Net debt in Australia has been growing more slowly recently. Companies have been able to issue shares to the market and internally finance their investments which is reducing the need for debt. Thus, debt is growing more slowly which is positive for Australia’s external stability (HSC Topic 3 – Economic Issues).
    • More debt is denominated in Australian dollars than it was in 1980. This means that exchange rate fluctuations will not impact upon Australia’s debt obligations which may improve its external stability if the dollar is expected to depreciate (HSC Topic 3 – Economic Issues).
    • Debt is more long term now than it was before which reduces the risk of refinancing. When refinancing is required, there is risk of being charged higher interest rates in the future.

Theresa Dang THERESA DANG

Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.

Gary Liang GARY LIANG

Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.

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