Billion National Stimulus Plan - Assignment Example

Table of Contents 1.Stimulated Economy 1 2.Regulated Rates 3 1.Equilibrium Quantity 4 2.Excess Supply 6 3.Elasticity 7 1.Affordable Housing Packages 8 2.Deferred Duty 8 3.Lower Duties 8 4.Land Rent 9 5.The First Home Owner Grant (FHOG) 9 References 10 1. Stimulated Economy Beginning early 2009, the government of Australia initiated a $42 Billion National Stimulus plan in order to alleviate the industries from the impact of the global financial crisis. In light of the crisis, Australia, like the rest of the world is injecting a change in its economic picture by releasing such funds. First and foremost beneficiary of the stimulus package would be the communities. About $800 Million were allocated for various community infrastructure projects to help improve amenities like school buildings, parks, community areas, playgrounds, etc. Such flow of funds naturally stimulate the construction industry especially that which is local to the community in helping increase construction jobs, open up opportunities for business to supply the construction projects and upon completion, improve the quality of life of the community itself. The same is the case for the housing industry in general, which is also a major beneficiary of the National Stimulus Plan. A significant amount of $5.3 Billion is being released for Socialized Housing Projects which is spread for three years beginning 2009. After which an additional $400 Million is allocated for the next following two years allocated for repair and maintenance of public dwellings. Included in this socialized housing is funding focused primarily for building around 800 homes for the families of the Defence Force. While this stimulus package assists the socialized housing industry improve, the direct recipients of its output, benefit as well. The transporation sector is also benefitting from the stimulus plan. New and improvements to roads and rails are budgeted at $2.3 Billion . This helps the construction industry in two ways. Firstly, an increase in the construction projects directly impact the industry and secondly, an improved rail and road system helps the industry transport its materials to the communities. Part of the stimulus package is to stimulate sustainability, particularly in the aspect of renewable energy. Australians are encouraged to invest and try technologies that will reduce CO2 emissions and help the environment by providing tax breaks and cash incentives for trying the technologies. About $1.4 Billion has been released for rewarding families using the technologies. 2. Regulated Rates Stevens (2010, p. 3) painted a reassuring picture of the Autstralian economy to the House of Representatives Committee on the Economy in his opening speech: that Australia is well poised to overcome the global financial crisis through renewed expansion. His speech mentions several steps that the economy took in order to keep its head above water. One of the strategies did help influence the growth in the construction industry. In light of stimulating the economy, lending rates can be kept low to encourage borrowing and the flow of capital into infrastructure and therefore the construction industry. For Australia, this has been pegged at 3% during the crisis in 2009. However, with its good recovery growth showing continued growth in GDP, monetary rates have been slightly increasing in the last quarter of 2009. While it may impact the rapid growth of the construction sector negatively, it does improve the credit worthiness of the country from a global financial standpoint, and thus strengthens its position for recovery. Despite the slight increase, the construction sector still has seen moderate growth as it enters 2010 and thus may still gain from the stability resulting from the regulated rates. 1. Equilibrium Quantity Equilibrium is a state of balance between the market forces demand and supply. If plotted in a curve against an axis of price and quantity, it is the point where the two curves meet (Mankiw 2008, p.75). To illustrate, look at Fig. 1 which shows a theoretical graph of cement Fig. 1. Theoretical Supply and Demand Curves of Cement From the example above, the point at which the supply curve meets the demand curve is the point of equilibrium. At that point, the market forces are balanced. The commodity is at a state where it is priced at the point where the buyers are willing to pay to satisfy the quantity of cement they require. In the same manner, it is the point where sellers are willing to sell for the quantity level that is provided. Should the buyers demand more, i.e., need a higher quantity than indicated in the equilibrium point, they will demand a lower price because of the higher demand. However at such higher quantity, the sellers are not willing to sell at a lower price, but on the contrary can demand a higher price because they demonstrated the capability to supply what the buyers required. The equilibrium quantity therefore is the amount of commodity where all market forces balance out, in this case, at 1.5 MM tonnes of cement per annum. 2. Excess Supply Excess supply is a situation where suppliers have more than enough quantity of goods that the consumer is willing to buy, given the price defined for such a supply level. Taking the same example above, when suppliers of cement have built up capacity to produce two million tonnes of cement per annum, they will be pricing it at a premium than when they were capable of producing only half a million short of that. Suppliers invest in technology, equipment and infrastructure to increase capacity. Doing so, they will naturally pass it on to the consumer to pay the price of having more supply. However, in some cases, the buyers will not be willing to pay such a price despite the volume availability. The buyers will not buy at the higher price. Thus, this creates excess supply. This situation is also called a surplus (Mankiw 2008, p.76). To illustrate in Fig. 2, Fig. 2. An excess supply situation When a situation of excess supply happens, the tendency of suppliers is to lower down the price of the commodity to entice consumers to buy. As illustrated above, the market is not willing to pay A$ 10.0 per bag, thus there is excess supply, so the best solution is to sell near the equilibrium price to entice demand. 3. Elasticity Elasticity is the measure of how buyers and sellers respond to market changes (Mankiw 2008, p. 89). Suppose there is a major strike in the Union of Cement Workers cause a shortage of supply. How the market will respond will show how elastic the industry is. Demand may continue to hold at the same level prior to the strike, at which case there will definitely be a shortage of supply. If that is the case, cement prices will go up. The percentage of change between the quantities of supply as compared to the percentage of change between the prices is the measure of elasticity. A commodity or industry is said to be elastic if the elasticity value is 1.0 or more, meaning the change in demand quantity is proportional to the change in price, while it is said to be inelastic if the result is less than 1.0 (Mankiw 2008, 91). In the last quarter of 2009, Business Day reports that the Australian construction industry has seen growth for the first time after 18 months. The main driver of the growth was the increase in the residential construction sector of the industry. Two main drivers were responsible for such, namely the lowered interest rates offered by banks and a tax incentive offered by the government for first time home buyers. These are examples of government policy that help expand the construction industry. 1. Affordable Housing Packages A very basic government policy that can enhance the construction industry is to mandate developers to come up with affordable housing. For Australia, the government defines such as an affordable package not to exceed $300,000 for the purchase of the lot and construction of a new home. The intent of this level of price is to keep the housing payment of low income members to 30%. The average housing payment in Australia can be as much as 50% of the take home pay. 2. Deferred Duty Simply deferring duty can also entice the construction industry. By allowing residential property buyers a lee-way of paying their duties within a year from the purchase of their home, they are allowed a scheme of payment that will be more in-tune with their monthly mode of income. The key is to ensure that the payments are followed through to the schedule for pain of seizure. 3. Lower Duties Australian pensioners and veterans, under the Pensioner Duty Concession Scheme (PDCS) will be granted minimal duty rates for buying a home or transferring to a more accessible home This is another incentive that the Australian government called the Home Buyer Concession. The intent is for home or residential land buyers, not just for first-time buyers but for anyone planning to own a residential property. The act grants home buyers under certain eligibilities based on income and number of dependents to be granted a minimal amount of tax duty for the purchase of a home or a residential land. By law, a buyer of a property must pay land and improvement duties upon purchase depending on the value of the property being bought. The minimum charge is $2.0 for every $100 for homes whose market value amounts to $100,000 and below. The charge per $100 increases in value as the range of the market value increases. In contrast, applying for a Home Buyer Concession only charges a minimal duty of $20 for homes valued at $349,800 and below or for lots valued at $198,800 and below. Homes purchased at $422,000 and above as well as land purchased at $ 233, 300 and beyond will not enjoy such concession. 4. Land Rent Yet to help limited income families to avoid renting and afford a new home, the Australian Government through its Affordable Housing Action Plan has come up with The Land Rent Scheme. The scheme gives a prospective buyer the option to rent the land through a rent lease scheme and focus their capital into the construction of the home on top of it. Such shceme maybe availed on units sold by the the Land Development Agency (LDA) who have the option of applying for the crown lease to be issued as a land rent lease.  The advantage for potential lessees in taking up this option is the reduction of the up-front costs associated with owning a house.  That is, lessees will not need to finance the cost of the land, only the costs associated with the transfer of the land (such as duty) and the construction of the home. 5. The First Home Owner Grant (FHOG) Introduced in 2000 yet applicable to contracts entered into between 14 October 2008 and before 31 December 2009, the Australian Government as administered by the ACT Revenue Office will be giving monetary grant to first-time home buyers and builders in Australia. The grant ranges from $ 7,000 to as much as $21,000 per home, depending on the time of purchase and whether the buyer is investing in an established home or building a new home from scratch. Obviously to further entice the construction industry, building a new home from scratch has a significantly higher amount of grant than the already-built homes. References Mankiw, N. Gregory, Principles of Microeconomics, South-Western Cengage Learning, Ohio. 2008. Australia Department of Treasury, ACT Revenue Office; Home Buyer Assistance Guide, 2009 , http://www.revenue.act.gov.au/home_buyer_assistance/first_home_owner_grant accessed on 04 April 2010. Australian construction Industry expands, Business Day, http://news.theage.com.au/breaking-news-business/australian-construction-industry-expands-20091007-gm0m.html, accessed on 04 April 2010. Stevens, Glenn. “Overview of the Australian economy and future Challenges.” Opening statement by Mr Glenn Stevens, Governor of the Reserve Bank of Australia, to the House of Representatives Standing Committee on Economics, Canberra, 19 February 2010. Read More