Australia's economy is dominated by its services sector, yet it is the agricultural and mining sectors that account for the bulk of Australia's exports. Australia's comparative advantage in the export of primary products is a reflection of the natural wealth of the Australian continent and its small domestic market; 21 million people occupy a continent the size of the contiguous United States. The relative size of the manufacturing sector has been declining for several decades, but has now steadied at around 10% of GDP. Australia currently enjoys a record high terms-of-trade well above its long-run average, reflecting the rise in global commodity prices created by booming demand in China and the drop in prices for imports for manufactured goods, mainly from China.
Since the 1980s, Australia has undertaken significant structural reform of its economy and has transformed itself from an inward-looking, highly protected, and regulated marketplace to an open, internationally competitive, export-oriented economy. Key economic reforms included unilaterally reducing high tariffs and other protective barriers to free trade, floating the Australian dollar, deregulating the financial services sector, including liberalizing access for foreign banks, increasing flexibility in the labor market, reducing duplication and increasing efficiency between the federal and state branches of government, privatizing many government-owned monopolies, and reforming the taxation system, including introducing a broad-based Goods and Services Tax (GST) and large reductions in income tax rates.
Australia enjoys a higher standard of living than any G7 country other than the United States. Australia's economic standing in the world is a result of a commitment to best-practice macroeconomic policy settings, including the delegation of the conduct of monetary policy to the independent Reserve Bank of Australia, and a broad acceptance of prudent fiscal policy where the government aims for fiscal balance over the economic cycle. Largely due to the fall in revenue as a result of the global economic downturn, net government debt is projected to reach about A$188 billion (U.S. $150.4 billion) in four years. The previous government, drawing from budget surpluses, created the “Future Fund” to provide for future liabilities resulting from the retirement of civil servants. The The Government of Australia is predicting negative 0.5% growth in the 2009-2010 fiscal year; the International Monetary Fund (IMF) predicted growth to be negative 1.4% for 2009.
Over the last year, unemployment has risen to around 5.5% from 4.2%, and the labor market participation has remained at around 65%. Both the federal and state governments have recognized the need to invest heavily in water, transport, ports, telecommunications, and education infrastructure to expand Australia's supply capacity. The largest river system in Australia, the Murray-Darling, and related coastal lakes and wetlands in South Australia are critically threatened and the government has developed a plan to improve irrigation infrastructure and efficiency and buy back unused water allocations along the river.
A second significant issue is climate change. A report commissioned by then-Prime Minister John Howard recommended a domestic carbon emissions trading scheme and that Australia take an active role in developing a future global carbon emissions trading system. Prime Minister Kevin Rudd plans to introduce a domestic carbon trading system by 2011. It aims to reduce emissions by 5% from 2000 levels by 2020; the paper includes the possibility of increasing cuts to 15% should an international commitment to cut emissions be reached.
The Australia-U.S. Free Trade Agreement (AUSFTA) entered into force on January 1, 2005. The AUSFTA was the first FTA the United States concluded with a developed economy since the U.S.-Canada FTA in 1988. Australia also has FTAs with New Zealand-ASEAN, Singapore, Thailand, and Chile, and is pursuing other FTAs, including with China, Japan, Malaysia, and South Korea. A burgeoning trade relationship marked by ongoing, multi-billion dollar resource export contracts and rising manufactured imports has driven FTA negotiations with China.
Information by U.S. Department of State