How Does Government Expenditure ; Revenue Affect the Role of the Share Market in the Economy Essay

The share market is an important aspect in order to operate the economy that provides a way for individuals and businesses to interact . The share market also provides opportunities for companies or businesses to raise funds needed for their growth and gives returns to individuals for their surplus funds. The share market in Australia plays two key roles; it allows companies to sell shares to new investors and also shareholders to sell all of their security to a new owner. The Australian Stock Exchange (ASX) is the largest stock market in Australia whereby most transactions of shares and trade occur through here.

Only listed companies are allowed to trade on the ASX, therefore allowing ASX to regulate the share market. This essay discusses how government expenditure and revenue affect the role of the share market from three different perspectives; shareholders, companies & the economy as a whole. Australia has an extraordinary level of share ownership as it has more shareholders per head of population compared to any other country, with shares owned by half of the adult population in the country, making the share market a very important aspect of the lives of Australians.

Statistics from the Australian Survey of Social Attitudes 2003 show that 4. 9% Australians own shares in more that 10 companies listed in the stock exchange. Government expenditure and revenue can impact shareholders in many ways; positive and negative. As owners, shareholders are entitled dividends, which are profit gained from their companies. The government gains revenue mainly from taxation whether income, goods and services tax or customs duty and most shareholders buy shares with their income surplus.

If the government decides to decrease the percentage of tax that individuals have to pay, it can provide and opportunity for individuals to expand their ownership by buying more shares with the extra surplus they receive. Most of the trades that occur on the Australian share market are secondary market transactions, meaning the financial assets have already been issued on the primary market in the past. However companies also have the option to sell some of their shares to the public.

In order to do this, a company must list itself on the stock exchange for the first time, which is a process called a float. By public listing their companies, it is a big benefit as it allows them to issue new shares and in return, gain access to finance for investment and growth. Annual government expenditure has positive impacts on companies. The government may decide to allocate funds for industry assistance and development, providing assistance to Australian based business with subsidies and grants.

It gives companies another option to grow their company and market their product internationally. The value of the share market often acts as the indicator of a country’s economic condition. Rising prices of shares tells us that the economy is in good condition. However if a country is moving towards an economic recession whereby prices of shares will decrease and companies will have fewer opportunities to grow. The share market is also known as the ‘barometer’ of the economy, that is because it is a useful guide to the confidence and strength of the economy.

However it is a whole different story when it comes to government expenditure. Most argue that government expenditure does not impact the economy in any positive way as it does not stimulate economic growth. During the 1930s and 1970s inflation, the US tried to stimulate their economy by expanding the expenditure of the government, however they failed every time they did it. An article found explains why the method hasn’t work. “Government spending fails to stimulate economic growth because every dollar Congress “injects” into the economy must first be taxed or borrowed out of the economy.

Thus, government spending “stimulus” merely redistributes existing income, doing nothing to increase productivity or employment, and therefore nothing to create additional income. ” An article in the European Journal of Political Economy found; “We find a tendency towards a more robust negative growth effect of large public expenditure. ” Some others feel differently towards those statements. They believe that government expansion of expenditure is actually capable of stimulating the economy in terms of taxation.

In an article by Dean Calbreath, is states that tax cuts and rebates do little to immediately jolt the economy, though well-designed tax cuts can have a positive long-term effect. Overall, whether positive or negative, the government will always affect the role of the share market in many aspects. Especially in a country with a modern market economy, with annual revenue and expenditure of over $300 billion, Australia will continue to record consecutive strong growth in share prices led by industrial and financial companies.

It is uncertain whether or not Australia will suffer an economic downturn and a decrease in share prices, but there is always a positive chance that the government would intervene and provide expenditures that can benefit Australia’s share market. Dixon, Tim, and John O’Mahony. The Market Economy. Sydney: Leading Edge Education, 2008. Print. Hanson, Dallas, and Bruce Tranter. “WHO ARE THE SHAREHOLDERS IN AUSTRALIA AND WHAT ARE THEIR ETHICAL OPINIONS? ” CORPORATE GOVERNANCE (2006): 2-3. Print.