The hypothesis of this report is that the Australian economyÃÂs performance is assessed based on the achievement of economic objectives through economic policies.
To evaluate the performance of the Australian economy over the years, the achievement of economic objectives of the Australian economy will be examined. The three main economic objectives are; Economic growth, Internal stability (low inflation and full employment), and External stability (stable exchange rate, a sustainable level of foreign debt and the current account deficit).
The government implements an economic policy mix involving macroeconomic and microeconomic policy in order to achieve their objectives. The GovernmentÃÂs macroeconomic policy, also known as counter-cycle policies, is made up of monetary policy and fiscal policy which forms a part in their policy mix. This is designed to impact upon economic activity, smoothing the peaks and troughs of the economic cycle. It aims to influence the level of aggregate demand in the economy.
Within the governmentÃÂs policy mix, while macroeconomic policy influences the level of aggregate demand, microeconomic policy is the effective tool used to influence the aggregate supply side of the economy. Microeconomic policy is action taken by the government to improve resource allocation between firms and industries in order to maximise output from scare resources. It thus brings about positive structural change, as the main aim is to encourage the efficient operation of markets (e.g. to lift productivity).
Monetary policy involves action by the Reserve Bank of Australia (RBA) to influence the cost and availability of money and credit within the economy.
(RBA: Monetary Policy, www.rba.gov.au/Education/monetary_policy.html)The Reserve Bank is involved in the stability of Australian currency. This includes minimising inflation, maintenance of full employment, and encouraging a sustained level of economic growth. In recent years, the main objective of the RBA is to minimise inflation and keep it within its target range of 2-3%, over the course of the business cycle. Monetary policy is effectively used in order to impact upon economic growth. The RBA can adjust its monetary policy stance to suit the current or expected economic situations. To reduce the severity of a recession the RBA can adopt a monetary policy stance of loosening. Here, the RBA buys government securities which will boost economic activity. This boost in economic activity will occur by increasing the level of aggregate demand as consumer and investment spending increases. This will also help to achieve lower unemployment, though it will contribute to inflationary pressures. Alternatively, to dampen strong economic activity during a booming period, the RBA can develop a monetary policy stance of tightening. Here, the RBA sells government securities. This will slow economic activity through decreasing the level of aggregate demand as consumer and investment spending decreases. This is likely to lower inflation but increase the level of unemployment. Recently, this has been the case as the RBA has given priority to low inflation and concentrated in significant monetary policy tightening.
This tightening has been the recent stance as Australia has been experiencing strong levels of economic growth and activity. Australia has been booming since the early 2000ÃÂs, where this is now the 17th year of continuous expansions since the last recession. The low unemployment rate and high participation rate supports this point. The RBA has consistently tightened monetary policy in order to achieve low inflation, where the cash rate in May 2002 was 4.25% and the current case is 7.25%, increasing at a steady rate. Furthermore, as our economy is showing signs of slowing down the RBA is unlikely to raise interest rates further unless believed necessary. Though achieving these objectives may cause the government to encounter some problems. Such as a decrease in consumer confidence because of signs showing a slowdown in the economy. This decrease in consumer confidence may lead to consumers spending less which may cause government revenues to decrease as well.
Fiscal policy, involves the use of the governmentÃÂs budget in order to achieve the government economic objectives.
(Fiscal Policy in Australia, www.kewpid.net/notes/macro_reform.pdf)By altering the amount of government spending and revenue, the government can effectively change the level of economic activity, which in turn will influence economic growth, inflation, unemployment and the external indicators of the economy.
The governmentÃÂs budget is what the fiscal policy works of, an annual statement from the government dealing with its income and expenditure plan for the next financial year. Fiscal Policy is an effective tool which can target specific sectors of the economy such as individual industries, unlike monetary policy which affects the economy as a whole. This is why the government implements a policy mix.
An indication of the overall impact of fiscal policy on the state of the economy is the fiscal outcome. The three possible outcomes include a surplus, deficit and balance. The main aim of fiscal policy is to achieve fiscal balance, over the course of the economic cycle. The Howard Government targeted a fiscal surplus of 1% of GDP, whereas the current Rudd Government has raised this target to 1.5% of GDP, reflecting the strong activity present in the Australian economy. The Government can make further changes to their current situation to reach this target of GDP, which goes with their objectives. They can adopt one of the following stances; an expansionary stance, a contractionary stance or a neutral fiscal policy stance.
The current 2008-09 budget of the Rudd Government is intended to be contractionary, due to our strong levels of economic activity, but in reality appears to be expansionary. This is because of the significant amount of tax cuts government revenue. Despite these tax cuts likely to add to inflationary pressures, they were a political decision rather than economic. This proves the political constraint of fiscal policy, as opposed to monetary policy which is controlled by the independent RBA whom have the incentive to maintain low inflation despite the political situation.
Not only can fiscal policy be used to influence economic activity, but it can also impact other parts of the economy. Here the government can spend on particular areas of the economy, such as the construction of an underground tunnel in order to make movement more efficient. Likewise, the government can impose a tax on polluters to minimise economic activity which can be environmentally damaging. Similarly, the government can place a high tax on goods to decrease their consumption, for example tobacco products or alcohol. Recently the Rudd Government placed a higher tax placed on the alcohol type ÃÂalcopopsÃÂ. These taxes may help to reduce the long term costs to the health care system, which in due course will increase government revenue.
A significant aspect of fiscal policy is its relationship with the external factors, being the CAD and foreign debt. A budget deficit categorises Australia into being ÃÂcrowded outÃÂ. The inflow of funds for investment must then come from overseas, which increases the level of foreign and CAD. Therefore, the government should avoid running a budget deficit unless believed necessary, such as in a recessionary period. External stability is a significant objective of the government. The Australian economy strives for international confidence and a good credit rating, which is of benefit to the economy.
In conclusion, it can be seen that economic policies, when implemented correctly are able to stimulate the economy and are able to achieve the governmentÃÂs main objectives in some way or another. Although the Australian economy is doing well, there are some significant problems and it has recently entered into a recession. At the moment economic growth is steady, unemployment is slowly increasing and the Australian community experiences a high standard of living. The major problem lies in inflation.
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