Economics for Business: The Australian Government and Reserve Bank - Term Paper Example

? Economics for business: The Australian Government and Reserve Bank The Australian government is liberal democratic in nature and it is based on the principles of tolerance towards religions, freedom of speech, and rule of law (Australia’s system of government, 2008). The Labor Party is the oldest party of Australia and recently it has once again come into power in the year 2010 after winning the federal elections by defeating the Liberal Party. The elected party under the leadership of Julia Gillard have prepared a “strong policy and legislative agenda” in order to build up a strong and just economy. The main purpose behind the development of such type of an economy is to ensure the availability of opportunities for every Australian citizen for their future success (Key Achievements, n.d). The Reserve Bank of Australia started operating as the central bank of Australia on 14th January 1960. The main purpose of the Australian Reserve Bank is to “conduct monetary policy,” maintaining a strong economic system and issuing currency of the nation (Reserve Bank of Australia, 2011). The paper seeks to examine the performance of the Australian government and Reserve Bank of Australia in the past two with emphasis on their macroeconomic policies. How successful have the Australian Government and the Reserve Bank of Australia has been in running the Australian economy over the last two years? The time when most of the major powers like UK and USA were suffering due to the recession, the Australian economy was growing at a rate of 0.4pc in the first quarter of 2009 according to the Australian Board of Statistics. There was even a rise in its GDP. Source: Keep Australian Government The only thing that might put the Australian economy at the backseat was the growing rate of unemployment and it needed immediate attention (Malkin, 2009). Thus when the Labor Party came into power it was expected from them to design their policies in such a way so as to bring more improvements for the economy and also reduce the rate of unemployment. In the department of health, the Gillard Government had signed a number of health reforms with all the States and Territories in order to secure the health of the Australians in the future. This agreement will be a boon for the economy as it will provide the funds required for the public hospitals, one can expect greater levels of “transparency and accountability” and less waiting for the patients. As a result of the above health reforms one can see that hospital funding has increased by over 50 percent. Around $ 1.5 billion have been injected in the emergency departments. Plans for the aged section of the population have increased by 10,000. In order to ensure availability of medical facilities in the rural areas incentives and bonuses are being given to the doctors (Health Reform, n.d). Though the health reforms were meant for the whole economy yet it lacked a “common architecture binding policy” attitude. Increasing health care costs have proved to be a factor responsible for lack of health care facilities among the indigenous Australians. Apart from that there has been the problem of lack coordination and content (Gillespie, 2011). The Gillard government has made efforts to make every school a great school because they believe that proper education is very important for increasing a person’s potential and also for increasing the wealth of the nation in future. Accordingly policies were designed in such a way so as to ensure uninterrupted flow of quality education. Funding for education continued, existing Education Tax Rebate was expanded; $3.1 million was to be spent in the next two years in order to establish National Trade Cadetships and many more (Schools Policy Analysis, 2010). As global warming as become an important issue all over the world, the Gillard Government has taken steps to ensure a safer environment for the Australians. The government’s Clean Energy Future Package is considered to be an important economic as well as an environmental reform because it lower pollution levels and increase jobs (Combet, 2011). The Reserve Bank of Australia has been empowered to conduct the monetary policy of Australia. Accordingly the interest rates are fixed by the institution keeping in mind the following objectives: ensuring stability of the Australian currency, maintaining full employment, and ensuring welfare of the people (Monetary Policy, 2011). The Reserve Bank along with the government had announced in 2010 to keep the consumer price inflation between 2 to 3 percent because it is a known fact that high inflation rate is harmful for the economy. Thus it is always essential for the Reserve Bank to set its policy in such a way so as to bring the desired results (Reserve Bank of Australia, 2011). The Australian economy is said to be dominated by the service sector yet one can see that the major contributors in the export sector has been agricultural and mining products. As mentioned before the impact of recession was almost negligible in the Australian economy. Though there was a decline in the manufacturing sector growth initially but one can see that it is improving at present. Apart from that the recovery of the market has improved the Australian terms of trade. In the first quarter of 2011 it was seen that terms of trade increased by 3.4 percent and in trend terms GDP has increased by 0.2 percent. In case of non- farm activities it increased by 0.4 percent. In case of seasonally adjusted terms there was an increase in GDP as well as in non- farm GDP by 1.2 percent. Terms of trade increased by 5.4 percent and a 2.6 percent increase was observed in case of real gross domestic income. One can assess the economic well being of the people by seeing the real net national disposable income. In case of Australia the June quarter showed that it has increased by 3.3 percent. An increase in the compensation to employees by 2.1 percent was seen in June 2011 (Australian Bureau of Statistics, 2011). Unemployment has been a key issue even under the Gillard Government. It was a known fact that if unemployment was not reduced then it will have its long term impact on the economy. Policies were designed in such a way so as to ensure growth in employment rate. According to the September trend estimates it was seen that employment has increased to 11,441,800. The number of unemployed has decreased to 634,200 in September 2011. The rate of unemployment has not increased from 5.2 percent. There has also been revised aggregate monthly working hours which has increased to 1,620.7 (Australian Bureau of Statistics, 2011). The inflation rate in an economy is very important. If it increases to a very high level then it is harmful for the economy. The Australian economy along with the Reserve Bank of Australia had planned to design their monetary policy so as to keep the inflation rate between 2 to 3 percent and that has been achieved by the Australian economy. In fact the inflation rate in March 2011 was 3.3 percent. By setting inflation target and then designing policies accordingly helps in promoting economic growth (Annual Inflation, 2011). As the Australian economy is expanding over time one can see increased number of foreign investments and a disciplined growth of the economy. This has been possible because of the sound polices of the Gillard Government and a commendable monetary policy of the Reserve Bank of Australia which has brought about the improvements. The increasing demand of Australian goods by the Chinese has also brought about improvement in Australia’s terms of trade. Thus it can be said that the performance of the existing Australian government along with the Reserve Bank in managing the economy has been quite remarkable. Macroeconomic policies of the Australian government and Reserve Bank of Australia In an economy the government has to design policies so as to ensure long term benefits of the economy. In this situation a macroeconomic policy is used by the government in order to bring about full employment, economic stability, and economic growth. The most macroeconomic policies are fiscal and monetary. These policies are very useful under those circumstances when one finds undesirable situations in an economy and it demands immediate attention. Here the macroeconomic policies that influence the endogenous variables are “deliberately implemented” and it is directly under the control of the policy makers (Langdana, 2009, p.7). Thus keeping in mind the objectives and purpose of the macroeconomic policy a description and evaluation of such policies by the Australian government and the Reserve Bank of Australia have been done below. It was seen during the time of recession that the Australian economy had performed compared to the other economies of the world because of quick and suitable policies in response to the crisis and a continuous demand of its commodities from Asia. The fiscal position of the economy has been very good during the period of crisis. The challenges which the Australian economy is facing at the moment are short term in nature. Thus policies were designed to achieve “balanced, non inflationary growth” by strengthening the economy. It was essential that the growing demand of housing, labor, and infrastructure should be met with increasing supply. In order to ensure future growth, the Australian government had to design policies to strengthen its productivity gains (Organisation for Economic Co-operation and Development, 2010, p.22). The major objectives of the Australian government had been to bring economic growth, internal balance, and external balance. The policies designed to achieve these objectives would influence demand so that the goal of sustained economic growth can be achieved with lower rates of inflation and unemployment. The use of fiscal policy by the government involves the use of government budget so as to influence the economic objectives. Monetary policy is made with the aim of bringing about internal balance by influencing the interest rates. That is exactly what has been done by the Reserve Bank of Australia. The monetary and the fiscal policy of the government have played a major role in the good performance of the economy (Budget Review 2010-2011). The 2010-2011 budgets was designed by the Australian government with the objective to achieve surplus, improvement in the government’s financial worth and to keep taxation as a share of GDP at a lower level. Along with that the enhancement of the effectiveness of the fiscal policy was also kept in mind. The Nation Building Economic Stimulus Plan by Kevin Rudd in 2008 had shielded the Australian economy at the time of recession and hence the economy even in 2010 and 2011 has been performing at a nice pace. Growth was observed in the economy in 2010 after a short span of negative growth. Even the rate of unemployment had decreased by February 2010. In fact in April 2010 the IMF had said that “Australia is one of the leaders as the global economy recovers from the severe recession” (Palekar, n.d). Source: Keep Australian Government It was admitted by the Reserve Bank of Australia that the performance of the Australian economy had retarded in the first three months of 2011. However this has happened because of the summer disasters that had taken. As a result growth rate has dipped and inflation has increased. In order to bring the situation under control the Reserve Bank has announced the tightening of the monetary policy so as to bring the situation under control (Janda, 2011). The floods which had occurred in Queensland had resulted in fall of coal production. The meeting of Reserve Bank in April 2011 had clearly pointed out that demand appeared to increase but production has been less owing to the natural disaster. The spending in the household sector was retraining in nature. Borrowing conditions were tight but in few cases there were improvements. In case of the financial markets volatility was observed especially in case of the exchange rates. As the growth rate has been slow and with not much improvement in the rate of employment the Reserve Bank had taken the decision to keep the cash rate unchanged at 4.75 percent (Reserve Bank Minutes: April 2011, 2011). The Gillard Government in their 2010-2011 budget policy has shown every intention of ensuring growth for the economy in spite of the natural disasters which had dampened growth. The aim of the fiscal policy was to take the necessary steps so as to ensure surplus in the budget by 2012- 2013. Government spending has been planned in such a way to bring about growth and industry was placed at the centre of the training effort. Investments amounting to $143 million were done in order to build better skills for workforce participation. Around $20 million was invested by the government to help the disadvantaged job seekers to get full access to the Australian Apprenticeships Access Program. Incentives were given to employers so that new opportunities are provided by them. Even the disabled section of the population was taken care of under the new fiscal policy. The Australian government never ignored the regional side. In fact they considered the regional part to be a vital component of their economy, identity, and well being. The government has promised to take the necessary steps so that the regional side’s potential comes into full existence and it emerges as a strong side in future. Regional Australia has been the top priority of the current budget with investments in that area for a sustainable future. Initiatives worth $4.3 billion was planned to be delivered by July 2011 so that the regional side also gets a share of the nation’s wealth. Further $1.8 billion were to be provided in order to build up critical infrastructure in those regions (Budget 2011-2012). The current budget also recognizes the importance of health. Good health is an essential requirement for the economy because it ensures a healthy workforce. The current budget has planned their spending in such a way so as to bring about improvement in this sector. Tax policy of the government plays a crucial role in determining the demand pattern of an economy. If the tax system penalizes the consumers then this will affect demand and production in future. The Gillard Government had ensured tax reforms in favor of the Australians. According to the government the tax reforms would benefit individuals as well as businesses. Apart from that the budget had also been made keeping in mind the provision of equal opportunity for both men and women. The current budget had included measures that would guarantee greater participation of women education and workforce. $ 80 million would be given in the next four years to set up training centers and apart from that $ 11.2 million would be given in the next four years which would provide Equal Opportunity for Women in Workplace Agency so as to ensure gender equality (Ellis, n.d). Conclusion Thus it can be said that in the past two years the combination of fiscal and monetary policies has definitely affected the performance of the Australian economy. The country has indeed maintained the balanced between the demand as well as the supply side so as to prevent any extreme situation in the economy. The policies of the government had varied across the years so as to cushion the economy against unfavorable circumstances. Here it can be pointed that the policies have indeed been effective in bringing about such performance. The slow growth was attributed only to the natural disaster. However the government is designing its policies in order to overcome it and accordingly every sector is being given equal weight while designing the fiscal and monetary policies. Economists might be divided in their opinion regarding the future of Australian economy but the performance in the past two years has indeed been very remarkable. References Australia’s system of government. (2008), DFAT, available at: http://www.dfat.gov.au/facts/sys_gov.html (Accessed on October 31, 2011) Key Achievements. (n.d). ALP, available at: http://www.alp.org.au/federal-government/our-key-achievements/ (Accessed on October 31, 2011) Reserve Bank of Australia. (2011). RBA, available at: http://www.rba.gov.au/ (Accessed on October 31, 2011) Malkin, B. (2009). Australian economy escapes recession. The Telegraph, available at: http://www.telegraph.co.uk/finance/recession/5434160/Australian-economy-escapes-recession.html Health Reform. (n.d), ALP, available at: http://www.alp.org.au/agenda/health-reform/ (Accessed on October 31, 2011) Gillespie, J. (2011). The Gillard health program: reform without change? INSIDE, available at: http://inside.org.au/the-gillard-health-program-reform-without-change/ (Accessed on October 31, 2011) Schools Policy Analysis. (2010), ISCA, available at: http://www.isca.edu.au/html/PDF/Election%202010/Election%202010%20ALP%20schools%20policy.pdf (Accessed on October 31, 2011) Combet, G. (2011). ‘Blood Oath’ To Repeal Carbon Price Beggars Belief, ALP, available at: http://www.alp.org.au/blogs/alp-blog/october-2011/-blood-oath--to-repeal-carbon-price-beggars-belief/ (Accessed on October 31, 2011) Australian Bureau of Statistics. (2011). Australian National Accounts: National Income, Expenditure and Product, Jun 2011, ABS, available at: http://www.abs.gov.au/ausstats/abs@.nsf/mf/5206.0 (Accessed on October 31, 2011) Annual Inflation. (2011). NSW, available at: http://www.business.nsw.gov.au/invest-in-nsw/about-nsw/economic-and-business-climate/annual-inflation (Accessed on October 31, 2011) Langdana, F.K. (2009). Macroeconomic policy: demystifying monetary and fiscal policy, New Mexico: Springer. Organisation for Economic Co-operation and Development. (2010), OECD Economic Surveys: Australia 2010, Paris: OECD Publishing. Palekar, l. (N.D), Fiscal policies can stabilize Australia’s economy, EDU, available at: http://qaci.eq.edu.au/images/uploads/Stabilizing_the_Australian_economy_through_fiscal_policies.pdf (Accessed on October 31, 2011) Janda, M. (2011). Inflation threat lifts rate rise risk, ABC, available at: http://www.abc.net.au/news/2011-05-06/inflation-threat-lifts-rate-rise-risk/2707094 (Accessed on October 31, 2011) Reserve Bank Minutes: April 2011. (2011), Sunday Morning Herald, SMH, available at: http://www.smh.com.au/business/reserve-bank-minutes-april-2011-20110419-1dmku.html (Accessed on October 31, 2011) Ellis, K. (n.d), Women’s Budget Statement 2011-12, ALP, available at: http://www.alp.org.au/agenda/budget-2011-12/women-s-budget-statement-2011-12/ (Accessed on October 31, 2011) The Strategy (2010). Keep Australia Working, Government of Australia, Available at: http://keepaustraliaworking.gov.au/pages/Strategy.aspx (Accessed on October 31, 2011). Read More