Macro Economic Policy in Australia - Report Example

IMF Report on Macro Economic Policy in Australia This paper provides a report on macro economic policy in Australia 2007, which is prepared on behalf of International Monetary Fund. Macro economics is one of the important branches of economics, and it deals with the overall functioning of the economy as a whole. This subject gives necessary information about the concept of unemployment, level of income, trade and investment. Present macro economic policies in Australia are Fiscal and Monetary policies. Due to the implementation of this policy, the country has experienced consistent economic growth for over a decade. As a result of this, it attained the benefit of full employment and lower inflation level. Introduction: The macro economic policy in Australia is focused on its monetary and fiscal policy and it aims to attain a sustainable developmental growth by mitigating certain problems in the areas of unemployment, inflation and other trade difficulties. "A macroeconomic policy framework conducive to growth can be characterised by five features: a low and predictable inflation rate; an appropriate real interest rate; a stable and sustainable fiscal policy; a competitive and predictable real exchange rate; and a balance of payments that is regarded as viable. Countries with these macroeconomic characteristics tend to grow faster than those without them."(Andersen and Gruen 2007). Current Macroeconomic policies in Australia The present macro economic policies in Australia deal with fiscal policy and monetary policy. Fiscal Policy: The term fiscal policy is related with two major concepts like allocation of resources and proper distribution of income. Proper implementation of fiscal policy is essential for maintaining a constant price level, elimination of job redundancy, and thereby the fulfillment of effective economic growth. So, the fiscal policy can be seen as playing a very important role in the accomplishment of economic objective. The approach towards both fiscal and monetary policy is quite different. "While these two approaches proceed from distinctly different conceptions of how the economy (and government) work-or can be made to work-the qualitative difference as to budget outcomes is not really so dramatic. Even under circumstances in which annual budgets are strictly balanced, the irregular character of the within-year flow of expenditures and of revenues inevitably means that for some shorter periods within the annual time period, there will be 'deficits', albeit offset by 'surpluses' during other shorter periods, within the annual cycle. To the extent that the annual budget time-frame is ultimately arbitrary, this means that those who are committed to strict annual budget balance, in fact, as much acquiesce in the acceptability of temporary budget deficits, as do those who would argue instead for allowing some annual budget deficits, to be offset at other times by annual budget surpluses." (Approaches to Fiscal Policy. 2007). As far as the present economic situation prevailing in Australia is taken in to consideration, it is very clear that for the overall development of the economy, there should be a better resource allocation and income distribution is crucial. It is very important to make an understanding about the system of fiscal policy and its effectiveness. By taking this concept in the practical point of view, the fiscal policy may be short term, medium term and long term as far as the different situation is taken in to fact. "Fiscal policy is now directed firmly towards maintaining sound public finances over the medium term, based on strict rules. Where possible fiscal policy supports monetary policy over the economic cycle. This approach, together with the new monetary policy framework, provides the platform of stability necessary for achieving the Government's central economic goal of high and sustainable levels of growth and employment." (Fiscal Policy in the UK. 2007). For the effective implementation of an economy, the fiscal policy gives emphasis on certain major concepts like effectiveness and efficiency. In addition, the policy should be stable and goal attainable in nature. The interest rate level and fiscal policy framework are mutually related. Australia commands a prominent role in the global capital market and, therefore, it has certain influence on the international level in the matter of interest rates. The macro economic policy laid down by the Australian economy is helpful for improving the profitability and growth strategy in the country. The Australian economy developed in a better manner, due to the proper implementation of fiscal policy. As a result of this, the rate of tax percentage reduced, and the income level or net worth should be improved. Monetary Policy: It is one of the great tools and technique adopted by the government for improving the economic growth. This policy is giving stress for two concepts, such as the rate prevailing for the borrowal and the supply of money, which based on accepting of deposits and lending of money. Australian Government is mainly relying on the concept of Inflation targeting. "It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to: (a) the stability of the currency of Australia; (b) the maintenance of full employment in Australia; and (c) the economic prosperity and welfare of the people of Australia". (What is Monetary Policy and what are its Objectives 2007). Inflation force and monetary policy are related to economic development. The Reserve Bank should be in a position to provide appropriate statements of monetary policies at frequent intervals. Moreover, there should be an increase in the interest rate in the year 2007, as compared to the past year's interest rates. Not only the interest rates, but also there will be a chance of increase in the performance of the policy effectively. As a result of this, the problem of unemployment is minimized. The main focus of the monetary policy is to minimize the level of utilization and pressure in relation to the inflationary context. There should be a mutual effect among both fiscal and monetary policy, then only the overall impact of economic growth is possible. IMF (International Monetary Fund) plays a crucial role in relation to the macro economic policy development. It is an organization established at international level, which is giving higher priority to the financial systems and other implementations globally, which is especially dealing with the foreign exchange rates and balance of payments. Impact of current policy on key areas: 1) Unemployment: This is one of the major areas being affected by the present macroeconomic policy prevailing in Australia. It is a practical concept that through the proper implementation of fiscal and monetary policy, the problem of unemployment is reduced to a certain extend. By evaluating the past results, it is identifiable that this problem has been minimized in a better manner with proper macro economic policy utilization. Problem of job redundancy will lead to create an imbalance in the stable level of economy. It is not possible to attain an overall economic growth due to this issue. Appropriate implementation of macro economic policies is very relevant due to this context. So, this policy is crucial for the economic stability and financial viability. It is necessary to evaluate the level of employment for analyzing the rate of unemployment, and to determine whether it has been kept at the minimum. The growth rate of employment will correspondingly improve the economic growth as well as the total productivity of the labor force. So, it will be evaluated as-%Employment Growth Rate= %Economic Growth Rate_%Labor Productivity Growth Rate.%Labor Force Growth Rate=%Population Growth Rate+%Change in Participation Rate.% Change in Unemployment=%Labor Force Growth Rate_% Employment Growth Rate. (Quiggin 1994). 2) Economic growth: The macro economic policy had played a very important role in the economic development of the country. Australia has reported GDP growth of 3.4% over the year 2000 and later on they again hiked to reach 3.8% in the last years even when other countries were showing a downward trend. The macro economic policy had impacted the country for improving its GDP percapita growth. The GDP percapita of Australia has shown a growth rate of 2.7%. One of the major reasons for improvement in the GDP growth in Australia is the growth of population. The growth in the population had made it necessary for the supply of more production and allied services. The new policy has helped the Small Scale Business to flourish, which contributed a considerable share to the development of the economy. 3) Inflation: "Australia's strong economic growth has been coupled with low inflation." (A competitive Economy. 2007). For the past many years Australia's inflation has been decreasing. The trend is mainly due to the impact of the macroeconomic policy. Inflation has fallen from 15 years time. The average inflation of these periods is 2.5%. This change has really improved the living standard of the population at large. 4) Trade: The impact of the macroeconomic policy on the trade is also positive. The trade policy of Australia has been liberal which helped to pool up potential investments in the country. "Australia has been ranked by the World Bank as the second easiest economy in which to start up a business." (A competitive Economy. 2007). The tax rate is really attractive for the business. The various tax rates pertaining to the trade in Australia are Value Added Tax - 10%, corporate tax - 30%, tax on share transaction - 0. This factor has helped the country to foster growth in trade. Conclusion and recommendation It is seen that Australia has undergone a drastic improvement in all its growth factors. The monetary and fiscal policy had resulted in more employment, better economic growth, low inflation, and improved trade. The favorable tax rate aided the business organizations to operate at a high growth potential thereby contributing to the economic development. A further growth momentum can be maintained and attained through the following ways: 1) Research and Development: research and development is the key area that requires investment for further economic growth. Better innovation of more scientific methods for the production activity can attract more investments. 2) Investment in Information and Communications Technology (ICT): one of the major factors of the growth momentum is the ICT industry. Development of the ICT sector not only attracts foreign companies but also helps to curb the brain drain. 3) Investment in human resources: Investment in human resources helps to create better knowledge base for the country. This is possible by setting up better educational institutions. Proper and effective implementation of macro economic policy is essential for the attainment of economic growth in the country. A sound macro economic policy will help Australia to rise to a top position in the global economy. The impact of fiscal and monetary policy brings out a positive approach in the economy as a whole. Proper implementation of Australia's macro economic policy resulted in economic growth and has provided more employment opportunities and higher standard of living. Moreover, the country also attained tremendous growth in productivity also. The implementation of macro economic policy and proper coordination of various economic policies helps to attain an overall development as far as the Australian economy is concerned. Applicability of sound macroeconomic policies and attainable future goals differentiate the Australian economy, while improving the economic performance, financial viability, and technical feasibility, as compared to other countries. In addition to this, it is helpful to take an appropriate decision in the matter of investment criteria, and the analysis of the policies related to foreign exchange rates and other trade balance system. As a result of all the above mentioned facts, Australia is able to stabilize its economy for the coming future. Bibliography A competitive Economy. (2007). [online]. Australian Government Department of Foreign Affairs and Trade. Last accessed 30 October 2007 at: http://www.dfat.gov.au/aib/competitive_economy.html ANDERSEN, Palle and GRUEN, David (2007). Macroeconomic Policies and Growth. [online]. Reserve Bank of Australia. Last accessed 30 October 2007 at: http://www.rba.gov.au/PublicationsAndResearch/RDP/RDP9507.html Approaches to Fiscal Policy. (2007). The uses of fiscal policy and the role of monetary policy. [online]. Australian Review of Public Affairs. Last accessed 30 October 2007 at: http://www.australianreview.net/digest/2006/02/aspromourgos.html Fiscal Policy in the UK. (2007). Index. Introduction. [online]. HM Treasury. Last accessed 30 October 2007 at: http://www.hmtreasury.gov.uk/documents/uk_economy/fiscal_policy/ukecon_fisc_index.cfm Macroeconomic policies. (2007). OECD Economic survey Australia. [online]. Ingenta Connect. Last accessed 30 October 2007 at: http://www.ingentaconnect.com/content/oecd/03766438/2003/00002003/00000004/1003041ec004 QUIGGIN, John (1994). The White Paper and After: Policies for full employment. [online]. Last accessed 30 October 2007 at: http://www.uq.edu.au/economics/johnquiggin/JournalArticles94/WhitePaper94.pdf What is Monetary Policy and what are its Objectives (2007). About Monetary Policy. [online]. Reserve Bank of Australia. Last accessed 30 October 2007 at: http://www.rba.gov.au/MonetaryPolicy/about_monetary_policy.html Read More