The Australian Economic Policies - Example

Name: Tutor: Title: The Australian Economic Policies Course: Date: Public Economy Introduction Public economics aims at efficiency and fairness. The Australian economy is among the top economies whose markets are urbanized and experience high productivity in the south pacific. Despite the high Gross Domestic profits appearing among the top twenty in international trade, Australian economy is dependent on its service sector which is risky, consisting of almost quarter of the GDP. Microeconomics plays the role of market assessment in determining the suitability of a given domestic and foreign market for investment. It also includes identifying economic problems and the implementation of a suitable fiscal or monetary policy to solve it. Financial crisis is the current major economic problem that Australia is facing, with deficits in its current accounts. The government expenditure is to the extreme. High taxes are levied on businesses and individual households. This is also as a result of increased government intervention in business operation and the general economy. The economy employs the fiscal policy (to which is entirely dependent) using taxes and expenditure to control its economy which is also contributing to the current economic disorientation. Due to the three government activities, the economic variables are affected to a large extent. Stagflation is the problem which the Australian economy is facing as a result of the fiscal policy over reliance. There is shortage in supply and a lot of money is chasing after a few goods available, and in addition, the economy is in a retarded state where it is not growing. Employment in the labor market is another problem, posing a challenge to policy makers on whether to increase demand and in turn increase productivity and employment but at the same time encourage inflation or suppress demand and increase unemployment. A shift of the supply curve to the left means a decrease in supply due increase in costs of production leading to an increase in prices and a fall in output and increased unemployment. Increase in demand, a shift of the curve to the right increases the productivity and boosts employment but on the other side, causes increases in prices which encourage inflation. Government expenditure and taxes can be adjusted to ensure efficiency in the labor market, desirable growth and controlled inflation. The origin of the current state of the Australian economy is over reliance on taxation as a source of revenue, since the central government is the main center that finances all activities in the other levels of the government. This is the major problem facing the economy; having inequality in revenue and expenditure at the central and provincial government (The vertical fiscal imbalance) Tax imposition is in the Australian economy is based on individual persons and businesses. They are imposed by the government in the central government and local administrative levels. The provincial level of the government levies taxes on incomes and sale of land, businesses and unlisted share capital. The effect of tax increase An increase in tax affects the supply and demand in the economy. The initial equilibrium is at (Qe,Pe). Imposition of taxes leads to an increase in prices to Pt and the output reduces to Qt. Taxes increase the cost of production, and to this effect, producers cut on the level of production to meet the cost. They pass these costs to consumers by increasing the prices of goods. The increase in prices reduces the demand for the goods as the consumers respond to these changes. The government is also to blame of its overdependence on one sector, with the policy of growth dependency on commodity. Over the years, it has shown positive results. However, this has brought about content among policy makers, and overdependence over the years is now costing the economy. This is affecting a wide range of economic variables such as employment in the Labor market, stagnant economic growth and increased inflation. Stagflation increases prices of commodities to unaffordable levels and also leads to a reduction in income. Information from the Australian bureau of statistics suggest that the Australia economy is facing stagflation which is a combination of inflation and a stagnant economic growth, according to the 2011 interim report, the growth is reported negative. Inflation and employment levels are parallel, that is they increase and decrease at equal rates. At the time, the statistics body reported a more than the estimated rate of inflation of about 3%. According to Davidson (2011), such a level of the reported inflation out to increase the interest rates, although the economy is considered to be in a stagnant state and another negative report in growth means a recession stage. Irresponsible spending can be one of the causes of the inflation problem. The imposition of $37 carbon tax among the Australian taxes by President Gillard is more of a threat to the life of the Australian economy both currently and in the future. She supports the policy by saying that it is for the safety of the environment and also reinforcing the economy. According to Béland (2011), imposition of the tax increases the cost of production, this reduces the level of production or a sudden decrease in production as production becomes expensive. Less supply leads to an increase in prices, and slowing the economic growth, thus stagflation. Producers always pass the costs they incur to consumers, who are other businesses and domestic consumers, since producers’ aim is to maximize profits, and without passing the costs, they will not attain their objective. The gross domestic Product reduces as a result of a fall in the productivity level. The government is forced to increase the level of imports and reduce exports, while real wage rate and prices of imports remain constant and increasing export prices (Siriwardana & Meng, et.al. 2011, p.) Employment in the labor market is likely to suffer to a large extend since industries to which the carbon tax has been imposed will feel the need to cut on expenditure. As part of strategy, producers will have to lay off workers to cut cost as a result of costly production. According to Edge (1999), problems in the labor market trace way since the year 2002 where employment level reduced. High level of economic activity ensures a high level of employment in the economy, when the level of activity is low, the, employment also goes down. The Keynes theory that describes the mutual relationship between inflation and employment (illustration of the Philips curve) fails as the Australian economy is facing a situation of rising levels of unemployment while inflation and stagnant growth are also taking tall of the economy. Many people in the employment sector work as part time employees, this suggests that underemployment exist and is rising. (Edge. 1999, p.37-39) Relative commodity prices suffer as a result of integration of the carbon tax effect on its operations. Commodities that require carbon emission become expensive as companies adopt new production techniques to curb the increasing costs and a result of passing the new costs on to consumers. The increased cost of production is the tax burden passing to consumers. As a result, consumers may switch to using substitutes of the carbon-made commodities. Increase in cost of production as a result of imposition of the tax will cause a decrease in prices of factor inputs. Since households depend on the response of price of factor inputs, their income will in turn be affected by this change. This increases the cost of living, consumption reduces and living standards deteriorate. The general domestic product will fall as a result of all these. Reduced production means fewer exports, combined with low income levels and low living standards, the government revenue will reduce. This increases budget deficits and public debts. According to Sirwardana (2011), the GDP is expected to fall with about 0.68% and a 0.75% effect as a result of inflation on prices. Instead of solving the problem of inflation and employment facing the country, the government is adding to the suffering through the implementation of the carbon tax. Tax is a withdrawal form the economy. The state of the economy requires stimulation or boosting through injections, and tax will drain more money from the economy. The imposition of the tax means an increase in the cost of production, which affects supply by reducing it. This worsens the economic situation. Possible Remedies Rectifying stagflation is not an easy task ones it is affecting an economy, since it involves contradicting economic situations that neither the monetary, nor the fiscal policy is applicable on its own. Monetary policy is a possible remedy to inflation. The policy starts from the bank. To solve inflation, the central bank can decide to increase the interest rates on borrowing. This discourages the commercial banks from borrowing from the central bank and in the same away, limits the amount of money they have for lending to the public. Commercial banks in turn increase their borrowing rates too. This discourages the public from borrowing. It has a direct effect to the aggregate demand for goods. A decrease in demand is a step towards curbing inflation. Government expenditure is an expansionary policy that boosts economic growth. When the government spends, the amount of money in circulation increases in the economy, this boosts the economy and may save it from a stagnant growth. Imposition of tax reducing policies is a possible solution for boosting the economy. Taxes are withdrawals from the economy; it reduces the amount of money in circulation. A reduction in tax levels means an increase in income in the economy and reduction in cost of production. This will boost productivity in the economy and as a result, its growth. Employment is also a factor that benefits as there is job security. According to Matt (2012), income policies are also possible solutions for the control of inflation. In the situation of inflation, imposition of reduction measures on salaries, wages ensures that the restoration of people’s purchasing power and a reduction in price of commodities. Critical Evaluation Monetary policies such as adjustment of the interest rates on the higher side solve the problem of inflation but on the other side, it has a negative impact on slowing the growth of the economy more than before. An increase in interest rates scares investors from taking loans and investing, although it encourages savings. Investment is a major tool for economic growth in any economy. Less investment means less growth. When people have less to spend, it means they limit their spending, holding money by the public reduces the amount of money in circulation that is to enhance growth, and this affects growth even more. Therefore, monetary policy can not be used as the only policy to remedy the economy. Government expenditure is another possible solution; however, certain spending of less value to the economy. The government can increase the amount it spends on more valuable projects but it still doesn’t help since it leads to high and faster chances of diminishing returns. An increase in government spending boosts the economy the more, up to a certain level, when more spending yields lesser results, this is the situation of diminishing returns. Amount of money in circulation becomes more, and the public start holding money, and not spending it. This is against the classical assumption that all money the public has is in circulation and that there is no holding of money. Diminishing returns on government expenditure (B) E1 E2 E3 (E) Government expenditure B and E represent the benefits of government expenditure and the government expenditure respectively. Benefits as a result of government expenditure increase with an increase in the level of expenditure up to the point B2, E2. As the government increases its spending (E3), the returns start to fall. Increase in government spending does not only cause diminishing returns but also hinders growth in the economy. Since economic growth is the current focus, government expenditure is not viable policy to remedy the situation. The Rahn curve illustrates the effect of government spending on economic growth. As the government increases its spending, the Gross Domestic Product increases due to the increasing levels of production, as people have money to invest and consume. This has a maximum level (Optimum size of the government) beyond which the GDP is lay off (Government outlays of GDP) Miller (2011), notes that the economy at this state requires policies that will reduce government expenditure and at the same time encouraging investment by the private sector in order to reduce government intervention in the economy and work towards a favorable budget. Imposition of cuts on taxes is a possible but not effective policy as Davidson, (2011) notes, the policy will result into the taxes for people with less income to increase and the marginal tax too, which is not a solution to stagflation. Unless it is progressive tax where taxes for the rich and poor people vary, where taxes for the rich are high, low income earners end up paying more taxes leading to a bias state in the growth of the economy, where the poor remain poor and the rich become richer. This does not improve the living standards of everyone and there is inequality. Imposition income policy is a feasible solution; however, it’s a one-way solution for the problem. The policy targets the salaries, wages and prices of goods, this aims on the demand side of the equation and not the supply side, when the side affecting the economy is the supply side. A decrease in Aggregate demand reduces inflation but leads to an increase in unemployment. Another remedy is only by aiming at cutting on taxes and equally increasing the interest rates to curb inflation, in order to solve stagflation. The problem involves inflation, and at the same time, unemployment and an economy of suppressing growth. The solution is a two-way policy that caters for both. Both employment and inflation need a remedy that is not suppressing to the other. Summary Stagflation impacts the economy in general and the Gross Domestic Product of a country. The supply of side of the country’s economy is the victim of inflation and suppressing growth, where exports deteriorate as a result of less production. The economy faces inflation and at the recession stage. The supply affects prices of goods which increase rapidly as the production continues to fall. Companies lay off workers as a result of increase in production costs or rather impose cuts on the employees salaries to meet the increasing costs of production. Both the supply and demand side affects the general economy. This posses the challenge as macro economic factors in the economy vary and policies that rectify the situation contradict. The appropriate policy to correct the economic default must involve both the supply and demand. Stagflation requires restoration of production and hence the supply to the levels of meeting the general demand. This includes re-establishing of resources that are not available or implementation of strategies that encourage production. According to Miller (2011) the appropriate policies to remedy stagflation is privatization. Privatization allows the government to hand over its businesses and their management to the private sector. This can be through reverse acquisition or total transfer to the private sector without merging. The private sector acquires total control on the business, and unlike government which aims at maximum social benefits, private sectors aim at maximizing profits. This policy facilitates a reduction in spending on the side of the government, as the private sector takes control of the management, control and production. This increases investment too as the private sector is investing by purchasing the businesses. At the same time, it is an encouragement to the private sector to invest. Together with privatization, the government should also ensure that the interest rates are at a favorable rate so as to encourage the investors to purchase the public businesses. The public budget is also in to benefit as it is a step working towards a balanced budget. Application of fiscal and monetary policies also serves as a way to rectify the unbalancing situation. Imposition of tax cuts affects the income of individuals and encourages production by reducing the cost industries incur in the production process. However, on its own can not solve stagflation. In addition to reducing taxes, the government can also regulate the level of interest rates by reducing the rates. This encourages consumption and investment, however discourages savings. As people invest more, it ensures economic growth in return. The policy is a two-way strategy as it solves the demand problem and at the same times the supply. It reduces the cost of production and increase output or productivity and encourages investing at the same time, and equally attempt to solve inflation and economic growth (Pirayoff, 2011 p. 82). The Australian government should focus on revising its policies and rely on both the fiscal and monetary policies for balancing its budget and ensure economic growth. Taxation is a good regulating policy but is harmful to the survival of the economy where there is over reliance. Government intervention is good both for consumers and in the general market as it regulate s the operations in a given market. However, government interference to the extreme has negative impacts to the economy as it discourages growth and may lead to the unbalancing situation of the public budget. Reference Garman, E. T., & Forgue, R. E. (2011). Personal finance. Australia, South-Western Cengage Learning. Davidson, D. (2011). Stagflation' looms for Australia's economy < http://www.abc.net.au/unleashed/2814668.html> Edge, K. (1999). Economic issues in the Australian economy: Unemployment Riler, K. (2011). Crowding out < http://www.americanthinker.com/2011/06/crowding_out.html> Matt. (2012). How to solve inflation Pettinger, T. (2008). The Rahn Curve – Economic Growth and Level of Spending Béland, D. (2011). Ideas and politics in social science research. Oxford, Oxford Univ. Press. Pirayoff, R. (2004). CliffsAP economics micro & macro. Hoboken, NJ, Wiley. Read More