The Macroeconomic Policy in Australia - Example

The Macroeconomic Policy in Australia Name Grade course Institution Tutor Date Abstract Economic growth in any country is a major boost in addressing the issues facing a country like, unemployment, inflation and trade. The level of economic growth is not always constant and is subject to ups and downs as a result of the international trade cycle. The macroeconomic policies adopted by governments are meant to cut down the fluctuations by influencing demand in order to sustain growth and guarantee low inflation and unemployment. The Australian government employs fiscal and monetary instruments in order to influence demand and economy in order to address four main objectives of economy, inflation unemployment and growth which are addressed in this report. Monetary policies are employed to control inflation and interest rates while fiscal policies are used to improve the aggregate output of the economy. Combining both tools appropriately creates economic stability. For close to a decade, Australian government has used these tools to control the rate of inflation which in turn would help attain economic stability while at the same time avoiding the recession. This report will analyze the economic experience of Australia in the last decade while highlighting the challenges policy makers had to endure. It will also look at instruments and targets in macroeconomic policies. Introduction For the last few decades, the government of Australia has been focusing on how to stabilize trade both internal and external for the purpose of fostering economic growth. As a result of the global financial crisis (GFC), the Australian government has been forced to adopt fiscal and monetary policies to help address other issues like unemployment, inflation and trade (Thompson, Murray & Jomini 2007, p.37). This report focuses on the macroeconomic policies for economic growth, unemployment, inflation as well as trade. The report will give more emphasis on analyzing whether these policies support stability or if change is needed for stability to be realized. To help understand the impact of the macroeconomic policy, the report will focus on the target by the Australian government and monitor the trend for the last eight years. Section 1: Macroeconomic policy as currently set in Australia Economic growth Economic growth is measured in terms of growth domestic product (GDP). GDP refers to the rise in the value of the final output produced by a country over a period of one year. Australia has been very aggressive in the use of fiscal policies to minimize the macroeconomic impacts arising from GFC. The net federal debt has remained low as at 10 percent of the GDP even after the fiscal deficits spanning for the past few years. Sustainable fiscal policy makes it a requirement that the public debt does not rise relative to GDP (Soyoung 2005, p.776). During the GFC, the government debts rose but this had to be brought down when the economy recovered. The federal government has tried to phase out the fiscal stimuli which were applied during the GFC as the 2012-13 budget suggests. During the fiscal year 2012-2013, the net debt is expected at $143 while the GDP will grow at a rate of 9.2% which is the highest since 2007 when the GFC started (Budget overview 2012-13). Unemployment The Australian government has worked had to reduce the level of unemployment to 6 percent. The government has set policies that make the labour market flexible and ensuring that the economy is not subjected to boom-bust cycles as it was in the past (Allen & Wood 2006, p.154). The government support policies that allow flexible working hours where people can be paid in terms of hours they have worked as well as the people can work on part-time schedules. Further, the government has steady policies on product market reforms which ensure that the industries that provide jobs are protected. For those who fail to benefit from the labour market reforms, the government offers unemployment benefits (Hubbard, Garnett, Lewis & O’Brien 2010, p.44). Inflation The Reserve Bank of Australia (RBA) is mandated to keep check of the interest rates of the loans circulating in the money market (cash rate) all the time. The cash rate affects the way lenders and borrowers behave thereby affecting the economy and inflation as well. While setting the monetary policy, the RBA maintains price stability, economic stability, jobs and the general welfare of the citizens. The Bank sets an inflation target in order to keep the consumer inflation in the economy between 2 and 3%. In so doing, the Bank aims to restore the value of money thereby encouraging sustainable growth of the economy (Soyoung 2005, p.777). Trade The Australian government regulates trade in order to improve the wellbeing of its people through tariffs and trade barriers. Australia has been focusing on trade liberalization in order to favour it exporters. The government has cut down the tariffs to its exporters especially to those exporting goods to Asia-Pacific which is its major trade partner (Hubbard et al 2010, p.47). Section 2: trend of the macroeconomic policy Economic growth: Australia’s economy has experienced growth in real GDP per capita for over a decade now. According to the Australian Bureau of Statistics (2008), since early 90s to 2005, real GDP per capita has gone up by 36% (Love & Payne 2008, p.469). The growth in GDP maintained a stable trend between 1995 to 2007, apart from the slight decline recorded in 2000-01 period as indicated in the figure below. The worst decrease in GDP was recorded in 2007 when the GFC was at its peak. The government has been keen on its budget by determining its spending and revenue in a manner that the budget influences the economy by fiscal deficit, surplus or coming up with a balanced budget (Otto 2007, p.218). In so doing, the government fiscal policy has been effective in ensuring that the economy of Australia grows in the upward direction. Fig 1: GDP changes Source: (Sinai 2009, p.12) Unemployment Over a decade before the global recession, employment in Australia grew every year by about 2.3% as the trend in the graph below indicates. Availability of full time employment grew by 1.9% and that of part-time by 3.5%. After the recession in September 2008, growth in employment stalled and unemployment rose to 5.9% in 2009. In the following years, the economy saw great improvements with employment growing by about 3.3% in 2010 and unemployment falling to 4.9% and participation rate being recorded at 65.8%. In March, 2012 unemployment had settled at 5.2% (Sinai 2009, p.17). The government macro-economic policy on employment has been on ensuring flexible labour market that will ensure that majority of the citizens get some work. Fig 2: unemployment trends Source: (Sinai 2009, p.19) Inflation In the 1980s, inflation rate in Australia was at 10% and by early 90s it fell substantially to below 8% and now averages at 2% as indicated in the graph below. This was partly because the RBA set a target of 2-3% inflation rate and employed policies to attain the target. The RBA main aim is to maintain inflation at these rates because the economy is perceived to be at full employment at these levels (Cavallari 2008, p.540). The policy has been effective in controlling the value of money in the market and ensuring that Australians can afford to shop in the market and still save part of their income. Fig 3: inflation trends Sources: (Cavallari 2008, p.541) Trade In order to thrive from the GFC, Australia decided to have a trading economy that is dynamic and open. Trade liberalization policy has always received more attention by the Australian government because it supports trade. As a result, the country’s exports reached $300 billion in 2011 for the first time; this represented 20 percent of the GDP. Also, an annual trade surplus of over $18 billion was realized as a result of the outstanding performance (Otto 2007, p.220). Australia has also maintained to control the strength of its currency by support export trade thereby reducing inflation. Section 3: strengths and threats Threats During the 2008-09 periods, the level of inflation in Australia went high as a result of GFC. The purchasing power and the wealth of the citizens were heavily affected. This had a long term impact on business decisions and consumer behaviors because investors are faced with a difficult task of predicting the impact that may arise on their investments as well as savings. This fear may affect the economy which largely depends on the investors’ initiative in the economy. The policy makers are thus required to ensure that the inflation rate remains very low in order to attract investors. The Australian government has a policy of unemployment benefits for the unemployed population. Policy makers should ensure that unemployment rates remain as low as possible since any increase in unemployment would result to an increase in government expenditure. Just like in 2008-09, the unemployment rates went up and the government had to spend more in unemployment benefits, such expenditure would have been spent on other important government expenditures. A recurrence of a period similar to the 2008-09 will be the major threat on the economy of Australia that has almost recovered. Strengths Targets and monetary policies Macroeconomic policies in Australia like many other countries, seeks to ensure that its citizen are employed, there is economic growth, limited or no foreign debt and low levels of inflation (Otto 2007, p.221). The RBA set a target of 2-3% inflation in the early 90s and they need to implement instruments to attain this target. To attain the above set target, the RBA had to use proper monetary policies to control the money supply. In the late 90s and early 2000 when inflation was high, money supply had to reduce in order to counter the high rates therefore contracting monetary policies had to be engaged to counter the high supply. According to Hubbard et al (2010, p.19) the government spending is a key factor in economic growth. The more the government spends, more jobs are available and more opportunities for business to getting contracts. Although key to growth, the government should device policies to ensure that it does not overspend and hence need to borrow externally. The other instrument that Australia has used to create growth in the economy is shifting from producing to manufacturing. This improves the net export as more is exported than imported. This has been motivated by the government through proper monetary policies improving the value of the currency hence attracting more investors to build facilities to produce products for export (p.21). Taxes are part of people’s lives and cannot be avoided. Through proper fiscal policies, the Australian government has devised means to make taxes that are friendly to investors and tourists and hence the level of production and tourist visiting the country rises (Love & Payne 2008, p.473). Tourism, mining and service contributes a big part of the economic development. This has only been possible because of the friendly taxes the government has established. The government has limited its spending to tax collection so that it does not need to increase taxes or introduce more. These fiscal policies ensure that taxes do not cause inflation to go up hence distorting the economy (Afonso & Sousa 2012, pp. 4441) References Afonso, A. & Sousa, R, 2012, ‘The macroeconomic effects of fiscal policy’, Applied Economics Vol. 44, no.34, pp 4439-4454. Allen, W. & Wood, G. 2006, ‘Defining and achieving financial stability’, Journal of Financial Stability Vol.2, No.2, pp 152–172. Budget Overview, Budget 2012-13, Australian Government, Canberra: http://www.budget.gov.au/2012-13/content/overview/html/index.htm Cavallari, L. 2008, ‘Macroeconomic Interdependence with Trade and Multinational Activities’, Review of International Economics, Vol. 16, No.3, pp 537-558. Hubbard, G., Garnett, A., Lewis, P. & O’Brien, A. 2010, ‘Essentials of Economics’, Pearson Education, NSW. Love, R., & Payne, R. 2008, ‘Macroeconomic News, Order Flows, and Exchange Rates’,Journal of Financial & Quantitative Analysis, vol.43, no.2, pp 467-488. Otto, G 2007, ‘Central Bank Operating Procedures: How the RBA Achieves Its Target for the Cash Rate’, Australian Economic Review, Vol. 40, No. 2, pp 216-224. Sinai, A. 2009, ‘Macroeconomic Policy Challenges and Choices in a Time of Crises’, Challenge (05775132), vol.52, no.2, pp 5-35. Soyoung, K. 2005, ‘Monetary Policy, Foreign Exchange Policy, and Delayed Overshooting’. Journal of Money, Credit & Banking, vol.37, no.4, pp 775-782. Thompson, G., Murray, T. & Jomini, P. 2007, ‘Trade, Employment and Structural Change: The Australian Experience’, Pearson Educational, NSW Read More