Macroeconomic Policy in Australia - Monetary and Fiscal Policy - Case Study Example

Australia’s Macroeconomic Policies Contents Contents 0 1.Introduction 1 2.Macroeconomic Policies 2 2.1Fiscal Policies 2 2.2Monetary Policies 4 3.Impact of Macroeconomic Policies on Inflation, Unemployment, Commercial Expenditure and Economic Growth 6 4.Conclusion 7 5.Bibliography 8 1. Introduction Australian governments over precedent decades have conventionally aimed towards including triangular objectives of financial growth, domestic poise, and external poise within framework of single economy. (DORNBUSCH, Rudiger, 2006) Collectively, these trio set of objectives aim towards sustaining nationalized financial growth while retaining inferior inflation as well as limiting the mass of overseas debts and liabilities. Several researches conducted in concerned field have revealed that there is no consistency in level of economic growth though; it is influenced greatly by fluctuations of international business cycle. (DORNBUSCH, Rudiger, 2006) A governmental macroeconomic management is referred as an attempt to minimize the impact of international business fluctuations by controlling demand to facilitate sustained growth together with inferior inflation and unemployment. (BLINDER, Alan S., 2008) The macroeconomic policies, owing to influenced-by-demand nature, cannot be exercised exclusively and thus, are utilized in combination with supply side swaying microeconomic reforms. (BERNANKE, Ben, 2007) Conventionally, the fiscal policies are frequently implemented by Australian government to enhance domestic savings and to control government public debt in order to maintain adequate levels of external aspects and stability together with providing openings for economic growth. (BERNANKE, Ben, 2007) This paper hereby emphasizes on exhibiting current macroeconomic policy settings currently being applied in Australia in addition with suitable policies in the context of expectations regarding economic growth, unemployment, inflation and trade over the next year. 2. Macroeconomic Policies In influencing demand with and economy, the government uses the two instruments of fiscal and monetary policy. 2.1 Fiscal Policies “Fiscal policy” is the utilization of governmental expenditures together with taxation to sway the financial system of country. (SUESCÚN, Rodrigo, 2007) Usually governments execute fiscal policies to endorse sturdy and sustainable economic growth and diminish poverty. The function and aims of fiscal policy have achieved eminence in contemporary crisis as governments have intervened in markets to shore up economy, augment growth, and alleviate the impact of global financial crisis on susceptible groups. Governments unswervingly and obliquely sway the way possessions are utilized in an economy. (SUESCÚN, Rodrigo, 2007) Given below is a fundamental equation that demonstrates the way in which national income accounting works: “GDP = C + I + G + NX” In above equation GDP denotes gross domestic product i.e. the value of all final merchandise and services produced in economy. Whereas, C, I, G, NX denotes private consumption, private investment, procurement of goods and services by governmental agencies and net exports during a fiscal year i.e. amount of exports minus imports, respectively. (BARTOLOTTI, Leo N., 2006) The above equation contributes towards development of understanding that governments surely affects GDP by unswervingly controlling G and influences C, I and NX indirectly via modifications in taxes, transfers and expenditures. (BARTOLOTTI, Leo N., 2006) To attain short term goals, government’s centers their attention on macroeconomic steadiness for instance, motivating an ill economy, struggling with mounting inflation, or aiding to decrease external susceptibility on the other hand, to attain long term goals, the main intention is to cultivate sustainable intensification or decrease poverty with measures on the supply-side to progress infrastructure or edification. (BLINDER, Alan S., 2008) Though, these goals are generally common across nations, but their relative significance diverges depends on circumstances of a nation. (BARTOLOTTI, Leo N., 2006) In case of Australia, its current financial position is stabilized by both, internationally as well as historically. Via implementing correct fiscal policies Australian government had gained success in writing off its net debt and has continued its voyage towards strengthening the country’s balance sheet by issuing budget surpluses and gathered fiscal assets to future funds. According to “intergenerational report” issued in year 2007 by Australian treasury demonstrates that in long term, the intergenerational financial pressures pose unremitting challenges to be faced by governmental finances. (www.treasury.gov.au) The reports also projects that by the fiscal year 2046-47, the governmental expenditure is assumed to exceed income by approximately 3.5 % of GDP. Owing to these assumptions by Australian treasury, the government has commenced strengthening its balance sheet by generating assets in future funds to counterbalance the liabilities owed to former as well as current public sector employees. (www.treasury.gov.au) Source: Australian treasury projections 2.2 Monetary Policies In accordance with the provisions made by legislation of “Australia’s Reserve Bank Act”, the main goals of Australia central bank is to maintain the stabilization of national currency, economical prosperity, wellbeing of citizens and implementation of essential measures to avert joblessness. (KENYON, Peter D., 1995) The provisions made in above said act makes necessary for RBA to present a report annually to treasury department and to parliament, through which it gets public. (KENYON, Peter D., 1995) As per the statement issued by RBA on monetary policy in Feb, 2008, it is revealed that the despite of tremendous slowdown in worldwide financial markets, Australian economic condition all through out in recent years had demonstrated great results in addition with elevated levels of inflation owing to the constant domestic demand. (www.rba.gov.au) Together with utilization of fiscal policies, monetary policy also comprises measures implanted by RBA to manipulate the cost & availability of liquidity and credit with in Australian economy. In order to achieve internal balance RBA sways the level of interest rates using nationalized market operations like selling and procuring of governmental bonds, rectifying scarcity or excess of funds in short term liquidity market. (www.rba.gov.au) The report further states that the fiscal accounts of Australia in preceding year had exhibited economic growth of four percent over year with raise in nationalized demand by five and a half percent which is undoubtedly more than trend growth within economy’s yielding capacity. (www.rba.gov.au) Due to the counter balancing approach of RBA, there has been augmented growth in consumer growth which is being driven by the intensification of household incomes which further demonstrates the elevating levels of employment and actual wages together with decreasing income taxes. (PUBLISHING OECD PUBLISHING, 2008) According to economic indicators, it is revealed that this raising trend of nationalized demand had sustained its pace till quarter ended in December; however the speed of production growth had moderately slowed down as most of consumer demands were met by imports. In the midst of consumer demand still mounting robustly post elongated duration of development, there have been unrelenting signals that industrious capability is over lengthened backed up by a number of commercial surveys that indicates both elevated rates of industrious capability consumption and soaring levels of labor insufficiency. (OECD, 2009) Over the route of the trade cycle, it is anticipated that Reserve Bank of Australia, in the coming future will emphasize on tightening and loosening of monetary policy to prevent inflation dropping over its tow to three percent approximate target range. (www.rba.gov.au) However, according to researches conducted in concerned field by economists demonstrates that to maintain economic stabilization, the Reserve Bank of Australia should manipulate the rate of exchange devoid of modifying current stance of monetary policy. (www.rba.gov.au) This ought to be achieved via procurement and selling of bonds equal to amount of Australian dollar traded over time to maintain liquidity stabilization. (www.rba.gov.au) 3. Impact of Macroeconomic Policies on Inflation, Unemployment, Commercial Expenditure and Economic Growth Australian macroeconomic policies had witnessed a great accomplishment in maintaining the growth of inflation within its pre-specified goals, with the existing rate of price rises, as deliberates through the “CPI,” at 2.6%, i.e. inside the set range of Reserve Bank of Australia. (VINEY, Christopher, 2009) The RBA’s preventative approach towards aiming monetary policy to hoist the liquidity rate from 3.00 % to 3.25 % would make certain that inflation would not drop more than its target range. (VINEY, Christopher, 2009) Source: Australian treasury projections With regard to unemployment, the sluggish rate of economic growth of early 90’s - mid 90’s leaded to high rate of joblessness in country i.e. on an average of 8.5 % though, via implementation of current macroeconomic policies the economic growth of Australia began to gain its lost pace in fiscal year 1998-99 (VINEY, Christopher, 2009) and since then, the rate of unemployment in country had dropped down to the current level of 5.8 % which is at its lowest in past thirty three years. (VINEY, Christopher, 2009) Even though, triumphant macroeconomic policies substantially decrease recurring unemployment, these policies are observed to slightly effect structural side of unemployment thus, consequences in supply-side micro reforms. Nationally, the economy had continued to demonstrate extensive flexibility in the countenance of what has been a very complex global environment. (www.rba.gov.au) The Dec and Mar quarter GDP data, in combination with other data signals on economy, implies that industrious output constricted only discreetly around the ending of last fiscal year, evaluated with retrenchments experienced in most of the other nations. 4. Conclusion It is evident that the macroeconomic policies exercised by Australian central bank as well as government had proved to be victorious in limiting negative influences of demand, but on other hand, these policies are also recorded to have petite impact on the infrastructural issues of Australia. (HART, Jeffrey A., 2009) Due to the state of recession in global markets, the results anticipated in 2008 statement of Reserve bank of Australia were not met but the current monetary and fiscal policies has managed to achieve some of it. (OECD, 2009) Several economists had indicated that as policies post implementation takes at least six to eighteen months to be fully effective to feed through end user and commercial behavior, the current steps taken by RBA will strengthens the business investments, end user spending and will boost the employment rate in country. (www.treasury.gov.au) The present lack of apprehension over the CAD at the moment efficiently eradicates the “Barrier” to economy growth, facilitating elevated rates of expansion more than rate of 3.75% - 4%, placing Australia on the right track toward maximizing economic sustainability. (www.rba.gov.au) This paper hereby had present knowledge on key fiscal as well as monetary policies exercised by Australian central bank to attain a stable and unremittingly improving economy. 5. Bibliography BARTOLOTTI, Leo N. 2006. Inflation, fiscal policy and central banks. Nova Publishers. BERNANKE, Ben. 2007. Principles of macroeconomics. McGraw-Hill/Irwin. BLINDER, Alan S. 2008. Macroeconomics: Principles and Policy. Cengage Learning. DORNBUSCH, Rudiger. 2006. Macroeconomics. McGraw-Hill Australia. HART, Jeffrey A. 2009. The Politics of International Economic Relations. Cengage Learning. KENYON, Peter D. 1995. Monetary policy in Australia: an introduction. Dept. of Economics Murdoch University. OECD. 2009. Economic Policy Reforms: Going for Growth 2009. OECD Publishing. PUBLISHING OECD PUBLISHING. 2008. OECD Economic Surveys: Australia 2008, Issue 18. OECD Publishing. SUESCÚN, Rodrigo. 2007. “Fiscal policy, stabilization, and growth: prudence or abstinence?” World Bank Publications. VINEY, Christopher. 2009. Mcgrath's financial institutions, instruments and markets. McGraw-Hill Australia. www.rba.gov.au. [online]. www.treasury.gov.au. [online]. Read More