Macroeconomic Policy in Australia - Case Study Example

Name : xxxxxxxxxx Institution : xxxxxxxxxxx Course : xxxxxxxxxxx Title : Macroeconomic policy in Australia Tutor : xxxxxxxxxxx @2010 Table of Contents Table of Contents 2 Macroeconomic policy in Australia 3 Introduction 3 Economic growth 3 Challenges facing policy makers in the year 2010 4 Instruments and targets’ in macroeconomic policy 5 Reserve Bank of Australia (RBA) 6 Current microeconomic policy 7 Government spending 8 Conclusion 9 Bibliography 10 Macroeconomic policy in Australia Introduction Australia’s plentiful and diverse natural resources attract great levels of foreign investment and also encompass extensive reserves of coal, iron ore, copper, gold, natural gas, uranium and renewable energy sources. A series of main investments like the US$40 billion Gorgon Liquid Natural Gas project will considerably expand the resources sector. Australia also possesses a large service sector and is a significant producer of natural resources, energy and food. The key doctrines of Australian’s trade policy involve support for open trade and the flourishing culmination of the Doha round of multilateral trade. Economic growth The Australian economy grew for 17 successive years until the global crisis. Consequently the Rudd government launched a fiscal stimulus package valued at over US$50 billion to make up for the effect of the slowing economy all over the world and the Reserve Bank of Australia slashed interest rates to historic lows. These policies - and unrelenting demand for property, particularly from China - helped the Australian economy bounce back after just one quarter of negative growth. The economy expanded by 1.5% during the first three quarters of 2009 - the best performance in the OECD. In the late 2009, unemployment levels which were anticipated to hit the levels of 8-10% hit a peak of 5.7% and had already dropped to 5.3% by February 2010. As a consequence of the enhanced economy the budget deficit is anticipated to peak below 4.2% of GDP. Challenges facing policy makers in the year 2010 Some of the challenges facing policy makers in the recent past concerning the economy include low world real interest rates, falling prices of investment goods and the rise in china and India and their influence on commodity prices. The world real rates in the interest has halved since the 1990s as a result of lower world inflation, a drop in investment in goods and high rates of saving in China as well as other Asian countries. These have resulted to lower borrowing rates in Australia which has assisted to force asset prices higher with equity prices, rent prices and household wealth hitting record levels. These have consequently hindered high rates of growth in household consumption and huge levels of trade investment and house construction. This influence has also spread to all other industries though the greatest impact has been in the construction sector (Dornbusch, 2006). The prices of investment commodities have also dropped. Imported investment commodity prices have dropped by 40% over the past few years, with consistent huge drops in information technology and costs of software. This has brought about specific negative consequences in some sectors such as finance and insurance, communications, whole sale trade as well as the service sector which highly depend on the information and technology. The greatest hindrance is that the pace of adjustment has dropped in the last few years with the portion of information and technology in investment expenses stabilizing and the productivity benefits starting to taper off. This coupled with lower interest rates, the dropping prices of investment commodities are resulting to huge capital intensity across all sectors and huge changes within various sectors. The rise in China and India together with the resulting impact in the prices of goods has also posed a great challenge to policy makers. The economic rise in China and to some extent in India has forced the prices of goods to increase to high levels which have consequently led to transitional problems on the economy especially in the construction sector as new mines are established. This has resulted to high demand and activity in Western Australia and Queensland (Dornbusch, 2006). Instruments and targets’ in macroeconomic policy Australian governments over the past years have always aimed at achieving three crucial objectives. The three objectives are economic growth, internal balance and external balance within their economy. The three objectives are aimed at maintaining national economy growth while preserving low inflation and also restraining the size of foreign debts and liabilities. The rate of economic growth in any particular economy is never consistent since it is subject to the ups and downs of the international business cycle. Government macroeconomic administration is planned to reduce these fluctuations by impacting on the demand. As a result sustained growth was enabled, with low inflation and low unemployment rates. Nevertheless, due to its demand-side form, macroeconomic policies cannot be applied exclusively and thus applied in conjunction with the supply-side impacting on microeconomic reforms. In impacting on demand with and economy, the government applies the two instruments of fiscal and monetary policy (Bartolott, 2006). Australia GDP Growth Accelerated The Gross Domestic Product in Australia rose at an annual rate of 0.90 percent in the final quarter. The GDP has grown as a result of increase in interest rates which were affected by the RBA governor. Growth is expected to rise this year as a result of China’s demand for resources in the stokes investment by organizations which include BHP Biliton LTD and Chevron Corp. machinery and tools investment increased by 10.9 percent and government spending increased by 1.8 percent. This has led to a situation in which the Australian economy is outperforming other countries making its dollar to be the most traded currency. The currency has grown by 42% when compared to the U.S dollar in the past year (Bartolott, 2006). Reserve Bank of Australia (RBA) The Reserve Bank Act in Australia permits the payment systems board to form the Reserve Bank payment system policy. This is carried out in order to command risk and to assist in competitiveness and equilibrium in the financial system. The Bank’s mandate through the Payment Systems Act, it has the responsibility of regulating any payment system and can establish binding rules for safeguarding the duties of the system. If the members of a payment system are faced with the challenges of market risk, safety or competition, the RBA acts as the arbitrator to the consent of the parties involved. The Reserve Bank also has the responsibility of collecting information from a payment policy. In connection with the application of fiscal policy, monetary policy encompasses action by Reserve Bank of Australia (RBA) to have an impact on the cost and accessibility of money and credit in the economy. Over the past, monetary policy’s aim is to realize internal balance by having some impact on the revels of interest rates through domestic market activities which include trade in government bonds, handling a shortage or surplus of funds in that order, in the short-term money trade. To simplify or relax monetary policy, the RBA will purchase bonds in order to establish excess liquidity, placing descending pressures on interest rates, permitting enhanced consumer and investment expenses and ultimately lessen unemployment. Tapering monetary policy in reaction to rising inflationary pressures would stimulate the RBA to trade bonds, soaking up funds and thus raising the interest rates to reduce expenditure. In the entire business cycle, the RBA will consistently tighten and relax monetary policy to control inflation from spilling its target range which is set at 2-3%. At some instances the RBA has an impact on the exchange rate in order to sustain stability but without changing the monetary policy position. This is realized through sterilized involvement where the RBA would have to trade in bonds equivalent to dollars (Dornbusch, 2006). Current microeconomic policy The form of the Australian economy is consistently changing in reaction to domestic and international pressures which themselves are incessantly changing. In the past five years the service sector has unrelenting its inevitable raise whereas during the same time the mining sector has established a rebound in reaction to the rising world demand for goods. Manufacturing production has moved to goods regarded as more knowledge intensive that focus on design and various other components. Organizations have expanded and information communication and technology has taken the place of many clerical workers who have moved to other service industries. To assess the drivers of structural change over the past five years and what is anticipated over the next decade, it is necessary to differentiate between the factors that are beyond the Australian industry and government (Hart, 2009). The prices of world manufacturing commodities especially those that are labor intensive have fallen. The collective impacts of economic development in China and India, low interest rates and the application of ICT has resulted to a drop in the prices of manufacturing commodities all over in the world in the past five years. This trend is the less discussed reverse of the enhanced terms of trade. But unlike consumer prices which are expected to drop over the following years, the change in importation of manufactured commodities will continue. Falling relative prices in importations have two significant effects. They are enhancing consumption and real incomes and they are resulting to decreases in labor intensive competing firms (Hart, 2009). Government spending As spending require a funding through revenue, spending has accompanying costs resulting from taxation, varying resource allocation and minimizing economic growth. The higher the tax rates, the more the distortion and thus all other factors kept constant, higher government spending is expected to reduce the economic growth. A point worth noting is that government spending can either be welfare enhancing or detrimental to the welfare depending on whether the gains from the spending are higher than the expenses of taxation required in finance it. Macroeconomic policies have in the past been effective in influencing the short-term demand economy. In the past decade fiscal policy has had great impact in the policy mix, where the government has applied this objective to enhance Australia’s national savings and to manage government public debt in order to place peripheral factors under control and sustain external stability, offering opportunities for economic growth. In other words the government has in the past applied fiscal policy to establish external balance, though private sector saving and investment decisions are at the moment better placed due to successful microeconomic improvement. The government recognizes Australia’s position as a capital-importing country and attracting foreigners to invest within Australia in order create capital surpluses and by definition, current account deficits. As a result the current favorable stance of the economy, the Howard government has steadily left out the fiscal policy in its quest for external stability since it is not among the government’s prioritized objectives. In its place, the government ensures that it has no influence via private sector loaning and public sector debt to the CAD. The government still promotes private sector reserves, though according to the 2003/04 budget, the government has moved the role of fiscal policy to that of supplementing the monetary policy in the quest for internal balance and enhancing a significant economic growth (Bernanke, 2007). Conclusion After many years of budget surpluses, the past two years have found marginal deficits of almost $1billion, showing the government’s changing position in regard to maximization of growth. The government’s come back to a neutral fiscal position leads to reasonable upward or descending pressure from the public sector (G-T), on the circular flow. Due to these changes, the circular flow will merely be established via private division demand (C+I) and net exports (X-M). In 2003, private area demand via private consumption expenses, resulted to 1.6% to real GDP growth of around 3.25% with the demand in the private sector and trade investment also contributing a figure of around 1.6%. In 2003/04, the withdrawal of the boost in expenses in the public sector is anticipated to be met by a boost in the entire investment. The trade investment in this case is anticipated to rise by 7% (Blinder, 2008). Bibliography Bartolotti, N., 2006, Inflation, fiscal policy and central banks. Nova Publishers, New York. Bernanke, B., 2007, Principles of macroeconomics, McGraw-Hill/Irwin. Sydney. Blinder, A, S, 2008. Macroeconomics: Principles and Policy, Cengage Learning, New York: Australian Economic Review; June, Vol. 40 Issue 2, p216-224. Dornbusch, R, 2006. Macroeconomics, McGraw -Hill Australia, Sydney. Hart, J, A, 2009, The Politics of International Economic Relations, Cengage Learning, New York. Read More