Macroeconomic Policy Setting Currently Being Applied in Australia - Essay Example

Name: Professor: Course: Date of Submission: Macroeconomic Policy Setting Currently Being Applied In Australia The economic policies adopted by any given economy highly determine the growth rate and sustainability of that country’s economy. The Australian government has adopted the monetary and fiscal macroeconomic policies in medium-term framework. States apply different macroeconomic policies with the aim of establishing a stable economy that is capable of supporting investment decisions. The success of an economy leans heavily on the structural reforms and macroeconomic stabilization efforts by the government. Monetary policies are implemented by central banks in different states whose greatest role revolves around creation of stable economic conditions. The Reserve Bank in Australia (RBA) is charged with maintenance of the inflation rate on average of around 2 to 3 percent over the course of the business cycle while at the same time keeping monetary conditions conducive for sustainable growth in output and employment (OEDC 2006). The government applies the fiscal policy at the commonwealth level to achieve a balanced government budget. The medium-term orientation of these economic policies has enabled the government to achieve significant macroeconomic stability reflected in lower inflation as well as variability of inflation and output growth over the last few decades. Fiscal policy can influence economic growth through its impacts on the level of real long-term interests. Application of monetary policies in medium-term framework enables flexibility where in case of domestic economic slowdown and weakening of the international economic environment expansionary macroeconomic policies can be adopted. Expansionary macroeconomic policies involve relaxation of budgetary policies as well as reduction of interest rates. After improvement of the domestic economic situation, such expansionary macroeconomic policies may be wound back or completely removed if the international economy improves. Following the current encroachment of inflation in Australia, the government has faced significant challenges in maintaining a stable economy, and has sought to strengthen application of its monetary and fiscal policies to rescue the situation. This paper will describe the macroeconomic policies currently applied in Australia, and their suitability in the context of expectations about economic growth, unemployment, inflation, and trade over the next year. The Australian Macroeconomic Policy Setting The Australian government has endeavoured to foster economic growth through establishment of internal and external balances within the state’s economy. In this respect, the government has adopted macroeconomic policies such as the monetary and the fiscal policies with the ultimate goal of ensuring sustainability in the national economy growth as well as retaining low inflation rates and reduction of foreign debts and liabilities (OEDC 2006). Although the national economy’s stability is threatened by subjection to international markets, macroeconomic policies play an important role in countering possible economic growth fluctuations through imparting changes in the domestic demand. These policies ensure a sustainable economic growth characterized by low inflation rates and low unemployment rates. Despite the importance of macroeconomic policies in influencing demand, successful implementation of these policies involves combination with other legislations that influence the supply side of the economy as well. The Fiscal Policy Fiscal may be viewed as a collective term representing the use of taxation and government spending to influence the level of income or economic growth. Measures in the fiscal policy fall under two categories including expansionary and contractionary measures. The expansionary fiscal policies involve spending and taxation measures that tend to raise income while the contractionary policies entail measures that seek to reduce income. The government’s budget serves as the main tool in application of the fiscal policies in which economists influence the economy of a nation through manipulation of government spending and revenue (Comley, Anthony & Ferguson 2002). The economic activity is normally influenced through application of three types of budget including the fiscal balanced, deficit and surplus budgets. Government budgetary elements have the potential of influencing the national economy while the economy can also influence the budget. Since the main source of financing budget deficits comes from the printed money, fiscal policy is closely linked to monetary policy as an important element in stabilizing economies undergoing transformations. In this case, balancing of fiscal budgets is important because persistence of fiscal imbalances pose serious risks for the sustainability of the long-term economic growth as it triggers higher inflation rate (International Monetary Fund 2006). One of the important steps in macroeconomic stabilization strategies involves reduction of fiscal deficits so that revenues and expenses in the state budget can be more balanced. Reduction in state expenditures and increasing of state revenues ensure radical stabilization of the state economy. Balanced budgets are particularly important because they have formed the main criteria for receiving IMF financing and other credits from international financial markets (Wolchik & Curry 2010). Terms for the application of the fiscal policy in Australia are stipulated in the Charter of Budget Honesty Act 1998. According to the Act, the fiscal policy in Australia should be used to maintain the government’s debt at prudent levels as well as ensuring achievement of increased national savings and minimization of fluctuations in economic activities (Henry 2003). In addition, the Australian government applies the fiscal policy to establish policies that have the ability to morph into economic stability, reasonable tax burden on its citizens as well as ensuring integrity in its taxation system. Effectiveness of the Fiscal in Australia Application of the fiscal policy by the Australian government has been critical in reduction of its net debt for the past three years. The Australian government’s net debt position remained very strong in the period between 2008 and 2010 owing to the discretionary fiscal action and the operation of the automatic stabilizers on the budget (Ray 2008). Fiscal policies play a critical role in dealing with short-term fluctuations in demand, enabling the economy to function well below its threshold. In order to achieve this, the government has stimulated demand in the economy through increased spending on goods and services, transfer of payments to other sectors as well as reduction of taxation. Amid the ongoing global financial instability, the government has supported the application of expansionary fiscal policies in order to stimulate economic activity through influence of demand. Adoption of the fiscal policy in the context of medium-terms has facilitated adjustment of the policies to suit the prevailing conditions. Although there have been reports of crowding out and encroachment of unwanted inflation in the country, medium-term strategy application of the fiscal policy has enabled limitation of such occurrences. According to Barrett (2011), the Australian economy would have had an extremely bad experience during the recession without the fiscal stimulus than it did in its presence. These findings are clearly disputed speculations by some anti-macroeconomic policy economist that the Australian economy would have withstood the impacts of the recession without these policies but with China’s support. The success of fiscal policy in Australia is attributed to several factors including better financial regulation that prevented collapsing of financial institutions, flexible labour markets, flexible exchange rates, and action by the central bank to cut down interest rates during the recession (Barrett 2011) The Monetary Policy Monetary policy refers to actions undertaken by the Reserve Bank of Australia to control the value of money, its availability as well as credit within the national economy. Monetary policies are adopted in order to establish internal balance of the state economy through manipulation of interest rates. The monetary policy plays a critical role in controlling the sale and purchase of government bonds, prevention of shortage or surplus of the national currency that have a direct impact on the stability of the national economy (Milakovich & Gordon 2008). Application of the monetary policy has emerged crucial in boosting investment and reduction of unemployment rates. In order to achieve this, the RBA creates increased liquidity in the economy through purchase of bonds and securities as well as reduction of interest rates. In response to increased inflation, the RBA results into the selling of the purchased bonds, and soaking up funds in order to increase the interest rates. RBA maintains the inflation rates within the range of 2 to 3 percent through periodical tightening and loosening of the monetary policy. The main objective of monetary policy revolves around achievement of the inflation target over the medium term as well as encouragement of a strong and sustainable growth in economy (Hossain 2009). The monetary policy has been instrumental in ensuring the stability of the Australian currency, maintenance of low unemployment rates as well as promotion of the country’s economic prosperity and welfare of the Australian people. Adoption of inflation targeting, which is facilitated by the RBA through tightening of the monetary policy has been instrumental in keeping the inflation rates low in country during the recession period. Despite the challenges posed by the ongoing financial crisis, monetary policies have been crucial to the sustainability of the Australian economic growth. Through loosening of the monetary policy, the country saw sustainability of the economic growth and increased investment through reduction in loan rates. Effectiveness of the Monetary Policy The Australian monetary policy has shown significant effectiveness in its application where the interest rates went down up to 3 percent in 2009 in order to encourage economic activity following the global financial crisis(Ray 2008). Despite the continued increase in unemployment rates and the decline in GDP growth, the situation would have been worse without manipulation of the economic elements through the monetary policy. Manipulations of the monetary policy have enabled Australia to withstand economic shocks emanating from the global economy and leading to significant stability of the national economy. Owing to effectiveness of the monetary policy, the unemployment continued to decline since 1998 when the economy rejuvenated until today, although studies show slight increase in the inflation rates amid the global economic uncertainties (Kearns & Manners 2006). In combination with the fiscal policies, the Australian monetary policy has been instrumental in sustaining the growth of the Australian economy. Prediction and Recommendation According to Nguyen (n.d), following stability in the Australian national economy, the government slowly sidelined implementation of the fiscal policy resulting into significant economic instability in recent times. Instead of implementing the fiscal policy fully, the government turned back to the monetary policy in ensuring internal balance as well as economic sustainability. As a result, the past few years have seen encroachment of slight changes in the inflation rates and increase in unemployment rates in Australia. Following the success of the macroeconomic policies in retaining inflation rates within the targeted range of 2 to 3 percent, and ensuring low unemployment rates in the past few years, continued application of these policies would see the country’s economy recover from the current increasing inflation rates and rise in unemployment. Implementation of the preventive approach achieved through increase in liquidity will ensure that inflation rates do not jump out of the set limits. According to Fatas and Mihov (2009), implementation of the fiscal and monetary policies has proven to be of great importance in sustaining the Australian economy, and despite having negative impacts on country’s infrastructure; they still have a great role to play in the national economy. Continued implementation of the macroeconomic policies by the Australian government could see its budget return to surplus in the next few years as the international economy continues to recover from the impacts of the global financial crisis. The current inflation changes in the Australian economy and the rise in unemployment should not be perceived to result from failure in the macroeconomic policies only, but also the impacts from the ongoing global economic meltdown. Instead, the Australian government should pursue other strategies that can boost the effectiveness of these policies such as fostering transparency in the policy implementation. The government can also pursue factors cited to have played an important role in conjunction with the macroeconomic policies in helping Australia recover from previous recessions such as proper financial regulation and establishment of stronger fiscal position (Barrett 2011). Other than the government pursuing the discretionary policy as a back up to the monetary policy, and automatic budget stabilizers, it should embark on creating a strong fiscal position capable of enabling the national economy to withstand the huge shocks from the global economic mishaps. In addressing the inflation, unemployment rates, economic growth and sustainability, the government should consider addressing the root of economic fluctuations rather than dwelling on reviewing the failures of the existing macroeconomic policies. Conclusion The Australian government has adopted the monetary and fiscal macroeconomic policies in medium-term framework to ensure sustainable growth in the national economy. Application of monetary policies in medium-term framework enables flexibility where in case of domestic economic slowdown, and weakening of the international economic environment, expansionary macroeconomic policies can be adopted. The monetary policy plays a critical role in controlling the sale and purchase of government bonds, prevention of shortage or surplus of the national currency that have a direct impact on the stability of the national economy. The RBA maintains the inflation rates within the range of 2 to 3 percent through periodical tightening and loosening of the monetary policy. The fiscal policy in Australia has been used to maintain the government’s debt at prudent levels as well as ensuring achievement of increased national savings and minimization of fluctuations in economic activities. The Australian government’s net debt position remained very strong in the period between 2008 and 2010 owing to the discretionary fiscal action and the operation of the automatic stabilizers on the budget. Following the success of the macroeconomic policies in retaining inflation rates within the targeted range and ensuring low unemployment rates in the past few years, continued application of these policies would see the country’s economy recover from the current increasing inflation rates and rise in unemployment. Other than the government pursuing the discretionary policy as a back up to the monetary policy and automatic budget stabilizers, it should embark on creating a strong fiscal position that is capable of enabling the national economy to withstand the huge shocks from the global economy. 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