Monetary and Fiscal Policy in Australia during the Last 10 Years - Case Study Example

Monetary and Fiscal Policy in Australia during the Last 10 Years Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Monetary and Fiscal Policy in Australia during the Last 10 Years Executive Summary The Australian economy has progressively boasted of continuous success. This is has taken place even at times when the big economies of the world have been experiencing hard times during the recent recession and the financial crisis. Inflation has been a major characteristic of the falling economies and Australia has survived the wrath of the harsh economic conditions. But what is the reason behind the success of the economic success? There are various policies which governments use to control the economies of their countries. Two of the widely used policies are the Fiscal and the monetary policies. The Australian government has employed the use of both of the policies to as to achieve the economic strength it boasts of. For the better quarter of a century, the country has boasted of a stable economy which was proof to the recession and the financial crisis that has hit the world as opposed to other economies in the world. The monetary policy has been working for Australia for the time being. The Reserve bank has over the years exercised its mandate of stabilizing the economy by utilizing a deficit. So far the country’s economy has been able to stay afloat amidst the crisis, which means that the country should continue operating with the deficit rather than shifting to a Fiscal surplus. Over the time the country has operated with a deficit, it has been able to maintain inflation at a rate of 2%-3%, a very low figure as compared to other countries, increase the GDP to a constant growth of about 3.25% and reduce unemployment to the current state of 5.6% (Debelle & Stevens 2009).According to these figures, it is evident that the government should continue operating with a deficit. This report gives an analytical approach on the use of the monetary policy and Fiscal policy in Australia and their effect on the Australian economy Introduction Achieving a stable economy is the aim of each and every country. For this reason, ever countries applies polices which aim at propelling the country economically. Policy making bodies are present in different countries and the power bestowed to them varies from country to country. One of the most common policy making bodies is the ‘supreme’ banks which are charged with ensuring that their countries are protected against economical fluctuations for instance the inflation and deflation. The body charged with making economical policies in Australia is the Reserve Bank of Australia. The country has been able escape the economic crisis which has been facing the world for a record time of 12 years (Gittins, Gernaut, Long & Wade 2004). The recession that has previously hit the world economy with the big economies of the world like USA has not had any signifant effect on Australia. Fiscal Policy A fiscal policy is an economic policy which is aimed at increasing the level of government spending (Horton & El-Ganainy, 2009). The increase in government spending normally affects the spending decisions of a lot of people. The government is normally able to increase its spending by money on the infrastructure for instance roads and railway lines. Social security funds and many other channels which the government thinks that they need a boost. Normally, the fiscal policy is applied in instances when there economy is facing a recession ( Pelakar, 2009). For the better part of the last quarter of a century, the fiscal policy has not been given much emphasis in Australia. The reason for this might be because of the negative effects of the Fiscal policy on the economy. The reason for not integrating the fiscal policy as much as compared to the Monetary policy is a good choice by the Reserve bank. The decision by the Reserve bank to embrace the monetary policy as opposed to the monetary policy may be justified by the economic success of the Australia. As compared to other countries in the world, only Australia stands alone as the country which has continually experienced a constant growth in the economy even in the times of recession (Gittins,Irvine, Yeates & Saulwick, 2008). However Australia has constantly used the fiscal policy to keep a track of its primary method of economic policy, the Monetary policy. Several instances where the Australian government has employed the Fiscal policy are stated below. Before 2002, the use of the Fiscal policy in the Australia economy was given a reasonable space. The government was operating on large surpluses which were indicated in the budget allocations. Over the time, the government was not able to support the large deficits and resolved to reduce the public debt it had built as a result of practicing the Fiscal Policy (Gittins, Gernaut, Long & Wade 2004). However, over time, the extensive use of Fiscal policy has declined giving way to the monetary policy which the government has continued to use over the recent years. The Fiscal policy is normally used by the government to check on the aggregate demand. A good example of the use of the Fiscal process in recent years is the decision by the Rudd’s government decision to counter an economic imbalance that was caused by the 2008-2009 global economic crises (Paleker, 2009). An illustration of the use of Fiscal policy is best shown by the use of a graph. A Monetary Injection (Palekar, 2009). Tax reductions are also a way of regulating the spending habits of masses. The Australian government has over the years regulated the spending habits of a big number of people by reducing the taxation rates as shown in the table above. This increases the spending in the market. Monetary Policy The monetary policy has for long been linked to the success of the Australian economy. Many economist and financial analysts attribute the strength of the Australian economy amidst the economic crisis to the monetary policy which he Reserve bank of Australia has largely embraced over the Fiscal policy. It is used sometimes together with the Fiscal policy and the two have been used interchangeably overtime as different economic situations demanded. A monetary policy is a policy which regulates the money supply and circulation in the economy of a country (Poole, 2004). The government via its economic policy making body for instance the Reserve Bank in Australia is bestowed with the responsibility of ensuring that the implementation of the monetary policy is successful. This is made possible by government borrowing via the issues of trusts and bonds and also borrowing from banks (Battellino, & Plumb 2008). The Reserve bank may also raise or lower interest rates on loans depending on the market situation at the ground. In so doing, it is bale to cut off the supply and circulation of money (Little 2002). The use of Monetary policy in Australia is emphasized by the government more than the Fiscal policy (Gittins & Uren, 2005). Over the years the governments has seen a remarkable improvement in the economy of the country in addition to the individual economies of the residents of Australia. As noted earlier, Australia has remained unit by the recent global economic crisis and the recession that has hit the world economy over the recent years (Gittins, Gernaut, Long & Wade 2004). A major strength of the use of the monetary policy in Australia is the fact that its practice is independent of the elected government. The implementation of the monetary policy in Australia is done by the Reserve bank of Australia without any interference from the government (Gittins,Irvine, Martin & Deniss, 2006). This makes it possible for minimal government or political interference in the implementation of the policy, as opposed to the implementation of the fiscal policy whereby the government is in charge of when and where to spend its money. This is a major advantage of the Monetary policy’s use in Australia over the use of the Fiscal policy. This is one of the reasons as to why the use of the monetary policy has brought success to the Australian economy (Gettins, Saulwick , Irvine & Martin 2007). The regulation of interest rates affects the amount of disposable income on the hands of the people. An increase in interest rates reduces the amount a reduction in the interest rate increases the amount. An analysis showing the reduced disposable income due to interest rates (Gettins, R, Irvine, J, Yeates, C. & Saulwick, J. 2008) The regulation of the cash rate has for a long time been able to regulate the inflation levels. The following graphical illustration exhibits the Reserve bank’s cash rate. RBA Cash rate: monthly, real cash rate calculated using weighted median inflation rate (Gittins, Gernaut, Long & Wade 2004) As a result, the economy of Australia has progressively continued to withstand the world economic forces like the recession and also maintain a low inflation rate. The country has also had a steady growth in GDP. The following graphical illustration can be used to exhibit the country’s economic prowess. Conclusion The government should continue operating with a deficit as opposed to moving into a fiscal surplus. The government can be able to do this by issuing more bonds, regulating interest levels, regulating the cash rate and also regulating the forex exchange. 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