Current Fiscal and Monetary Policies in Australia

Abstract

The following report identifies the Australian Governments macroeconomic policies, fiscal and monetary, and whether or not they are adequately contributing to sustainable economic growth. Within the report, four aspects will be analysed, which include gross domestic product (GDP), unemployment, inflation and trade. In addition, the global financial crisis will also be taken into consideration, and recommendations will be made. To conclude this report, a five year trend analysis will be applied.

Introduction

Macroeconomics examines the economy as a whole. It studies the determination of national output and its growth over time. In addition, it also studies the problems of recession, unemployment, inflation and the policies adopted by the government to deal with these problems (textbook). The governments’ macroeconomic policies are essentially concerned with whether or not markets, when left alone, automatically bring about economic equilibrium. However, the level of economic growth within a country is never stable, and is subject to extreme fluctuations.

Therefore, macroeconomic policies are designed to essentially minimise fluctuations through demand control and also achieve sustained economic growth with lower inflation and unemployment rates. There are two essential policy instruments that are available to the government in order to manage the country. The two main macroeconomic policy instruments are the Fiscal Policy and Monetary Policy.

Fiscal policy involves “changes in the composition and level of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment.”

Monetary policy involves the use of changes in interest rates to control the level and rate of growth of aggregate demand in the economy, mainly by changing the cost of borrowing money, influencing the rate of return on savings and thereby changing the overall demand for and supply of money. Monetary policy also involves the effects of changes in the exchange rate – the external value of one currency against another – on the wider economy. The government (through the central bank) may choose to intervene in the foreign exchange market to influence the value of one currency against another.

Targets, instruments and goals of macroeconomic policy

Targets, instruments and goals of macroeconomic policy

Figure 1.1

The four macroeconomic objectives are:

Economic Growth

Economic growth is generally measured by the amount of production in a country over a certain period of time. In addition to production, gross domestic product is also another measure.

Country

Interest Rate

Growth Rate

Inflation Rate

Jobless Rate

Current Account

Exchange Rate

Australia

4.50%

1.20%

3.10%

5.10%

-5640

0.8929

Table 1.1

The Gross Domestic Product (GDP) in Australia has expanded with an annual rate of 1.20% within the last reported quarter. During 1960 – 2010, Australia’s average quarterly GDP Growth was 0.88%, reaching an historical high of 4.50% in March of 1976 and a record low of -2.50% in June of 1974. Australia’s comparative advantage in the export of primary products is a reflection of the natural wealth of the Australian continent and its small domestic market.

Australia GDP Growth Rate

Figure 1.2

This fiscal policy aims to support higher economic growth represent a preferred alternative. Higher growth per person directly raises the living standards of future generations of Australians. Growth also increases the capacity of the government (and individuals) to meet increasing demands for public services, not only arising from the ageing of the population, but also for better quality health care and other services. The government can contribute to raising economic growth prospects by ensuring individuals face the right incentives and markets are able to function efficiently.

However, intergenerational fiscal pressures pose ongoing challenges for government finances over the longer term. By 2046-47, spending is projected to exceed revenue by around 3½ per cent of GDP.

Unemployment

Unemployment refers to the number of people who are currently jobless yet actively seeking work. Unemployment usually results from cutbacks in production. Basically, if organisations are producing less, fewer people will be needed to be employed. (textbook)Therefore, the Australian Government’s macroeconomic policy focuses on ensuring low unemployment rates. Consequently, if economic growth increased, unemployment rates would decrease due to the demand for more labour.

In August 2010, the unemployment rate in Australia was reported at 5.10%. In February 2008, Australia recorded its lowest unemployment rate at 4%.

Jobless Rate

5.10%

Table 1.2

Australia Unemployment Rate

Figure 1.3

Figure 1.3 displays the Australian economies unemployment rate, which indicates there was a decrease rate of 0.2% over each month. According to the data, the number of people employed in the country rose 30,900 to 11,272 million on a seasonally adjusted basis.

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Inflation

Inflation refers to a general increase in price levels within the economy. If aggregate demand (the total spending on goods and services made in the economy) rises, prices also rise. This is due to the fact that if demand is high, firms can still sell as much, if not more, even at higher prices. This results in greater profits being made. Essentially, when price increases, inflation results.

There are a number of measures of underlying inflation that are used at the Reserve Bank of Australia (RBA). These measures are valuable in assessing current inflation pressures in the economy as well as the outlook for future movements in the consumer price index (rba.gov.au). Monetary policy is concerned with keeping the inflation rate low, with its target range typically 2-3%. Currently, the Reserve Bank of Australia’s’ (RBA) inflation policy is working exceptionally well, with a rate of 2.6%, which is well within its target range. However, The central forecast for underlying inflation is around 2.75% over the next year, with it gradually rising to 3% by 2012 reflecting capacity pressures in parts of the economy. CPI inflation is set to be over 3% due to increase in the price of utilities, (RBA 2010).

Australia Inflation Rate

Figure 1.4

Trade

Australia has recently overcome the shock arising from the Global Financial Crisis, and is now facing again the challenges of an economy operating at near to full capacity and terms of trade boom that reflects strong commodity prices. Many believe that this is the sort of macroeconomic policy challenge that we need to have. However there are risks associated which trends will affect the rate of productivity growth.

Trade has significantly decreased, and this weaker trade balance may help “cool” the economy that expanded last quarter by the most in 3 years. This record mining industry investment boom resulted in higher spending by households, which accounted for more than half of gross domestic product.

Australia Balance of Trade

Figure 1.5

Figure displays that Exports fell 4% to A$25.4 billion and Imports rose 2% to A$23.5 billion in July.

Conclusion

Although the fiscal and monetary policies seem to be functioning effectively and achieving sustained economic growth, there are some negative aspects. Although they are both successful in controlling negative influences on demand, the government’s macroeconomic policy has had limited impact on Australia’s structural problems.

An example of this is the fiscal policy concerning GDP. This is because accumulating debt is not a sustainable long-term solution, particularly in situations where budget deficits are expected to continue for a period of time, since at some point the debt needs to be repaid. In addition, the compounding effect of interest costs would see net debt rise very rapidly, particularly beyond the projection period. In contrast, via implementation of these current macroeconomic policies, the Australian economic growth began to regain its lost pace in fiscal year 1998-99 and since then, the rate of unemployment in country had dropped down to the current level of 5.10% which is at its lowest in past thirty three years.

Nevertheless, although due to the state of recession in the economy, the results anticipated in 2008 statement of Reserve Bank of Australia were not met, the current monetary and fiscal policies has managed to achieve some of it.

Therefore, over the past 5 years, overall economic sustainability has been increasing, and there are a number of economic indicators suggesting that the Australian economy will continue to perform strongly, placing Australia on the right movement towards maximising economic growth and sustainability.

List of Refrences