Discuss the use of current Australian macroeconomic policies to achieve economic objectives.
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The economic objectives of government are the attainment of sustainable economic growth (assumed to be
around 3-4%), price stability, full employment, ecologically sustainable development, income equality and
external stability. The government uses a number of macro and micro economic policies to achieve these
objectives. The two main macroeconomic policies available for use to the government are the federal
budget (fiscal policy) and monetary policy through the federal governments monetary authority, the
Reserve Bank of Australia (RBA).
Economic growth has always been a target of federal government and is defined as being increases in real
GDP over time. Sustainable economic growth ensures higher living standards for individuals in the
economy and comes closer to solving the economic problem. The Federal Government has set a target of
growth of between 3 and 4 percent while the RBA targets at least the long term average of 3%. In the past,
macroeconomic policies to achieve growth can be said to have been reasonably effective as Australia was
the only OECD country to have achieved growth of over 3% over the time period 1990 to 1998.
Fiscal policy can be used to encourage economic growth. Fiscal policy refers to the government’s
manipulation of the two variables, taxation (T) and government spending (G) to alter the level of aggregate
demand in the economy. If the government wants to encourage growth, they can run a budget deficit where
spending exceeds revenue (G>T). This increases the level of aggregate demand in the economy and
therefore the level of growth. If growth is becoming unsustainable with inflationary pressures setting in
however, the government can decrease the level of growth by running a surplus budget (G<T). This tends
to lower the level of aggregate demand in the economy and therefore the level of growth.
Interestingly, the government has relegated fiscal policy to a ‘backseat’ role – balanced budgets have been
employed in recent years with the governments other macroeconomic tool – monetary policy, being used to
alter the level of aggregate demand and achieve sustainable economic growth. In the 2002-03 budget, a
mild surplus of $2.1bn occurred and this displays the governments tendency in recent years to run balanced
budgets. In previous years such as those from 1991-1995 heavy government deficits were chosen to
encourage growth after the 1991 recession.
Monetary policy is a major tool used to influence economic growth. The federal governments monetary
authority, the RBA, alters growth through market operations which affect the cost of credit, which in turn
alters demand levels in the economy. In aiming to achieve an average growth rate of between 3 and 4
percent per annum, the RBA continually alters the cash rate to affect growth levels to achieve objectives.
For example, in 2001 there were 5 interest rate cuts used to encourage growth in the face of the GST
induced ‘bubble’ or mild recession in the 2000-2001 financial year. When the RBA seeks to increase
economic growth, interest rates are decreased which encourages borrowing and therefore spending. Extra
spending increases economic activity and therefore achieves economic growth. If the economy is
‘overheating’ however, the RBA can ‘tighten’ or increase the cash rate which will decrease borrowing and
spending, leading to a reduction in growth.
Inflation refers to a sustained increase in the general price level over time. The government’s objectives for
inflation state that inflation should be around 2-3% which is the RBA’s target inflation range. Although
inflation is primarily regulated by monetary policy, fiscal policy can also be employed to regulate inflation,
although this has not occurred in recent years.
The Reserve Bank has price stability as one of its primary objectives. The RBA targets an inflation rate of
between 2 and 3 percent, and this provides an anchor point for inflationary expectations and provides the
RBA with more credibility when this target is achieved. To alter the level of inflation in the economy, the
RBA targets primarily ‘demand pull’ inflation – lowering demand when inflationary pressures start to rise.
Typically, inflation sets in at the top of the business cycle and the RBA seeks to lower demand just before
inflation arises. When demand pull inflation occurs, the RBA can immediately tighten monetary policy
which will increase the cost of credit and decrease the demand for goods and services, placing less pressure
on the general level of prices to increase. Currently, inflation is just outside the target range, at 3.2% but the
RBA has no intention of targeting inflation – in a statement on the 11th of November 2002, the RBA stated
that there will be no rate rises in the immediate future.
Fiscal policy can also be used to achieve the government’s objective of price stability. In much the same
way as monetary policy, fiscal policy can be used to alter the level of aggregate demand in the economy,
thereby placing increased or decreased pressure on demand pull inflation. To decrease inflation, the
government would run surplus budgets, which would decrease economic activity and ease inflationary
pressure.
Full employment refers to the full employment of the four factors of production: Land, labour, capital and
enterprise. In practice, achieving full employment of labour usually leads to full employment of the other
factors of production and therefore the full employment of labour is the primary concern. The attainment of
full employment is an objective of government as there are a number of economic and social costs of
unemployment. The main economic cost of unemployment is that there is a scarce resource, labour, which
could be being used to produce more output, to the benefit of both the owner of the labourer and the
labourer themselves. Socially, unemployment can lead to crime, domestic violence and depression.
Because of these factors (and the fact that unemployed persons do not pay tax), the government seeks to
decrease the unemployment rate to the Non Accelerating Inflation Rate of Unemployment (NAIRU), which
is estimated in Australia to be between 5 and 7% of the total unemployment. The NAIRU takes into
account only frictional and structural unemployment which is not easily avoided. It could be said that
current macroeconomic measures used to achieve full employment have been very effective, as the current
unemployment rate is 6% which is very near to the NAIRU.
Through macroeconomic policies which target aggregate demand, the government can target Keynesian
unemployment or rather, unemployment which is caused by deficient demand. Expansionary fiscal policy
would be used to decrease unemployment significantly such as in the years 1991-1995 where
unemployment reached over 10%. Conversely, monetary policy could also be used to increase demand
through the reduction of interest rates. Not all unemployment is Keynesian however and other policies such
as microeconomic policies could be used to target structural, frictional, seasonal and hardcore
unemployment
Ecologically sustainable development is the situation where current levels of economic growth and
development satisfy the needs of the present generation without compromising the ability of future
generations to meet their own needs. The discretionary power of the Federal Budget can be used to achieve
ecologically sustainable development – when economic growth becomes ecologically unsustainable, the
government can channel funds into environmental care schemes and can decrease the levels of growth.
Income inequality is a major problem in many developed nations such as Australia. The Federal
governments goal is not to achieve perfect equality, but equality that encourages individuals to work harder
for higher incomes, without having a major disparity between rich and poor. Through our progressive
taxation system, the government collects more revenue from higher income earners and through the issuing
of the federal budget, the government redistributes tax collected to the poor in the form of welfare
payments, which comprise 40% of the budget outcome.
External stability refers to the situation where income received from exports is sufficient to finance import
expenditure. To measure our level of external stability, the amount left on the current account deficit and
our net foreign liabilities can be examined. At the moment, the current account deficit comprises 3.1% of
GDP, well down on the governments objective of keeping it below 5%. The government can use both fiscal
and monetary macroeconomic policies to alter the level of our external stability. Australians spend any
extra income on imports and therefore, current levels of growth will affect our current account deficit,
particularly the goods balance. If our external stability turned into external instability, with the current
account reaching over 5% of GDP, the government could employ contractionary fiscal policy and tightened
monetary policy to curb our propensity to demand imported goods and services.
In conclusion….Couldn’t be bothered and I don’t want to start a new page.