chapter
Economic
management using
microeconomic policy
7
7.1 Definition of microeconomic
policy
Microeconomic policy has to do with a wide range of supply-side, cost
cutting, efficiency measures designed to improve the way in which particular enterprises, industries and sectors within the Australian economy
undertake and organise production.
In essence, microeconomic policy includes reforms designed
to increase output from available resources. Reforms may
include structural change, better productivity, cost cutting in
production and the application of the best international practices by business managers and workers. In turn, these
reforms should collectively improve profits, bolster national
productive capacity and increase aggregate supply.
CHAPTER 7 Economic management using microeconomic policy
237
7.2 Aims of microeconomic policy
Although microeconomic policy can be used to pursue all the
government’s economic objectives, its main aim is increased
efficiency in resource allocation. Indeed, microeconomic reform is
almost entirely about lifting productivity by cutting costs, promoting competition and restructuring the way production is
organised in both the private and government sectors. These
measures involve allocating resources to get more output from
the same quantity of inputs, in order to raise real incomes and
raising material living standards.
Microeconomic reform aims to improve four aspects of
efficiency in resource allocation:
1. Microeconomic reform tries to increase allocative efficiency by
ensuring that resources are directed into areas where they
best help to satisfy society’s needs and wants. Often allocative
efficiency may be improved if there is strong competition
between producers and sellers in the market. This ensures
that resources are directed into areas of comparative cost
advantage. However, on some occasions, government intervention may be needed to ensure there is allocative
efficiency.
2. Microeconomic reform may aim to increase productive (technical) efficiency by encouraging businesses to use the least cost
method of production. Firms need to cut costs and purchase
fewer resources. This entails employing the best international
practices available along with savings reforms to lower the
cost of firms purchasing new equipment.
3. Microeconomic reform seeks to increase dynamic efficiency by
encouraging firms to be adaptive and creative in response
to changing economic circumstances. Policy needs to
encourage firms to use the latest technology, upgrade
employee skills and incentives for efficient work, promote
market research and product development, and encourage
innovation among firms so that they better meet the
changing tastes of consumers.
4. Microeconomic reform aims to improve intertemporal efficiency
by ensuring there is a suitable balance between resources
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Economics Down Under Book 2
being allocated towards current consumption on the one
hand and, on the other, adequate saving for financing future
investment.
By improving efficiency in resource allocation, ultimately
microeconomic reform promotes all other government economic objectives. For instance:
■ Domestic economic stability is helped by increased efficiency.
This is because greater efficiency raises the economy’s speed
limit or sustainable rate of economic growth. More output
can be gained from the same inputs. Increased efficiency also
helps to cut costs and slow inflation. This leads to increased
profits, improved competitiveness and better sales. As a result,
over the medium to long term, the total level of employment
should grow more quickly and structural unemployment
should be reduced by fewer business closures.
■ External stability should be improved through increased international competitiveness that follows better structural
efficiency and lower production costs. Efficiency should lift
our exports relative to imports, help slow the rise in the CAD
and rein in the foreign debt.
■ Increased equity in the distribution of personal income may occur
in the long-term, when greater efficiency leads to higher
levels of real incomes and production available for distribution among the population. Here, efficiency boosts the
value of government tax revenues collected, thereby making
the welfare system and the provision of community services
for the poor much more affordable. Greater efficiency also
leads to the creation of more jobs and helps eventually to
lower structural unemployment caused by a lack of competitiveness and business profitability. This improves equity too.
Moreover, increased efficiency helps to slow inflation that
would otherwise undermine the purchasing power of lower
income earners. Overall, material living standards are
promoted through increased efficiency in the allocation of
resources.
THE REASONS FOR USING
MICROECONOMIC POLICY
The 1950s and 1960s represent the golden age for Australian
productivity. However, during the 1970s, 1980s and early 1990s,
our economic performance lagged behind that of many countries:
■ Our sustainable growth rate was often slower
■ The inflation rate was generally higher
■ Unemployment levels were excessive
■ The CAD:GDP ratio mostly was large (limiting our sustainable rate of economic growth) and overall, our dollar depreciated badly
■
■
Efficiency grew very slowly
Australia’s material living standards fell from first place in
1901, to fourth in 1950 to around fifteenth in the early 1990s.
Because government macroeconomic measures on their own
had failed to provide the necessary solutions to this economic
decline, there was renewed interest in the possibilities offered
by effective microeconomic reform.
TRY SHORT ANSWER EXERCISE
1, p. 276
7.3 Specific instruments of
microeconomic policy
During the 1980s, 1990s and 2000s, federal governments were
keen to pursue microeconomic reform. Let us now take a look at
some of the most important ones.
3. abolition of import quotas
4. increased number of free trade agreements with other countries.
TRADE LIBERALISATION
Tariff cuts
Until the 1970s, Australian governments strongly protected local
industry from competition. They did this mainly by using high
tariffs (taxes on imports to make them dearer than the local
item), generous subsidies (cash payments to exporters or
import competing firms to help them cover their production
costs to allow them to sell more cheaply), and restrictive import
quotas (legal restrictions on the quantity and type of imports
permitted). Assistance like this sought to help local firms (often
infant industries) survive foreign competition and, supposedly,
to create more jobs for workers.
However, starting in the early 1970s, the Australian Government signalled the start of a change in its policy of protecting
local industry from foreign competition. Increasingly, it liberalised international trade. This involved the progressive reduction
of tariffs, subsidies and import quotas, and a shift towards the
idea of free trade. Increasingly, national borders no longer restrict
the movement of goods, services and money capital between
countries. With freer trade (associated with globalisation), we are
forced to allocate resources into areas of production where Australia has a comparative cost advantage (or least disadvantage). In
other words, resources will flow into areas where we are most
efficient. It will mean that more national output (or GDP) can
be gained from the same inputs of resources. This leads to
higher incomes and material living standards. In addition, in
the long-term, greater efficiency also leads to lower inflation,
improved international competitiveness and increased employment.
Our investigation here will focus on the four key aspects of
trade liberalisation policies:
1. tariff cuts
2. reduced subsidies and other assistance
Especially during the past thirty-five years, a debate has raged
about the appropriate level of tariff protection for Australian
industry. Tariffs or import duties represent an indirect tax levied
on selected imported goods. In general, tariffs are added on to
the price of imports to make them dearer, or less attractive, to
local consumers. Because this limits foreign competition in local
markets, economists agree that high tariffs cause resources to be
allocated inefficiently into industries where we have a comparative cost disadvantage. The existence of high tariff rates means
that local households and businesses consuming Australianmade goods and services must pay higher prices or costs for
these items. This offsets any possible increase in income and
employment in the short term arising from having tariffs. Additionally, when one country raises its tariffs, this becomes a justification for other nations to retaliate. As a result, world trade
volumes and domestic economic activity contract.
Figure 7.1 (p. 240) shows that there was a huge reduction in
the general tariff rate on most manufactured items from 36 per
cent in 1968–69, to effectively zero by 2005–06. It all started with
a 25 per cent overnight tariff cut in 1973. However, reductions
continued in different industries, at different rates. Effectively
by 2007, most goods were tariff free. Of the few remaining
imports still protected, around 90 per cent were at a rate of less
than 5 per cent. Even so, tariffs are still applied to local industries making passenger motor vehicles, textiles, clothing and
footwear. Traditionally, these areas were starting off from much
higher levels of protection and to suddenly remove tariffs would
have meant certain collapse. However, for these special industries, scheduled tariff reductions are continuing so firms know
that efficiency must continue to rise, if they are to survive.
CHAPTER 7 Economic management using microeconomic policy
239
Effective tariff rate (%)
200
General ma
180
Passenger motor
vehicles (PMV)
160
Clothing apparel
140
White goods
Agriculture
120
100
80
60
40
INDUSTRY
AREA
1980–
81
1985–
86
2010–11
2005–06
2000–01
1995–96
1990–91
1985–86
1980–81
1970–71
0
1968–69
20
1968–
69
1970–
71
1990–
91
1995–
96
2000–
01
General
manufacturing
36
35
23
20
16
5
Passenger
motor vehicles
(PMV)
50
50
96
125
60
25
15
10
Clothing
apparel
97
91
140
148
176
35
25
17.5
White goods
55
55
30
19
8
5
Agriculture
32
28
12
12
13
10
4.2
2005–
06
2010–
11
0
2.5
2.5
6
0
Figure 7.1 Changes in estimated effective rates of tariff protection of selected Australian industries,
1968–69 to 2005–06
Sources: Data derived from the Industry Commission, Productivity commission reports,
‘Trade policy review, Australia, 2002’, AGPS and other sources.
Reduced subsidies and other
assistance to local producers
Subsidies are government cash payments made to local producers to help them cover some of their production costs. They
can enable Australian firms to export at a more competitive
price. Some even involve special assistance to accelerate
industry restructuring. For example, there is the one billion
dollar ‘Automotive competitiveness and investment scheme’ for
2000–05 to help car firms upgrade plant, equipment and technology, and an $800 million grant to help textile firms restructure, with tax rebates as high as 45 per cent offered for
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Economics Down Under Book 2
companies with significant export orientation. However, there
are problems with giving government subsidies. For example,
they tend to increase inefficiency in resource allocation among
firms that come to depend on their continuation. There is also
the extra cost of subsidies to taxpayers who have to foot the bill.
As part of its trade liberalisation measures, the Australian
Government has increasingly reduced subsidies or used them to
help restructure the industry more efficiently.
Figure 7.2 shows us that in the period between 1971–72 and
2006–07, there was a general reduction in gross subsidies, from
around $25 billion in 1971–72, down to an estimated
$4.3 billion or less by 2006–07.
In addition, by 2006–07, negotiations were underway for
striking FTAs with China, Malaysia, ASEAN and Japan. The aims
of this type of trade reform include lifting the competitiveness
of our exporters, establishing a business presence abroad,
expanding Australia’s market share in overseas countries, delivering stronger economic growth, reducing costs paid for
imports by local firms and prices paid for imports by households, and making Australia a more attractive destination for
overseas investment.
30
$ billions
25
20
15
10
2006–07
2000–01
1996–97
1989–90
0
1971–72
5
Figure 7.2 Estimated gross federal government
industry subsidies, 1971–72 to 2006–07 ($ billion)
Sources: Data calculated using information derived from
Industry Commission, Productivity commission reports,
2006–07 budget overview and other sources.
Again, this reform is consistent with the government’s belief in
the benefits of strong competition and trade liberalisation.
Abolition of import quotas
Import quotas are designed to restrict the quantity of specific
types of imports permitted into the country. In order to achieve
a stated volume target, prospective importers must obtain a
licence that gives them permission to import a certain
maximum number of articles of a particular description. Quotas
were commonplace in the 1970s and early 1980s, especially on
cars, textiles, footwear and clothing. However, these were progressively abolished. The last of these quotas, applying to
cheese, was terminated in 2000–01. Again, this reform is part of
the belief in the long-term efficiency benefits of freer trade and
stronger competition.
Increased number of free trade
agreements (FTAs)
Australia has membership of various multinational (i.e. involving
many countries) trading groups like the World Trade Organization (WTO). Through the Doha rounds of trade negotiations with
the WTO (called the Doha rounds because negotiations took
place in Doha, the capital of Qatar), Australia has been pushing
hard for general reductions in global tariffs and the abolition of
subsidies, along with increased international access to agricultural, manufacturing and services markets. Indeed, Australia was
instrumental in setting up the Cairns group of fair agricultural
traders bent on eliminating agricultural subsidies. Despite these
efforts, progress has been slow due to significant opposition from
groups in the US, Japan and Europe.
Given this slow pace of multilateral trade reform, Australia
has increasingly tried to negotiate bilateral free trade agreements (FTAs) with two or more individual countries. For
example, by early 2007, we had four FTAs in place:
■ Australia–New Zealand FTA (also known as ‘Closer economic
relations’) in 1983
■ Australia–Singapore FTA in 2005
■ Australia–Thailand FTA in 2005
■ Australia–United States FTA in 2005.
DEREGULATION AND OTHER
REFORMS OF THE LABOUR
MARKET
The labour market is an institution dealing with matters affecting
all workers such as wages, incomes and other conditions of
employment including work hours. During the 1990s and,
especially, between 1996 and 2007, the federal government introduced major microeconomic reforms in this area. These changes
were based on the belief that the quality, efficiency, training,
health and skill of a nation’s labour force are vital in determining
Australia’s productive capacity, sustainable rate of economic
growth, adaptability to changing circumstances and our international competitiveness. Most importantly, labour market
reform has involved a gradual shift from the centralised
minimum wage (prior to November 2006 this was called the
minimum award wage), to a system involving greater deregulation
of wages based on enterprise or workplace agreements. Although
both these wage systems are still used today, by late 2006, only
about 10 per cent of all workers were covered by the minimum
wage, with the remaining 90 per cent on workplace agreements.
Let us now consider the details of these two wage systems.
Australian Fair Pay Commission and
the centralised system of minimum
wages
Traditionally, Australia has relied very heavily on a centralised
wage fixing system which, since November 2006, is under the control of the Australian Fair Pay Commission (AFPC) (previously
controlled by the Australian Industrial Relations Commission
(AIRC) the main role of which is to settle industrial disputes).
The AFPC is responsible for determining the federal
minimum wage for low paid workers not covered by various
enterprise or workplace agreements. In particular, the commission is guided by a new set of criteria to those used previously by the AIRC. In particular, the AFPC sets its minimum
wage taking into account:
■ the promotion of the economic prosperity of the people of
Australia
■ the capacity for the unemployed and low paid to obtain and
remain in employment
■ employment and competitiveness across the economy
■ providing a safety net for the low paid
■ providing minimum wages for junior employees to whom
training arrangements apply and employees with disabilities
that ensure those employees are competitive in the labour
market.
In addition, under Australia’s Corporations Act (recently
tested in an appeal to the High Court), the federal government
CHAPTER 7 Economic management using microeconomic policy
241
has successfully overridden much of the various state governments’ wages system, thereby increasing its power to determine
wages. This means that now the minimum wage is applied fairly
uniformly to particular workers across Australia, who are not
covered by enterprise or workplace agreements. In its first
decision in November 2006 (to apply from 1 December 2006 to
about 1.4 million workers), the AFPC announced:
■ an increase of $27–36 per week in the standard federal
minimum wage taking it up to nearly $512 per week
■ an increase of $27–36 per week in all Australian Pay and
Classification (pay) scales up to $700 per week
■ an increase of $22.04 per week in all pay scales above $700
per week.
The next annual wage review for these workers will occur in
mid-2007.
Increased reliance on workplace
agreements
In Australia nowadays, decentralised or firm-by-firm workplace
agreements (also called employment contracts and enterprise agreements), are a far more popular alternative to the traditional
centralised wage system. The main features of enterprise agreements are as follows.
Wage agreements are negotiated on a firm-by-firm basis
Under workplace agreements, wages and conditions are usually
set on a firm-by-firm basis and more closely reflect the freer operation of the forces of demand and supply in the labour market.
This allows businesses to have greater flexibility in setting wages,
so they better mirror worker performance, local market trends,
the firm’s profitability and other unique circumstances for the
business, thus helping to improve competitiveness. However, a
no disadvantage test is applied. This requires that enterprise
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Economics Down Under Book 2
agreements match or exceed, minimum conditions or standards
including those relating to wage rates, long service leave entitlements, unpaid parental leave and four weeks annual leave.
Importance of productivity for wage rises
An important and common feature of most enterprise or workplace agreements is that wage rises are based on actual improvements in worker efficiency or productivity (i.e. increases in output
per worker per hour). Pay rises are usually performance-based.
Agreements are renegotiated regularly
At fairly regular intervals (i.e. up to 3 years), workers and their
particular boss, renegotiate wages and conditions so that the
workplace agreements can be updated to reflect changing circumstances, both inside and outside the firm.
Two types of enterprise agreements
Today there are two possible types of enterprise agreement: Certified agreements and Australian workplace agreements. Certified
agreements (CAs) can only occur between unions and
employers. Australian workplace agreements (AWAs) provide an
alternative to CAs. An AWA can exist between an employee and
his or her employer. These are individual employment contracts
that can apply even to salaried employees such as executives and
professionals.
Recent industrial relations reforms
In 1996 and 2005, the federal government passed two important
reforms in the area of industrial relations:
1. the Workplace Relations Act 1996
2. the Workplace Relations Amendment (Work Choices) Act 2005
(effective March 2006).
Table 7.1 sets out the details of these two important reforms
designed to further deregulate Australia’s labour market:
Table 7.1
Recent changes to Australia’s industrial relations laws
WORKPLACE RELATIONS ACT (1996)
1. The role of
the AIRC
The Act scaled back the responsibilities of the AIRC (whose wage-setting role was later taken
over in 2005 by the AFPC). Its most important duty was presiding over the annual National
wage case that determines the minimum or safety net wage (i.e. the idea of a living wage
where workers earn enough to live and not just survive). For example, from 1997–98 to
2005–06, the AIRC’s annual safety net award wages were increased by between $8 and $18
a week, so that its last minimum weekly award wage was set around $484. However, these
days the key role is settling industrial disputes. Another current responsibility of the AIRC is
the enforcement of awards.
2. Simplification
of the award
system
The traditional system of minimum award wages was complex, expensive and clumsy. Under
this Act, award simplification occurred so that any award decision could only cover twenty
allowable matters (e.g. classification of skills of employees, hours of work, pay rates,
incentives, long-service leave, holidays, pay loading for overtime, redundancy pay, dispute
settlement procedures, stand-down provisions and superannuation).
3. The no
disadvantage
test
The Act requires that all enterprise or workplace agreements meet the minimum standards
set out in relevant awards. This is called the no disadvantage test so that workers could not
be worse off than they would be under an award.
4. Role of trade
unions
The Act reduces the direct role of trade unions in some wage negotiations. It restated the
principles of voluntary unionism and illegality of compulsory unionism. It also confirmed
that a worker could not be discriminated against on the basis of union membership and
established the general right to strike (72 hours notice is needed for lockouts and strikes
that are only allowed during the negotiation period for a new agreement).
In addition, the legislation covers the illegality of secondary boycotts (e.g. ‘sympathy strikes’
where other unions go out on strike to support a cause not directly their own) as well as
strike pay (when workers receive payment while undertaking industrial action).
5. Unfair
dismissal
provisions
The Act changed the unfair dismissal laws to instances where dismissal was seen as harsh,
unjust or unreasonable. However, adequate notice had to be given or pay offered in lieu of
notice.
6. The
Employment
advocate
The Employment advocate was set up to enforce AWEs and to protect vulnerable groups (e.g.
the young, females, apprentices, non-English speaking migrants).
WORKPLACE RELATIONS AMENDMENT (WORK CHOICES) ACT (2005)
1. Setting up the
Australian
Fair Pay
Commission
After nearly 100 years, the AIRC’s minimum wage setting role was handed over to the newly
set up, Australian Fair Pay Commission (AFPC). Depending on the results of the federal
election scheduled for late in 2007, this situation may change.
2. The reduced
role of the
Australian
Industrial
Relations
Commission
The old AIRC was to concentrate on industrial relations dispute resolution, the simplification
and rationalisation of awards (i.e. reducing the number of awards and the allowable matters)
and dealing with applications about industrial action (e.g. strikes).
3. Creating a
more national
wage system
The Corporations Act is used to give the WorkChoices legislation its national power to
override the state government industrial relations system (but unincorporated employers
and their employees will remain within the state industrial relations system in WA, NSW, SA,
Queensland and Tasmania). The challenge to the constitutional legality of this power failed
to get support in a landmark decision in late 2006, thereby increasing the power of the
Commonwealth in this and perhaps other areas (e.g. water, nuclear power).
4. Creating the
Australian fair
pay and
conditions
standard
The Act establishes certain minimum, statutory, standard working conditions. For example,
the 38-hour week, four weeks annual leave, and sickness, parental, personal and carers
leave. In addition, individual can cash in up to two weeks of annual leave. These conditions
form the universal Australian fair pay and conditions standard.
(continued)
CHAPTER 7 Economic management using microeconomic policy
243
Table 7.1
(continued)
WORKPLACE RELATIONS AMENDMENT (WORK CHOICES) ACT (2005)
5. Allowable
matters
Award wage agreements struck prior to 2006 will continue to apply but the list of allowable
matters (e.g. incentive-based payments, hours of work, leave loadings, public holidays) has
been reduced to 13, and non-allowable matters (e.g. union picnic and training days) are now
no longer legally enforceable.
6. Types of
Australian
workplace
agreements
Work Choices distinguishes four main types of Australian workplace agreements (AWAs) or
individual contracts:
1. non-union negotiated collective agreements
2. union negotiated collective agreements
3. employer negotiated greenfield agreement (where the employer makes a wage agreement
with themselves before any person is hired, that employees will become subject to the
agreement, thus giving the employer total control over staff wages and conditions)
4. union negotiated greenfield agreements.
Under these arrangements, it is possible that particular staff might be singled out, one at a
time, and pushed onto AWAs with reduced conditions of work (e.g. relating to weekends,
shift work, and special pay rates for overtime rates, public holidays and shifts).
7. Exemptions
from unfair
dismissal
laws
There have been changes to some of the provisions of the unfair dismissal laws. These have
increased the power of employers with fewer than 100 staff to sack workers. This further
erodes the rights of employees. The claim in support of this change is that it will help lower
unemployment since firms are more likely to hire extra staff if they know that they can more
easily dismiss them if they prove to be unsatisfactory or even if they are unnecessary, given
operational developments. Contested claims for unfair dismissal are still possible, but they
are expensive.
8. The Minister
for Industrial
Relations
The Minister for Industrial Relations has the power to terminate agreement negotiations,
even if there is only the possibility of a strike (it does not even have to be an actual strike).
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Economics Down Under Book 2
Other labour market reforms
Apart from changing the nature of Australia’s wages system
through the Workplace Relations Act, there have also been other
important labour market reforms.
Multiskilling and multitasking
Multiskilling of workers has become more common and wage
awards have been simplified and combined to cover those
workers with broadly similar skill levels. Competency based
vocational education and training, where people demonstrate
skills, knowledge and understanding against set standards, has
also encouraged multitasking by employees. These changes have
helped to improve labour efficiency and make workers more
employable.
Job demarcation
During the late 1980s and 1990s, job demarcation boundaries
(where workers have set tasks they perform that cannot be transferred to other areas) were radically reduced, creating wider,
less traditional employment areas. This shift was believed necessary to help reduce strikes, lower production costs and improve
employment flexibility.
Union amalgamation
Thanks to changed guidelines developed in the early 1990s,
there has been a significant level of union amalgamation (i.e.
combining smaller unions to form larger unions). In addition,
union amalgamation partly reflected the huge decline of
unionism, the advance of multiskilling and reduced job demarcation. One benefit of encouraging fewer unions is that it simplifies industrial bargaining and reduces delays caused by
demarcation or inter-union disputes.
Table 7.2
Retraining of workers
Over the past 10 years or so, there have been many schemes introduced by the government to improve the skills and training of
workers. For instance, there was the 1994 Working nation scheme,
the 1997–98 Modern apprenticeship and traineeship scheme, the creation of the Green corp, expansions of the Work for the dole scheme
(1998–99 to 2005–06), and the 2001–02 Australians Working
Together package. The Australians Working Together scheme, for
example, included new requirements for recipients of parenting
payments to undertake job searching, education, or training to
develop their work skills and prepare them for a return to work.
These activities need to involve 150 hours in each six-month
period (or approximately six hours on average per week). In
addition to these government schemes, 24 new Australian technical colleges were established between 2005 and 2007.
Job placement agencies replaced the Commonwealth Employment Service (CES)
Until 1998, the CES was responsible for finding jobs for the
unemployed. Since then, Private employment placement enterprises
(PEPE) have been responsible for connecting the unemployed
with prospective employers. Centrelink facilitates this process
and the government pays these job broking agencies, only when
they find real employment for an unemployed individual.
Some strengths and weaknesses of
recent labour market reforms
Labour market deregulation and other reforms have been undertaken to help improve Australia’s economic performance. Some
of the strengths and weaknesses of these changes are listed in
table 7.2.
Some strengths and weaknesses of recent labour market reforms in Australia
SOME STRENGTHS OF LABOUR MARKET
REFORMS
SOME WEAKNESSES OF LABOUR MARKET
REFORMS
Reforms help to reduce inflation
Under workplace or enterprise agreements (i.e. since
1991) and other labour market reforms, pay rises
increasingly reflect improved performance or worker
productivity, thereby keeping down RULCs. In turn,
better efficiency and lower costs reduce inflation (e.g.
as occurred generally during 1992–2007). This was not
usually the case under the old system of award wages
where pay rises occurred irrespective of worker
efficiency or the ability of particular firms to pay.
Reforms have increased income inequality in the
short term and reduced the power of workers
The growth of enterprise agreements has contributed to
the rise in inequality in the initial distribution of market
incomes (i.e. income before government tax and
outlays). This is partly because increasingly, workers in
different firms in various parts of Australia get paid
different wages. Another worry is that some workers
are relatively disadvantaged in workplace negotiations
(e.g. the inarticulate, non-English speaking, unskilled,
unproductive, young people, non-unionised, rural
workers, part-timers) as compared with, say, senior
executives in profitable firms. Additionally, those
workers remaining on the old centralised wage system,
have not generally gained such rapid pay rises as those
using the new system of workplace enterprise
agreements, and increasingly, trade union scrutiny of
pay rises is disappearing due to falling membership.
(continued)
CHAPTER 7 Economic management using microeconomic policy
245
Table 7.2
(continued)
SOME STRENGTHS OF LABOUR MARKET
REFORMS
SOME WEAKNESSES OF LABOUR MARKET
REFORMS
Reforms help to accelerate productivity and the
sustainable rate of economic growth
Workplace or enterprise agreements (used since 1991)
offer pay rises in exchange for improved efficiency by
workers. With increased efficiency of labour resources,
more output can be gained from the same or fewer
inputs, thereby accelerating economic growth and
raising average incomes (e.g. generally between 1992–
2007). Additionally, locally made goods and services
become more competitive, raising sales and production
levels.
Reforms may have increased unemployment in
the short-term
The growing popularity of performance-based, firm-byfirm enterprise agreements dramatically accelerated
worker productivity against 1980s levels. This meant
that many local businesses have been able to produce
more output with the same or fewer staff. As a shortterm result, this may have tended to slow employment
growth and add to structural unemployment.
Reforms help to create fuller employment in the
long term
In the long term, labour market reforms have increased
worker efficiency, improved worker competitiveness,
lowered business costs and reduced business closures
that cause structural unemployment. Additionally, the
traditional minimum wage system sets pay rates at
levels above the free equilibrium in the labour market,
thereby contributing to a glut of workers (supply
exceeds demand) or structural unemployment. By
reducing emphasis on this system, structural
unemployment should be cut. Furthermore, estimates
suggest that the recent changes to the unfair dismissal
laws may help create between 40 000 and 50 000 extra
jobs by making employers more willing to hire full-time
workers, knowing that they can be dismissed more
easily if they prove to be unsatisfactory.
Incomplete reforms
Some claim that the government has not gone far
enough with labour market reforms to ensure that
Australian firms and their employees are sufficiently
competitive against even more deregulated labour
markets abroad in Asia, the United States and New
Zealand. For instance:
Reforms help to improve external stability
By reducing labour costs, reforms have helped to make
Australian workers and firms operating in local and
overseas markets more competitive, thereby helping to
increase exports relative to imports, thereby tending to
reduce the CAD.
Reforms help to promote equity in the long term
Equity may be protected by the retention of safety net
wages and initially, the no disadvantage test.
Additionally, in the long term, labour market reforms
have helped to accelerate economic growth, lift average
per capita incomes (including those from exports), slow
inflation so necessities are cheaper and more
affordable, reduce unemployment by improving local
business competitiveness and lift tax revenues to pay
for the expensive welfare system. These developments
help equity.
Reforms help to encourage cooperation and
reduce strikes
Labour market reforms involving workplace and
enterprise agreements have promoted cooperation and
discussion between workers and their management.
Employees are encouraged to be more accountable, and
to show greater initiative and self-management. This
approach is believed to have dramatically reduced
industrial unrest including strikes (e.g. as seen during
1992–2007), absenteeism and poor product quality.
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Economics Down Under Book 2
– Some people (even discussed by the Opposition)
argue that safety net wages should be replaced with
a tax credit scheme for low-income employees. Here,
tax cuts would replace the need for rises in the
minimum wage. This proposal would protect
workers’ purchasing power, keep real wage costs for
firms stable and reduce the structural unemployment
rate.
– Unfair dismissal laws may need to be relaxed further
so that firms employing more than 100 staff are more
likely to hire extra full-time employees.
– The income gap between having a part-time job and
being on government welfare is too small and
distorts the efficient operation of the labour market.
– Real wages (especially for youths) are perhaps still
too high, causing higher unemployment. Estimates
suggest that a 10 per cent fall in real wages could lift
employment by possibly 4–7 per cent.
Lack of coverage by agreements limits the impact
Workplace or enterprise agreements were formally
endorsed in 1991. However, even by 2006, around
10 per cent of all workers (higher for women) were still
not covered by this system. Instead, these employees
continued to rely on an inflexible and inefficient
centralised approach to wage determination.
SOME STRENGTHS OF LABOUR MARKET
REFORMS
SOME WEAKNESSES OF LABOUR MARKET
REFORMS
Change was essential and there was little choice
Whether we like it or not, Australia was forced into
labour market deregulation by similar developments
abroad. Given the need to be competitive because of
globalisation, there was little choice if we wanted local
firms to survive and workers to have jobs in the future.
Productivity is hard to measure under enterprise
agreements
The system of workplace or enterprise agreements
bases pay rises on productivity gains. However, it is
very difficult to accurately measure efficiency
improvements attributable only to workers (i.e. as
opposed to capital equipment). Moreover, the
encouragement of productivity may even worsen
structural unemployment in the short term.
■
efficiency in resource allocation (by affecting savings, consumption and investment levels)
■ the size of the CAD, NFD and our external competitiveness
■ equity in the distribution of personal income.
However, of all these, most of the recent tax reforms that
emphasised reductions in rates, were driven by the government’s push to improve efficiency in resource allocation by
encouraging savings, lifting investment, increasing the motivation to work hard, rewarding personal effort, and extending
international competition. In turn, greater efficiency also promotes economic and employment growth, lower inflation,
external stability, rising incomes and the potential for greater
equity in income distribution.
TAX REFORMS
To assess the quality of a tax system, economists often apply four
criteria. A tax should be:
1. Simple
Is it easily understood and simple to administer?
2. Fair
Does it promote an equitable income distribution?
3. Efficient Does it promote an efficient use of resources?
4. Adequate Can it raise the necessary revenue so that governments can pay for their budget outlays without going
into debt?
Given changing circumstances and, with these four guidelines in
mind, by the late 1990s it became especially clear that Australia’s
tax system was in need of a good overhaul. Table 7.3 (p. 248)
sums up some of the key tax reforms introduced in the years to
July 2007.
Tax reform will have many impacts on the economy. For
example, the changes will affect:
■ the sustainable rate of economic growth by altering both AD
and AS (including the levels of employment, production
costs, business profitability and prices)
REFORMS TO PROMOTE
NATIONAL SAVINGS
In 1993, the National savings strategy was first released. It
attempted to address the problems of relatively high domestic
interest rates (which disadvantage local firms that borrow for
expansion) and the large national savings–investment gap currently filled by heavy foreign borrowing (which worsens the
CAD through interest payments abroad). Between 1993 and
early 2007, a number of microeconomic reforms were used to
try and encourage national savings, often involving initiatives
announced in the annual budget.
CHAPTER 7 Economic management using microeconomic policy
247
Table 7.3
Key federal government tax reforms
REFORM OF TAXATION
TOP RATE
(2006)
HISTORICAL
TOP RATE
PAYG income tax
Between 2000 and mid 2007, the tax-free threshold
for personal incomes was increased, the entry points
into higher marginal tax brackets were moved up
considerably (e.g. until July 2008 the 45 per cent tax
rate cuts in at $150 000 per year but this will rise to
$180 000), and the top marginal rate was cut from
47 to 45 per cent.
45 per cent
(Plus 1.5 per
cent Medicare
levy)
75 per cent
(<1951–52)
CGT
In 1986, the tax rate on capital gains (other than the
family home that is exempt) was effectively halved.
Only 50 per cent (not 100 per cent as previously) of
the capital gain was to be taxed. The family home is
normally exempt.
22.5 per cent
(Plus Medicare
levy)
NA
(Before 1986)
Superannuation
For many years, the government has made
superannuation contributions very attractive (as a way
to save for retirement) by offering tax concessions on
both contributions and end benefits. These
arrangements were frequently altered, with the most
significant changes announced in the 2006 budget
that allows a tax-free withdrawal of end benefits from
aged 60 years from July 2007.
zero
(For endbenefits
withdrawn after
aged 60 years
from July 2007)
30 per cent
(1983 on lump
sum payments
above a
threshold)
Company tax
Between 2000 and 2002, the tax rate on company
profits was lowered from 36 to 34 per cent and finally
to 30 per cent.
30 per cent
49 per cent
(1986–88)
Changes in some
excise taxes
As an anti-inflationary measure, the automatic
indexation of the fuel excise tax ceased in 2001–02.
Previously, as the price of fuel increased, the amount
of tax collected increased without discretionary
decisions being made by the Treasurer. This policy
added to inflation and grew government revenues.
Additionally, there were modifications made to other
excise taxes (e.g. on light beer).
NA
NA
Tariffs
By 1996, the general tariff rate on most manufactured
imports had been reduced from nearly 40 per cent in
1968–69 to only 5 per cent. In 2005, the 3 per cent
tariff on business inputs was abolished where there is
no local substitute (business inputs, for example, are
natural resources, labour and capital purchased by
firms to allow them to make final goods and services
or output production).
Today most imports are tariff free, except for motor
vehicles, and textiles, clothing and footwear.
zero
(General tariff
rate effectively)
38 per cent
(General tariff
rate, 1968–69)
Indirect taxes
In July 2000, the 10 per cent GST replaced the
Wholesale Sales Tax (that had rates between 12 to 45
per cent). Unlike the WST, the GST is a broad-based tax
applied to most (non-essential) goods and services
and was levied on behalf of the states.
10 per cent
GST
45 per cent WST
(Before July
2000)
Source: Data derived from the Treasury Economic roundup, Winter 2006.
Acceptance of ‘fiscal balance’ as a guiding principle for budgets
Between 1991–92 and 1996–97, the federal government ran up
many budget deficits totalling nearly $60 billion. Unfortunately,
these deficits required financing. Local borrowing by the
government pushed up domestic interest rates relative to those
overseas. This encouraged the private sector to borrow even
more from overseas and attracted foreign capital inflow. In
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Economics Down Under Book 2
turn, overseas borrowing to finance government budget deficits, also led directly to a structural rise in the CAD and NFD.
In contrast to this, recent budgets have been based on the
principle of fiscal balance over the medium term, so that budget
surpluses in some years pay for deficits in others. Here, there is
no need for federal government borrowing. Indeed, between
1996–97 and 2007–08, budgets were mostly surpluses (only two
out of 11 were deficits) totally over $80 billion. This is shown
in figure 7.3.
In addition, by 2005, the government’s previous debt was
completely repaid. Fiscal consolidation like this abolished one of
the structural problems causing Australia’s NFD. It can also be
argued that the many budget surpluses (i.e. government
savings) helped to keep down domestic interest rates, making
overseas borrowing by the private sector relatively less attractive.
This too, helped to reduce income payments abroad, thus
tending to lower our CAD.
Establishment of the Future Fund
In 2005, the Future Fund was created to lift national savings,
improve the government’s long term financial position and its
ability to meet unfunded public sector superannuation liabilities
of around $100 billion. It was started using seed capital (as discussed in chapter 5) of around $18 billion, contributed by the
government. The money has been used to create a giant investment portfolio that should grow over time through the generation of income, topped up with extra capital from further asset
sales (e.g. Telstra 2006) and future budget surpluses.
Promotion of household savings
Microeconomic reforms (implemented through the federal
budget), have also tried to encourage private sector savings. For
example:
■ Superannuation guarantee charge (SGC). Starting in 1991, superannuation was made compulsory for all employees through
the introduction of the Superannuation guarantee charge. This is
a compulsory levy on a company’s payroll and was originally
equal to an extra 3 per cent of wages paid into a worker’s
superannuation account. However, as from 2002, it was
increased to 9 per cent.
■ Generous tax advantages for voluntary contributions to superannuation. The government encourages private super-
annuation contributions by offering very generous tax
concessions. For instance, marginal tax rates on income might
be as high as 45 per cent (plus the Medicare levy) but for those
involved with salary sacrificing (i.e. using some of your pre-tax
earnings to pay for benefits such as a car), there is only a
15 per cent tax on contributions. Also from July 2007,
individuals can withdraw their superannuation tax free once
they reach the age of 60 years. Again this provides further
incentive to save.
■ Superannuation co-contributions scheme. The Superannuation
co-contributions scheme commenced in 2002–03. Basically, the
government matches low income after-tax superannuation
contributions at the rate of up to $1.50 for every $1 (up to a
limit) put into an approved superannuation account by an
individual. For 2007–08, this will rise to $3 for every $1
contribution. This increases the incentive to save.
– Reductions in tax rates. Between 1999 and 2007, there were significant tax reforms involving cuts in tax rates. Many of these
changes should help to increase national savings. For
example, the 50 per cent reduction in the rate of capital gains
tax (1999) effectively lowered the maximum current rate to
only 23.25 per cent. Reforms in 2000 and 2002 also cut the
rate of company tax from 36 to 30 per cent. This should help
to boost business savings via increases in retained profits. In
addition, lower PAYG tax rates should provide temporary
relief from the effects of bracket creep (where individuals find
that over time, they end up moving into higher tax brackets
with a heavier tax burden). In turn, this may help to lift
household savings. Similarly, the 10 per cent GST (introduced in 2000) is a tax that discourages consumption and
indirectly encourages savings. It also broadened the tax base
to include both goods and services (relative to the old and
narrow WST on goods only), perhaps adding further to
public sector savings.
10
5
0
–5
–10
2009–10
2008–09*
2007–08*
2005–06
2006–07
2004–05
2002–03
2003–04
2001–02
2000–01
1998–99
1999–2000
1997–98
1996–97
1994–95
1995–96
–20
1993–94
–15
1992–93
Underlying budget outcome
($ billions)
15
Figure 7.3 Federal underlying budget outcome 1992–93 to 2006–07 and 2007–08 ($ billions)
Sources: Data derived from RBA Bulletin, various editions; 2006–07 budget overview.
Note: *represents latest estimate
CHAPTER 7 Economic management using microeconomic policy
249
By encouraging higher levels of national saving (i.e. an
increase in the supply of savings relative to the demand for savings), these reforms should tend to lower domestic interest
rates, slow cost inflation, improve long-term economic and
employment growth, raise dynamic and intertemporal
efficiency, reduce the NFD and CAD, and possibly help improve
equity in the distribution of personal income.
REFORM OF THE PUBLIC SECTOR
Reforms of government businesses and the public sector have
involved eight key aspects.
Privatisation of selected government business
enterprises (GBEs)
Many claims have been made about the supposed inefficiency of
government businesses. One response to this was to partially or
fully privatise selected GBEs. Figure 7.4 shows that there was
much privatisation between 1995–96 and 2005–06, especially in
the earlier years (although the sale of Telstra in late 2006 should
see a jump when the 2006–07 final figures are released).
16 000
12 000
8 000
2007–08
2006–07*
2004–05
2005–06
2003–04
2002–03
2000–01
2001–02
1999–2000
1996–97
0
1998–99
4 000
1997–98
Value ($ millions)
20 000
Figure 7.4 Estimated value of federal government
privatisation ($ million)
Sources: Derived from budget papers and other sources. Note:
data represent estimates only based on asset sales and other
smaller items. Note for 2006–07: this figure should be very
large given the success of the Telstra 3 share sales.
The justification for privatisation as an efficiency measure, is
often based on three main arguments:
1. Private owners and shareholders demand greater efficiency
and cost cutting in order to maximise their profits or returns.
2. Private owners often have better access to the huge amounts
of capital needed for investment in new equipment and technology. This helps them to grow their efficiency more quickly.
3. Private owners may be able to recruit and appoint management and staff of superior quality, ambition and creativity,
than would be the case if the business remained in the
public sector.
Examples of partial or full privatisation include the complete
sale of the Commonwealth Bank (1996), Aussat (which became
Optus with 49 per cent foreign ownership), the NSW Government Insurance Office (GIO), Qantas, TABCORP, some roads
(e.g. Melbourne’s City Link), many ports (e.g. Geelong,
Portland), some airports (e.g. Melbourne, Brisbane), parts of
Sydney’s water supply, PowerCor and Telstra.
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Economics Down Under Book 2
Corporatisation of some remaining government operations
Corporatisation involves full government ownership of the business enterprise. However, the GBE is run more like a private
enterprise (e.g. Australia Post, Australian Airlines in the 1980s,
and the Port of Melbourne Authority). Providing there is no service obligation (e.g. Telstra has an obligation to provide some
public telephone access in the community even though it may
not be profitable), the main goal is usually to make a profit by
minimising costs and by applying the user pays principle. There is
also independence of management and corporatised government businesses are not given special commercial favours (i.e.
there is competitive neutrality). Sometimes this can bring benefits
and cost savings to the users of government services and, in particular, reduce the financial burden of these GBEs for governments and taxpayers.
Commercialisation of some government activities
Commercialism also involves government ownership of businesses
but, unlike corporatisation, the enterprise is not expected to
actually make a profit. Often this feature reflects the existence
of community service obligations. Instead, the enterprise is
expected to help cover its running costs by generating at least
some revenue. It also seeks to reduce losses, lower the tax
burden and raise efficiency (e.g. some rail operations, aspects of
the ABC and some water boards).
Public-private partnerships in infrastructure
Between 2000 and 2007, some state governments tried the idea
of private funding of public infrastructure (e.g. schools, roads,
tunnels, water treatment, public housing and hospitals). These
are often called, public–private partnerships. Here, private money
would build, maintain and operate the facility but the government would lease these facilities back for periods up to 30
years. The questionable success of these ventures in Europe
has not stopped over $9 billion worth of projects being earmarked by Victoria and New South Wales for the period 2003
to 2007.
Public sector staff cuts
Structural change (1987–2007) initially involved dramatic
public sector staff cuts of around 35 per cent designed to reduce
costs and raise worker efficiency. In part, staff downsizing
reflects the impacts of fiscal balance, as well as privatisation and
corporatisation. Although there has recently been a 25 per cent
rise in public sector staff numbers in the six years to 2005–06
due to national security concerns and government reforms,
staffing levels are still well below the peak of 1987–88.
Reform of Commonwealth–state relations
During the period 1992 to 2007, the Council of Australian Governments continued reforms in Commonwealth–state relations. It
aimed to reduce the degree of inefficiency caused by service
duplication. Problems in this area are not only costly to taxpayers and business, but they represent a misallocation of the
nation’s resources. As a consequence of these changes, by 2007
there was good progress on reducing railway duplication, the
creation of a single eastern electricity grid, centralisation of
TAFE education, water trading, and uniform product and road
laws applying to all states.
National Competition Council (NCC)
The NCC is an organisation providing advice, conducting
research, making recommendations and evaluating state
government microeconomic reforms. This forms the basis of
the National competition policy. In particular, the NCC scrutinises
the changes with regard to road transport, power generation
and the creation of a national electricity grid, gas and water
supply, standardisation of regulations and laws between states,
the promotion of interstate trade and competition, and pricing
reforms undertaken by government monopolies.
WELFARE REFORMS
Deregulation of agricultural markets
During the past 10 to 15 years to 2007, there have been significant reforms involving deregulation of markets for primary
products, along with other measures to accelerate structural
change. For instance:
– Wool pricing. Some years ago, the minimum or reserve price
scheme for wool was abandoned.
– Egg marketing. Victoria, New South Wales, South Australia and
Queensland, have deregulated egg marketing.
– Milk marketing. Between 2001 and 2005, milk marketing was
deregulated, along with dairy farm-gate prices. In addition,
there has been compensation to dairy farmers for the loss of
milk quotas designed to encourage structural change in the
industry.
– Grains. There has been extensive deregulation of grain sales
and especially following the scandal surrounding the Australian Wheat Board’s (AWB) behaviour in its wheat dealings
with Iraq. The single desk, international marketing system is
to be reviewed during 2007.
– Sugar industry restructuring. In late 2002, the government was
forced to announce a levy of between 16 and 18 cents a kilogram on sugar consumers to raise money to promote structural change and help farmers to leave the industry. This was
aimed at relieving the problems of over supply and low prices.
– Cheese quotas. During 2000–01, import quotas on cheese were
finally abolished.
Between 1996–97 and 2006–07, reforms (again announced
through the budget) made welfare less accessible to some
people. For example, measures included:
■ working for the dole
■ maintaining a jobs interview diary
■ forcing the unemployed to turn up to job interviews by suspending the payment of benefits
■ tightening the work test
■ requiring some on disability benefits and single parents
(whose children have reached school age) to do at least 15
hours of work a week
■ encouraging the aged to defer retirement and build up their
superannuation
■ setting up a hot line to report welfare fraud
■ allowing welfare recipients to earn more income before benefits are lost (so as the reduce the welfare trap as recipients
start work).
Welfare reform has been seen as an opportunity to increase
efficiency in resource allocation. Some people felt the original
system was over generous. Claims were made that it encouraged
welfare dependence, and discouraged work and financial independence. It was also seen as a burden on taxpayers, a limitation
on high rates of labour force participation and a constraint on
the rate of economic growth.
Deregulation of transport markets
In the past two decades there have been numerous examples of
changes in the Australian transport system.
■ Airline deregulation. In 1990 the government’s two airline or
duopoly policy for domestic flights (i.e. Ansett Airlines and
Australian Airlines) was ended. In addition, Qantas was
allowed into the domestic market and was privatised. This
cleared the way for new competitors like Virgin Airlines, Jetstar and foreign carriers, to compete on both domestic and
international routes.
■ Unifying state railways. Some years ago, the National Rail
Corporation was set up, owned jointly by the Victorian, New
South Wales, Western Australian and federal governments.
This reform was designed to improve efficiency and cut waste
and duplication.
■ Waterfront and shipping reform. These included the privatisation
of some ports (e.g. Geelong), allowing competitors into freight
handling to help improve worker productivity on the waterfront (helped by the extension of workplace agreements) and
an end to the closed or union shop for waterfront workers.
■ Road reforms. Much money has been spent on upgrading
national highways. In addition, the level of motor registration
charges more closely reflect the damage to roads caused by
various types of users.
Contracting out and competitive tendering
Contracting out (also called outsourcing) is where agreements are
made for the supply of goods and services, between the government and private business. In order to cut costs, firms are
invited to respond to government advertisements by submitting
quotes or tenders. This approach has been widely used in
garbage collection, cleaning and maintenance of government
buildings, fleet management, information technology, legal
services and public works. Sometimes this can be more cost
efficient than having these goods and services provided by fulltime government employees and departments.
All up, reforms of the public sector will affect unemployment,
inflation, economic growth, external competitiveness, allocative,
productive and dynamic efficiency, and the distribution of personal income.
GENERAL DEREGULATION OF
MARKETS
Economists generally believe that resources are most efficiently
allocated where there is strong competition. Sometimes, this
can only occur if governments reduce regulations that restrict
competition. During the 1980s, 1990s and 2000s, market
deregulation has been a focus of many of the government’s
microeconomic reforms.
Financial sector deregulation
The main microeconomic financial reforms have already been
covered in chapter 6 (p. 206). You may recall that these focused
on reducing government controls. It exposed the banking
sector to more competition so that efficiency improved and
interest rates on loans became cheaper.
Deregulation of telecommunications
Between 1990 and 2007, there were some significant changes in
telecommunications to allow more competition in the industry.
CHAPTER 7 Economic management using microeconomic policy
251
Optus and Telstra, for example, were locked in a battle for
customers and the cost of some telephone services has come
down. Telstra downsized its staff to cut costs and was progressively privatised between 1997 and 2006, after the Coalition
government gained a majority in the Upper House that allowed
it to pass the necessary legislation.
REFORMS TO STRENGTHEN
COMPETITION
Strong competition usually results in greater efficiency, lower
costs of production, cheaper prices, and better quality of service
and product. Unfortunately, in some markets, competition
between rival firms is weak due to the existence of monopolies,
oligopolies, takeovers, mergers, and price collusion. For these
reasons, the government undertook reforms to strengthen competition. In 1995, the Australian Competition and Consumer Commission (ACCC) was set up to take over the roles previously covered
by the Trade Practices Commission (TPC) and the Prices Surveillance
Authority (PSA). As such, the ACCC now enforces the TPA, which
is designed to help prevent powerful companies (i.e. price
makers) from artificially raising prices to exploit consumers.
Under the Act, a number of practices are illegal such as:
■ Price fixing, for example, where firms collaborate to set prices.
■ Exclusive dealing, for example, where companies refuse to
supply their products or services to one or more firms.
■ Collusive bidding, for example, in submitting a tender or quote
for the completion of works or to supply goods or services,
supposedly competing firms meet secretly beforehand to
agree whose tender should be most attractive, cheapest and
likely to win the contract.
■ Price leadership, for example, where the dominant or leading
firm takes a lead in setting prices that others follow.
■ Predatory pricing, for example, where the dominant firms conduct a price war involving big cuts in prices with the intention
of driving rival firms bankrupt, and then later enjoying the
market without competition.
■ Market zoning, for example, where competing firms in a
region divide up the market into zones, areas or regions
within which they agree not to compete with each other over
prices.
■ Interlocking directorships, for example, where a person acting as
a member of the board of directors for one company, is also
on the board as a director of a supposed rival company.
If a company is found guilty of these offences, fines of up
$500 000 for individuals or $10 000 000 for companies may be
imposed, along with possible jail sentences for company directors. The ACCC also performs other functions. For example, it
supervises company mergers and takeovers to ensure that they
do not reduce competition and that they are in the public
interest. In addition, it monitors pricing (prices surveillance)
and other arrangements (e.g. false advertising claims) in industries where competition is weak including the utilities, aviation
and airports, insurance, petrol, postal, rail, waterfront and communications.
Recently, between 2000 and 2007, the ACCC has adopted a
high profile and aggressive stance to promote competition. It
took legal action against Coles which owns Liquorland. There
were allegations that Coles had engaged in anti-competitive
behaviour in New South Wales by entering into contracts with
outlets licensed to sell liquor. One of the terms of the contract
prevented these licensed operators from supplying packaged
takeaway liquor to consumers and, therefore, restricting competition. The ACCC also considered cases involving the companies
and industries listed below (but it should be noted that not all of
these firms have been found guilty of breaching the Act).
Qantas
Major banks
Archem Australia
Telstra
Seven Network
Hutchison Australia
Foxtel
Berri Fruit Juice
Advanced Medical Institute
Optus
ABB Power Transmission
Australian Gaslight Limited
Mobil, BP, Shell and Caltex
Darwin Radio Taxis
Chubb Security
Coles–Myer, Liquorland, Woolworths
Coopers & Lybrand and
Price Waterhouse
(Price WaterhouseCoopers)
Nissen
Source: Data derived from the ACCC.
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Economics Down Under Book 2
ENVIRONMENTAL REFORMS
Environmental reforms cover issues related to environmental
change, energy and water use.
Energy
For some years now, concern has been expressed about the
impact of burning fossil fuels (e.g. by cars, trucks, power generators, industry and waste disposal) on greenhouse gas emissions
and global climate change. This gave rise to a summit that proposed the Kyoto protocol or convention that commenced in
2003. The aim was to limit carbon emissions by industrialised
nations to specific target levels. Emissions by firms would need
to be offset by firms purchasing carbon credits in the marketplace. This scheme gives pollution emissions by a firm a cost,
or money value, that affects company profits and hence their
resource allocation. For Australia, the target for the 2008–12
commitment period, was to slow the emissions rise to only
108 per cent of the 1990 benchmark level. Clearly, if Australia
had signed up to this agreement, it would have had significant
effects on the structure and operations of some local industries
and firms, relative to others (e.g. brown coal power generation,
road transport, the smelting of aluminium and other metals).
The government did not sign this protocol, but did set
renewable energy targets. More recently, the rise in oil prices
(2004–06) and growing concern about climate change (in the
context of the current drought) caused by greenhouse gases,
has led to the federal government’s renewed interest in the
problem. Reports were commissioned in 2006 into nuclear
energy and a possible system for trading carbon credits
(i.e. licences to pollute, the market price of which would place
a cost on firms that pollute).
Water trading
There is growing concern also about water. The current
drought and, for farmers, the string of dry seasons that stretches
back to 2003–04, have prompted this. Many of our largest cities
are on stage 4 (or higher) water restrictions and our productive
capacity has been reduced. The matter has also raised debate
about using irrigation for growing crops like rice in almost
desert conditions and how to maintain environmental river
flows. In late 2006 and again in 2007, the Prime Minister called
a summit of state premiers to discuss the matter and to commence work on reforms including a water trading scheme.
SOCIAL INFRASTRUCTURE
The social infrastructure includes the government’s provision of
adequate health, education and housing. This task is made
more difficult because of financial constraints in the budget, an
already high direct tax burden, tax avoidance, growing welfare
dependency, a drop in the growth rate for the labour force, and
an ageing population that is expecting higher standards of welfare and health care (as highlighted in the Treasurer’s 2002–03,
Intergenerational report). These developments have forced
efficiency improvements in the government’s delivery of services. Additionally, other reforms have involved the following.
Funding cuts and user pays
During the past 10 years, there have been cuts in the government staffing and funding of departments, and in some cases,
increased application of the user-pays principle.
Public–private partnerships
Public–private partnerships involving the private financing of
social infrastructure (e.g. schools, welfare housing and hospitals) have expanded, where the government leases these facilities back from private-sector owners.
Health insurance rebate
There has been the introduction of the 30 per cent rebate to
help offset some of the cost of private health insurance (to
relieve the pressure on Medicare), along with the use of casemix
funding in public hospitals.
Education
A review of education has taken place. This has included federal
funding of public and private schools and the application of
national literacy standards.
MICROECONOMIC POLICY
RESULTED IN PRIVATE–SECTOR
REFORM
Government microeconomic reform, especially market deregulation and trade liberalisation, have a knock-on effect. They
force the private sector to restructure the way it goes about producing goods and services. No longer can local firms coast
along if they want to survive foreign competition. In their battle
to increase efficiency, privately operated firms must keep on
reviewing their business practices. Often this has involved the
following changes.
Rationalisation of operations
Local firms must rationalise their operations, closing down
unprofitable or less viable branches. For example, BHP closed
its Newcastle plant, Email ceased its dishwasher and other operations in Victoria, Mitsubishi closed its engine plant in South
Australia, banks including the ANZ, the Commonwealth, NAB
and Westpac have reduced branches and shed over nearly
20 per cent of their staff.
Benchmarking against best practice
Benchmarking has been widely introduced and involves setting
time targets for particular processes and work tasks, using the
standards set by leading international plants.
Costs
There has been an increased focus on recycling, reducing production times, operating with fewer staff, and cutting costs,
waste and delivery delays.
Technology
Technology has been applied more widely and is updated more
frequently.
Management
Many firms have used a flatter management structure. This
involves fewer levels of middle management and increased
responsibilities and performance targets for ordinary workers.
Training
There has been the promotion of continuous learning,
multiskilling, teamwork and encouragement of adaptability by
staff.
CHAPTER 7 Economic management using microeconomic policy
253
Stocks
Keeping large stocks of components or finished product is expensive so, increasingly, firms employ the idea of ‘just in time’ (JIT)
(when new stock is only ordered when stocks are running low).
Marketing
During the 1990s and 2000s, there has been a broadening in the
approach to product marketing from having a local orientation,
to greater emphasis on e-commerce and global markets.
Wage system
Most firms use a performance-based pay system from CEOs
down. This involves workplace agreements that link wage rises
to the achievement of productivity and other targets.
Some of the results of reform have been nothing short of staggering. For example, at Rio Tinto’s Hamersley mining operations, wage, industrial relations and other changes reduced the
number of hours lost to industrial disputes by around 98 per
cent over a recent 10-year period, and at the same time, grew
productivity by nearly 90 per cent in terms of tonnes of ore
mined per employee a year. These outcomes meant a huge cost
saving that translated into increased output, higher profits, business expansion, increased employment and rises in real
incomes.
Communication
Businesses have sought to improve communication between
staff, since this helps to lift efficiency. Increasingly, the top-down
command system of management has been replaced by a twoway system of communication. This gives employees greater
responsibility for their performance and may improve the level
of cooperation between workers and management, leading to
lower rates of strikes and industrial conflict.
TRY SHORT ANSWER EXERCISE
2, pp. 276–77
7.4 Using microeconomic policy to
improve domestic economic
stability
254
Economics Down Under Book 2
side conditions aimed at encouraging an increase in AS, all three
aspects of economic stability should eventually improve. Economic growth should be stronger, inflation slower and unemployment lower than would otherwise occur. Let us see why these
improved outcomes should occur.
AS1 =
original supply-side
conditions
General price level
Remember that internal or domestic economic stability entails the
government simultaneously achieving the objectives of:
■ price stability (an average annual inflation rate over the cycle
of 2–3 per cent)
■ sustainable economic growth (average annual GDP growth of
around 4 per cent)
■ full employment (an unemployment rate of around 5–6 per
cent of the labour force).
During the past two decades, microeconomic reform has become
an increasingly important part of the overall policy mix or combination. While monetary and budgetary policies act as shorterterm stabilisers of the level of AD, microeconomic policies help
to improve stability in the longer term by growing Australia’s
productive capacity and boosting our AS. Supply-side microeconomic reforms like labour market or wage deregulation,
trade liberalisation, cuts in tax rates, improved public-sector
efficiency, growing the level of national savings and competition
reforms, all help us to produce a greater level of national output
from fewer inputs, and at a lower cost or general price level.
These beneficial impacts of reforms are illustrated on the AD–AS
diagram shown in figure 7.5.
Notice that, as a result of microeconomic efficiency policies,
the economy’s productive capacity has grown from AS1 to AS2
(i.e. the AS line has shifted outwards). As a result, the equilibrium level of national output has grown from GDP1 to GDP2,
and the general level of costs and prices has fallen from P1 to P2.
This is more or less what has happened in Australia following
microeconomic reforms, especially during the past 20 years to
2007. Because microeconomic policies try to promote better supply-
P1
Cost inflation
AS2 = increased
productive
capacity
following
macroeconomic,
supply-side
efficiency
reforms
P2
AD1 = ideal
levels of
spending
GDP1 =
original sustainable
rate of economic growth
and employment
GDP2 = increased
sustainable rate of
economic growth
Real GDP (national output)
Figure 7.5 How microeconomic supply-side
reforms can help improve domestic economic
stability
Microeconomic reforms have helped
‘price stability’
Through various efficiency reforms (i.e. productive, allocative,
dynamic and intertemporal efficiency) involving structural
change, the use of positive incentives, and stronger competition,
firms have lowered their production costs. If goods and services
Table 7.4
cost less to produce, businesses can keep their prices down and
still make good profits. This slows cost inflation and greatly
improves price stability. In the long term, improved price stability and international competitiveness also help GDP and
employment growth and, hence, general economic stability.
Six of the most significant microeconomic reforms designed
to slow cost inflation pressures are reviewed in table 7.4.
The top six microeconomic reforms that fight inflation
1. Tariff cuts and
trade
liberalisation
There were progressive cuts in general tariff rates from around 40 per cent in 1968–69,
to zero for most items by 2005–06, along with ongoing reductions in those for cars,
textiles, clothing and footwear. Additionally, subsidies were reduced, import quotas
abolished and four FTAs were in operation by early 2007 (with four more in the pipeline).
Tariff cuts helped to keep inflation down. This happened in several ways.
■ Reduced tariffs increased the level of competition forcing local firms to slash their costs
and prices.
■ Lower tariffs and freer trade made imports cheaper. This meant a significant reduction
in production costs for firms using imported equipment. Goods were also less
expensive for households purchasing imports such as cars, footwear, clothing and
electrical goods.
■ Cheaper imports helped to siphon off excess AD, thereby slowing demand inflation.
■ Lower tariffs forced businesses to allocate resources more efficiently to areas where our
comparative cost advantage was greatest. This too helped to keep inflation down.
2. Labour market
deregulation
The past decade and a half has seen the extension of efficiency or performance-based
workplace wage agreements. These and other labour market reforms helped to actually
reduce RULCs during the 10 years to 2005–06. Being the main cost of production for
many firms, lower RULCs in turn slowed cost inflation. In addition, these reforms also
contributed greatly to reducing costly industrial strikes.
3. Competition
reforms
Changes were made to improve the level of competition between sellers of goods and
services. These included the creation of the ACCC, the strengthening of the TPA, widened
surveillance of prices, and closer scrutiny of mergers and takeovers. Economists believe
that strong competition between rival firms is a precondition needed for efficiency and
lower inflation rates.
4. Public sector
efficiency
reforms
Public sector efficiency reforms helped to reduce production costs and hence inflation.
These included privatisation, corporatisation, contracting out and competitive tendering,
and public service staff cuts. As a result of reforms, the cost to users of many government
services actually fell in real terms.
5. Tax reforms
The reductions in most tax rates (e.g. on personal incomes and company profits) between
2000 and early 2007, helped to slow inflation. Companies had higher after-tax profits
allowing them to absorb some of the cost rises without putting up their prices. This
helped to accelerate investment in more efficient new equipment. Individuals were also
encouraged to work harder, knowing they would get to keep more of their income. This
helped productivity and lowered inflation.
6. Promoting
national savings
Measures (e.g. encouragement of superannuation, budget surpluses, the Future Fund)
were put in place to try and promote national savings. With more savings available for
lending, the cost to firms of borrowing credit used to finance investment in new
equipment and technology tended to become cheaper than otherwise. Indeed, current
interest rates are at a 30-year low. This helps to reduce cost pressures on firms and slow
inflation.
CHAPTER 7 Economic management using microeconomic policy
255
Microeconomic reforms have
promoted higher sustainable
economic growth
There are two ways supply-side microeconomic reform can
help accelerate the rate of economic growth that an
economy can sustain, without jeopardising price stability:
1. Microeconomic policy can increase Australia’s sustainable rate of economic growth by expanding our productive capacity. This occurs because greater efficiency
allows businesses to produce a bigger output from the
same inputs, simply by cutting costs or using the available resources more efficiently.
2. Cost-cutting efficiency reforms (e.g. industry assistance,
cuts in tax rates, labour and capital market deregulation,
modifications to welfare access and R&D schemes) lift
the sustainable rate of GDP growth by boosting business
profits and creating incentives for individuals to work
harder. This improves worker motivation and makes
firms more willing to expand their output.
Table 7.5 shows some of the more important microeconomic reforms used to help increase Australia’s sustainable rate of economic growth during the past 10–20 years
to 2007.
Table 7.5
The top four microeconomic reforms that promote sustainable economic growth
1. Tax reforms
In general, lower tax rates (as in Australia, 1999–2007) help to boost economic growth
and productive capacity. From the supply-side point of view, reduced rates of company
and capital gains taxes help to grow the after-tax profits of investors and firms. This
motivates business expansion through increased investment spending on new equipment
and technology. Capital deepening (i.e. more investment or capital per worker) leads to
better efficiency. Similarly, lower rates of PAYG help to encourage hard work since
individuals can retain a larger percentage of their income. This may also lead to higher
rates of saving and investment.
2. Labour market
deregulation
Australia’s labour market reforms have mainly been about boosting worker productivity
and using resources more efficiently. For instance, workplace agreements represent a
performance-based wage system. Typically, these agreements only pay higher wages
when there is increased worker efficiency. In addition, the relaxation of the unfair
dismissal laws (see Work Choices, 2005) might mean that more workers are employed
than previously, contributing to increased national production.
3. Public sector
reforms
Australia’s public sector produces almost 20 per cent of GDP. As a result of efficiency
reforms including cost cutting, contracting out, privatisation and corporatisation, our
productive capacity and sustainable rate of economic growth should tend to increase.
4. Reforms to
promote
national savings
Australians save too little to finance national investment. Among other things, this leads
to higher interest rates that discourage business expansion in plant and equipment. In
turn, this slows our sustainable rate of economic growth. However, the savings reforms
between 1991 and 2007 including many surplus budgets, the creation of the Future Fund,
the introduction of compulsory superannuation and other incentives to encourage private
superannuation, should help to correct this problem.
256
Economics Down Under Book 2
Microeconomic reforms have helped
encourage fuller employment
There is little doubt that microeconomic reform increased structural unemployment over the short and medium terms. Often,
cost reductions by firms, the promotion of efficiency and the
rationalisation of production by the private and public sectors,
resulted in the downsizing of staffing levels. Although this is very
distressing for those involved, theoretically, if there is improved
efficiency, product quality, price competitiveness and business
profitability, in the longer term, fewer firms should close down.
Structural unemployment should drop. Indeed, reforms should
eventually help to grow employment opportunities more than would
be the case if industries were inefficient. In addition, local
efficiency reforms help to grow domestic and international sales
of goods and services, generating even more jobs.
Table 7.6 summarises some stand out microeconomic reforms
affecting employment.
Some other advantages of
microeconomic policy
Microeconomic reforms have other advantages.
effective in dealing with supply-side structural causes of economic
instability.
■ While contractionary monetary and budgetary measures
work well to slow demand inflation, they often worsen cost
inflation. This is not a problem with microeconomic reforms.
These actually reduce costs and do not depend on stopping
the economy to check inflation.
■ Similarly, expansionary budgetary and monetary policies
work quite well by boosting AD to counteract a cyclical slowdown economic activity and employment. However, microeconomic measures are far more effective than
macroeconomic strategies in actually lifting the sustainable
rate at which the economy can grow.
Microeconomic policies are consistent with achieving
most other government economic objectives
In promoting domestic stability through greater efficiency, this
helps the government achieve its other economic objectives. For
instance, external stability should be improved as firms become
more internationally competitive and we are less dependent on
financing national investment through overseas borrowing and
debt. Certainly there will be greater efficiency in resource allocation and, in the long term, this may even lead to improved
equity in income distribution.
Microeconomic policy is more effective than
macroeconomic policy in some situations
Unlike macroeconomic policy in general, and especially
monetary policy in particular, microeconomic reforms are very
Table 7.6
The top five microeconomic reforms that can lower unemployment in the long term
1. Tax reforms
Tax rates were cut (especially during the years 1999 and 2007) partly because lower rates
help to create more jobs and less unemployment. Reduced company and capital gains
taxes encourage higher levels of business investment and expansion because after-tax
profits are higher and firms are more internationally competitive. This generates jobs
whereas low or falling company profits destroy employment.
2. Welfare reforms
Reforms (especially 1996–2007) have made it more difficult to access welfare and have
removed some of the disincentives to work. The welfare trap has been reduced. New
policies have also aimed to increase labour force participation rates and get more
individuals to accept responsibility for their personal financial situation.
3. Trade
liberalisation
Over 20 per cent of Australian jobs result from international trade. Trade reforms in the
years to 2007 focused on cutting the level of tariff and other protection, and expanding
FTAs. In the short term, it is likely that the move towards freer trade caused structural
unemployment to rise as local firms closed down due to import penetration of the
domestic market. However, some research confirms that employment grows fastest in
more globalised industries where, due to lower tariffs, resources are allocated efficiently
into areas of comparative cost advantage.
4. Labour market
reforms
Employment grows and unemployment shrinks if Australian firms are profitable due to
lower production costs. One of the key costs is wages for labour. Over the past 15 years
to 2007, there has been extensive deregulation of our labour market and wages, with the
extension of workplace agreements to cover around 90 per cent of workers. This has
been the main reason for the actual fall in RULCs (by around 0.44 per cent per year during
1996–2006), and record levels of business profitability experienced in recent years.
5. Reforms to lift
national savings
Business can only expand if it has access to cheap finance and low interest rates. Recent
reforms have tried to grow the pool of national savings via surplus budgets, the Future
Fund and inducements for superannuation. As a result, interest rates are lower than would
have otherwise been the case.
CHAPTER 7 Economic management using microeconomic policy
257
HAS MICROECONOMIC POLICY
PROMOTED DOMESTIC
STABILITY?
Conclusive evidence of the success (or otherwise) of these
microeconomic reforms is difficult to find. This is because
there are so many local and international factors other than
microeconomic policy, that affect how well the economy performs. Even so, it is interesting to compare data for two
periods of time — first, for the years 1980–1992 (prior to the
acceleration of reform), and second, for the period from
1992–93 to 2005–06 (when changes in microeconomic policy
were much faster). Table 7.7 attempts to do this using a
scorecard.
Table 7.7
Notice for example:
■ Productivity is growing much more strongly.
■ RULCs for firms have actually decreased.
■ Strike rates are greatly reduced.
■ The cost of overdraft interest rates is much cheaper for firms
borrowing credit.
■ Tax rates on companies are significantly lower.
■ The labour force participation rate has increased.
■ Tariff protection of local manufacturing industry is now
almost non-existent.
■ Many goods and services (e.g. electrical appliances and air
travel) are now cheaper for households and firms.
These trends have implications for the achievement of domestic
economic stability.
A scorecard for government microeconomic policy for domestic economic stability
INDICATOR OF THE SUCCESS OF
MICROECONOMIC POLICY
REFORMS
AVERAGE
1980–
92
AVERAGE
1992–
2006
NOTES ABOUT THE
CHANGE IN AVERAGES
(1992–06 COMPARED WITH
1980–92 AND OTHER YEARS)
Price stability: Inflation (average annual
percentage change in CPI)
8.1
2.6
Inflation down by 67.9 per cent
Sustained economic growth: GDP growth
(average annual percentage change)
3.4
3.7
Sustainable rate of economic growth
faster by 8.8 per cent
Full employment: Unemployment rate
(average percentage of labour force)
7.7
7.1
Unemployment down by 7.8 per cent
(October 2006, a 30-year low figure
of 40.3 per cent down on 1980–92)
1. Productivity (average percentage change
in GDP per hour worked)
1.2
2.1
Average labour efficiency increased
by 75 per cent
–0.3
–0.4
Average RULCs for firms are falling
and cheaper by 33 per cent
65
Estimate down by 81.5 per cent
(2005–06 figure down an estimated
97 per cent on 1970s average)
2. RULCs (average annual percentage
change)
3. Strikes level (average working days lost
per 1000 employees)
352
4. Gross profit growth (average annual
percentage change)
11.2
8.5
5. Rate of company tax (average
percentage of profits)
44
6. Interest rates on overdrafts (average
percentage a year)
16
9.1
7. Labour force participation rate (average
percentage of total persons)
61
63.4
Average is up by 3.9 per cent
(October 2006 figure down 6.7 per
cent)
8. General manufacturing tariff rate
(average annual effective percentage)
19
2
A fall in the average annual level of
tariff protection by 89.5 per cent
33
Sources: Data derived from ABS 1350.0; RBA Bulletin; RBA Occasional Paper, No. 8A.
258
Economics Down Under Book 2
Down by 24.1 per cent
Down by 25 per cent (2005–06 rate
39.9 per cent down on 1980 rate)
Down by 43.1 per cent (2005–06 rate
down 54 per cent on 1989 rate)
Some possible successes of reforms
Based on table 7.7 and other data for the past 25 or more years
to 2005–06, many commentators believe that recent microeconomic policies generally have been very effective in promoting
domestic stability in three ways.
1. A faster sustainable rate of economic growth
Economic activity rose in all years at an annual average of
around 3.6 per cent. This higher sustainable rate of economic growth was the result of good profits, greater productivity, increased labour force participation rates, fewer
strikes, lower tax rates and cheaper credit. Although the
average rate was just short of the government’s 4 per cent
target, it was held back in the past 3–4 years to 2007, because
the economy had little unused productive capacity.
2. Better price stability
Overall, inflation was within the government’s 2–3 per cent
target (unlike the years 1980–92), thanks partly to stronger
productivity of over 2 per cent a year, falling RULCs, lower
tariffs and cheaper credit for firms. The price of some goods
and services actually went down. Even so, there were two
spikes in Australia’s inflation rate in 2000–01 and 2006–07.
These were partly provoked by once-off events, and more
recently, by the fact that the economy was close to its productive capacity.
for whatever reason, equity in income distribution also tends to
suffer in the short term. This is because unemployment causes
incomes, purchasing and access to basic goods and services to
be reduced. When assessing the short-term effects of microeconomic policy on the level of structural unemployment and
equity, the following reforms have proved to be the most
damaging.
■ Reduced tariffs and protection. Import duties have been progressively reduced. The general tariff rate was cut from 15 per
cent in 1992 to zero by 2005–06. In addition, in the 14 years
to 2005, tariffs on cars fell from 35 to 10 per cent, and, for the
textiles, clothing and footwear industries, from 47.5 to a
maximum of 15 per cent. This caused business closures and
structural unemployment in the manufacturing sector.
■ Labour market reforms. Labour market reforms (especially the
extension of enterprise agreements) have increased worker
productivity. In many cases, more work is now completed
using fewer staff, temporarily causing a slower growth in
employment.
■ Reforms to the government sector. Initially between 1987 and
1999, there was a 35 per cent reduction in public sector staff
levels due to the effects of privatisation, corporatisation, commercialisation, contracting out and the government’s fiscal
consolidation. However, between 1999 and 2006, numbers
have again grown, although not to previous levels.
3. Fuller employment
This period eventually saw the achievement of the full
employment target (i.e. 5–6 per cent unemployment).
Except for a slight rise during the slowdown of 2000–01,
unemployment fell fairly steadily from 8.3 per cent in 1996,
to a 30-year low of only 4.6 per cent in late 2006. This may be
partly attributed to the increased competitiveness of local
firms following effective microeconomic reforms (e.g. labour
market deregulation, tax cuts and savings reforms).
Some areas of weakness in reforms
Despite this apparent success, critics of recent microeconomic
policy draw attention to some areas of weaknesses.
The pace of microeconomic reform slowed down
between 2001 and 2005
Microeconomic reform appears to have moved in waves with
peaks in the early 1990s, 1996, 2000 and perhaps 2005. Despite
some renewed interest in 2005, the pace of change did seem to
slow and the federal opposition believed that the government
had run out of new ideas.
Possible conflict with other government objectives
in the short term
Perhaps the most severe weakness of many microeconomic policies in Australia is that, in the short term, they are likely to
weaken the achievement of full employment and equity. For
example, in the 1990s and 2000s, structural change has meant
that most firms have produced more output with fewer workers.
Indeed, ABS data shows that while manufacturing output rose
36 per cent between 1996–97 and 2005–06, this sector provided
nearly 7 per cent fewer jobs. This was only possible because
there has been a 19 per cent rise in labour productivity (i.e.
GDP per hour worked). In addition, when unemployment rises,
■
Structural change by businesses. There has been massive restructuring, especially in the car, textiles, aviation, transport,
farming, telecommunications and banking industries. This has
often been associated with the accelerated use of new technology (e.g. robots, computers and the Internet, and R&D),
the rationalisation of company branches (i.e. sometimes
caused by integration, mergers, takeovers), and the introduction of new worker–management systems designed to cut costs.
Political constraints slow or weaken reform
As we saw between 1996 and 2007, many microeconomic reforms
(e.g. the Workplace Relations Act, the privatisation of Telstra, and
the introduction of the GST) initially failed to gain approval in
the Upper House where federal governments lacked a majority
until 2005. In addition, WorkChoices (2005–06) the proposed
sale of Medibank Private (perhaps 2007) and the Snowy Mountains Hydro Scheme (the idea was scrapped in 2006), proved
CHAPTER 7 Economic management using microeconomic policy
259
unpopular with some sections of the community. Political constraints like these, slow the speed of reform and may sometimes
result in them being watered down and made less effective.
a short-term stabiliser to iron out fluctuations in the business
cycle. Instead, microeconomic measures are more aimed at the
longer term where they are limited mainly to raising efficiency
and the sustainable rate of economic growth, cutting business
costs and inflation, and improving the international competitiveness and profitability of Australian firms.
Implementation lags are often long
Microeconomic policy can involve enormous time lags or delays
in policy implementation. Reform of the car industry, for instance,
commenced in 1983 but the tariff cuts associated with it, will still
not be complete until some time after 2010. Another example
of implementation delays is labour market deregulation. This
was designed to slow the growth in wages, reduce cost inflation
and improve external competitiveness. Workplace agreements
were first approved in 1991, but even by 2006, over 10 per cent
of the labour force was still regulated by the old minimum wage
system. This long implementation lag also reduced the ability of
reform to improve domestic stability.
Institutional constraints slow the pace of reform
While some people are critical of change, others believe that
our pace of reform has been too slow. One reason for this is the
institutional constraints that limit progress. There does seem to
have been a lack of real commitment to reform across a wide
range of institutions from unions, to business and to government at all levels. In addition, greater determination to
implement reform overseas has meant that relatively, Australia
may still be losing ground.
Inability to use microeconomic reforms as a
short-term stabiliser
Unlike macroeconomic policies that can help reduce the severity
of booms and recessions, microeconomic reform cannot be used as
TRY SHORT ANSWER EXERCISE
3, pp. 277–78
7.5 Using microeconomic policy to
improve external stability
For Australia, the government’s objective of external stability
means that we should be able to pay our way in international transactions, without undue downward pressures on the A$ or an
excessively large CAD or NFD. Figure 7.6 shows, hypothetically,
that there are two sets of factors currently causing Australia’s
external problems.
1. From time to time, excessively strong AD and economic
activity can cause a cyclical rise in our CAD.
2. There are ongoing or long-term structural problems that
cause the CAD to seldom fall below 3 per cent of GDP.
As supply-side efficiency measures, microeconomic reforms are
very well suited in the long term, for dealing with Australia’s
external structural problems, namely:
■ the large saving–investment gap that is currently filled by borrowing overseas
■ our relatively high production costs that reduce our international competitiveness.
Let us now consider each of these two areas to see what macroeconomic policy is doing to correct the problem.
CAD:GDP ratio (%)
6
2. A large CAD:GDP ratio of around 6%
shows that there is excessively strong AD
and economic activity. National
expenditure is running ahead of our
productive capacity. Contractionary
macroeconomic measures might help to
reduce this problem.
3
1. This area represents ongoing structural causes of
external instability including our poor
competitiveness and our big NFD due to a lack of
domestic savings to fill the S–I gap.
This problem can be reduced by microeconomic
reforms that improve our competitiveness and close
our national S–I gap.
0
A figure of around 3–4% for the CAD:GDP
ratio is the government’s target for the
objective of external stability. This is most
likely to be achieved when there is domestic
economic stability (rather than a boom).
Years
Figure 7.6 The causes of external instability and its reduction using microeconomic policies
260
Economics Down Under Book 2
Reducing the large ‘gap’ in national
savings and investment
Australians do not save enough to finance their high level of
investment in new plant and equipment. We have come to
depend very heavily on overseas borrowing and debt, in order
to make up the difference. This problem then adds to Australia’s CAD (especially the huge net income deficit) and has
contributed to the long-term decline in the A$. In addition,
poor savings mean that domestic interest rates paid by businesses borrowing credit, are often higher than those faced
abroad. This further encourages overseas borrowing. It also represents a cost disadvantage by discouraging local firms from purchasing the latest technology needed to lift efficiency, and it
lowers the competitiveness of our exports relative to imports.
Table 7.8 reviews some of the key microeconomic reforms used
to try to increase domestic savings.
companies have to contend with relatively high tax rates. Because
it often costs more to produce goods and services here, it is difficult for local firms to keep prices down and still make reasonable profits. Regrettably, high domestic costs and prices
undermine export sales and encourage imports. They also prevent our firms from adding greater value to exports through further processing or manufacture. Together, these problems
contribute directly to Australia’s ongoing structural CAD, rising
NFD and overall declining value of the A$.
Microeconomic policy has tried hard to improve Australia’s
international competitiveness through the cost-cutting
efficiency measures shown in table 7.9 (p. 262). Coverage here
will be brief because these measures have been mentioned
already in connection with slowing inflation.
Lowering our high costs and
improving our international
competitiveness
Often due to low efficiency and our particular endowments of
resources, Australian firms often face higher production costs
relative to those overseas. Costs here include wages, interest rates
on borrowed credit, utilities (i.e. energy, water, telecommunications), transport, imported materials and equipment, and high
fixed costs caused by the local market being comparatively small
in size (this reduces economies gained from large-scale production where costs can be spread more thinly). In addition,
Table 7.8
Five microeconomic reforms that may help increase national savings
1. Surplus budgets and
pursuit of fiscal
balance
Since 1996, the Treasurer has accepted the idea of fiscal balance in the medium
term, where budget surpluses pay for deficits. This means that there is no Federal
public sector borrowing requirement and, by 2005, all Commonwealth debt had
been repaid. This helped to reduce the size of the NFD and CAD. It also meant that
interest rates were lower than otherwise, stimulating private sector investment in
new technology and helping to improve our international competitiveness.
2. The Future Fund
In 2005, the Future Fund was created. It used proceeds from asset sales and surplus
budgets to try to grow national savings and capital through wise investments.
3. Tax concessions
for private
superannuation
contributions
The government encourages private superannuation contributions by offering very
generous income tax concessions for those sacrificing their salary and, from July
2007, individuals can withdraw their superannuation tax-free, once they reach the
age of 60 years.
4. Introduce the
compulsory national
superannuation
guarantee charge
Starting in 1991, national superannuation was made compulsory for all employees
through the introduction of the Superannuation guarantee charge (SGC). This levy
on business originally started at 3 per cent, but in 2002, was increased to 9 per cent
of an employee’s pay.
5. The co-contributions
superannuation
The Superannuation co-contributions scheme commenced in 2002–03. Basically, the
government matches low-income after-tax superannuation contributions at the rate
of up to $1.50 for every $1 (higher for 2007–08) put into an approved
superannuation account.
6. Tax reform involving
lower tax rates
Between 1999 and 2007, there were significant reforms involving cuts in tax rates.
Many of these changes should help to increase disposable incomes and national
savings by individuals and companies.
CHAPTER 7 Economic management using microeconomic policy
261
Table 7.9
Six microeconomic reforms that help increase our international competitiveness
1. Tariff cuts and trade
liberalisation
In the 30 or more years, to 2007, local industry has been exposed progressively to
much stronger competition from imports following reductions in tariffs and
subsidies, the abolition of import quotas and the growing number of FTAs. This has
forced Australian firms to cut costs by restructuring their production, improve
product quality and service, and to allocate resources more efficiently into areas
where our comparative cost advantage is greatest.
2. Labour market
deregulation
Under workplace agreements, wage rates paid by firms now, more closely reflect
market conditions of demand and supply than was the case when the traditional
centralised minimum wage system was more dominant. Reforming the wage system,
changing legislation about unfair dismissal, and encouraging union amalgamation
and multiskilling, have all helped to lower RULCs. This has made local exporters
more competitive.
3. Deregulation of other
markets
The government also has deregulated many other markets (e.g. including aviation,
power, communications, primary products, and financial markets) to stimulate
competition, improve efficiency and strengthen the international competitiveness of
local firms. The floating of the A$ in particular has helped to ensure that the A$
trades at an appropriate level that reflects global demand and supply conditions.
This acts as an automatic device to help correct the size of our CAD.
4. Competition reforms
The promotion of stronger competition through the Trade Practices Act and its
enforcement by the ACCC has helped to keep business costs and prices down. This
makes local firms more competitive.
5. Public sector
efficiency reforms
There has been significant privatisation of government business enterprises during
the past 20 years to 2007. Supporters claim that this lifts efficiency, cuts production
costs for firms using these services, and allows them to sell profitably at lower
prices. In addition, corporatisation of some government businesses and overall
reductions in the size of the public sector have contributed to lower costs of
government and a more competitive economy.
6. Tax reforms
Reforms here have especially focused on lowering tax rates on individuals and firms.
For example, reductions in taxes on company profits and capital gains, allow firms
to enjoy better after-tax profits. Local exporters can also sell at a lower more
competitive price, encouraging better sales.
HAS MICROECONOMIC POLICY
PROMOTED EXTERNAL
STABILITY?
It is hard to prove the success or otherwise of microeconomic
policies. This is because there are so many local and international factors affecting Australia’s ability to ‘pay its way’, and
262
Economics Down Under Book 2
in turn, influencing the CAD, NFD and exchange rate for the
A$. Isolating cause and effect accurately, is almost impossible.
Even so, the data in table 7.10 helps to cast light on the situation. It compares statistics for the years spanning 1996–97 to
2005–06 (when microeconomic policies were at their peak),
with those for 1980–1992 (before microeconomic reforms
gained popularity).
Table 7.10
A government microeconomic policy scorecard for external stability
INDICATOR OF THE SUCCESS OF
MICROECONOMIC POLICY
REFORMS
ANNUAL
AVERAGE
1980–
92
ANNUAL
AVERAGE
1992–
2006
NOTES ABOUT THE
CHANGE IN AVERAGES
(1992–06 COMPARED WITH
1980–92 AND OTHER YEARS)
CAD:GDP ratio (percentage)
4.8
4.6
There was a slight reduction in the
average size of the CAD:GDP ratio by
about 4 per cent
NFD:GDP ratio (percentage)
25.7
38.5
The average size of the NFD:GDP ratio
ballooned by nearly 50 per cent
TWI (1970 = base year = 100 points)
67.1
55.8
The average value of the A$ on a TWI
basis fell by nearly 17 per cent
1. Productivity (percentage change in GDP
per hour worked)
1.2
2.1
The average annual rate of growth in
labour efficiency increased by 75 per
cent
2. Household savings ratio (percentage of
GDP)
7.8
1.6
Household savings as a percentage of
GDP collapsed by nearly 80 per cent
–0.3
–0.4
The average annual level of RULCs fell
by 33 per cent
65
Estimates of the strike rate are down
by over 80 per cent (with the 2005–
06 figure down 97 per cent on the
1970s average)
3. RULCs (annual percentage change)
4. Strike levels (estimated working days
lost per 1000 employees)
1878
5. Gross profit growth (percentage)
11.2
8.5
6. Rate of company tax (percentage of
profits)
44
7. Interest rates on overdrafts (percentage)
16
9.1
The average cost of business
overdrafts was down by about 43 per
cent (with the 2005–06 rate down
54 per cent on that for 1989)
8. General manufacturing tariff rate
(estimated percentage)
19
2
A fall in the average annual rate of
tariff protection by nearly 90 per cent
33
Annual rate of profit growth slowed
by about 24 per cent
The company tax rate is down by
25 per cent (with the 2005–06 rate
down about 40 per cent on that for
1980)
Sources: Data derived from ABS 1350.0; RBA Bulletin; RBA Occasional Paper, No. 8A.
Some strengths of microeconomic
policies
Supporters of Australia’s microeconomic policies point out that
there are limits to what the government can do to strengthen
external stability. As we have seen, a host of reforms certainly
tried to improve national savings and our international competitiveness, without which, it could be argued, the results would
have been much worse. Microeconomic policies have helped
external stability by:
■ increasing worker productivity
■ lowering RULCs for export firms
■ reducing strike rates that are costly to firms and disrupt
export trade
■
pushing down interest rates on business overdrafts to a
30-year low, thus cutting production costs and improving
competitiveness
■ improving after-tax company profits thereby allowing firms to
absorb rising costs and sell exports more cheaply.
Some weaknesses of microeconomic
policies
However, despite these claims, on the face of it, microeconomic
reforms appear to have failed to deliver external stability. Table
7.10 supports this. For instance, it can be seen that, for 1996–
2006, the CAD:GDP ratio averaged 4.6 per cent. This exceeds
the government’s 3–4 per cent target and, overall, it looks like
CHAPTER 7 Economic management using microeconomic policy
263
efficiency and savings measures to reduce the CAD have not yet
worked. It is also clear that the average size of the NFD as a percentage of GDP has ballooned by nearly 50 per cent. This is despite reforms to close the savings–investment gap. In fact,
household savings as a percentage of GDP have actually fallen
and are now negative. In addition, despite a much stronger A$,
recently, since the low of 2000–01, overall the currency has lost a
lot of ground against where it was in 1970, or during the period
1980–92. The picture is even worse taking an even longer-term
view. In 1901, for example, A$1 would buy over 70 per cent
more in terms of the US$ than at present.
Although most commentators acknowledge the usefulness of
the government’s microeconomic policies in helping Australia
control its external problem, there are several reasons why success appears to be rather limited.
Some negative effects of trade liberalisation on
external stability
On the one hand, tariff cuts can help reduce the cost of
imported equipment for local firms and make our exporters
more competitive. However, it is also true that lower tariffs can
worsen the CAD and weaken the A$. This is because imports
become cheaper, thereby encouraging Australians to buy more
items made abroad.
Conflicts with some other government goals
Improving efficiency and international competitiveness through
microeconomic policy can conflict with the achievement of
other goals. For instance, in the short term it appears that
efficiency reforms (e.g. tariff cuts, privatisation, deregulation)
often cause structural unemployment. In turn, unemployment
usually results in a lower level of disposable income for an individual that limits his or her access to basic goods and services.
Typically, living standards are reduced.
Policy time lags are usually long
The fact that microeconomic policies often have large time lags
for implementation and impact, is one reason why the gains may
not be all that apparent in the short term. For instance:
■ tariffs cuts commenced in 1973 are still going
■
labour market deregulation involving performance-based
workplace agreements started in 1991 yet some workers are
still covered by this system.
■ the privatisation of Telstra began in 1998, but all shares will
not be sold until at least 2007
■ the Superannuation guarantee charge commenced in 1992,
but savings still only represents 9 per cent of payroll and is
insufficient for retirees to have reasonable living standards
■ despite significant changes in 2000 and 2007, tax reforms
have a significant way to go to make local firms more internationally competitive.
Political constraints
One reason for Australia’s cautious approach to reform is the
adverse political impact on voters at election time. Tariff cuts,
workplace relations and privatisation for instance, have hardly
been popular in some electorates with manufacturing industries. This is because some of these microeconomic policies
cause structural unemployment in the short term. There is also
the added problem for the federal government if it does not
have a majority in the Upper House that allows it to ram legislation through parliament.
Institutional constraints
Microeconomic measures such as tariff cuts and labour market
deregulation have sought to create an export culture and sharpen
our focus on the need to be more internationally competitive.
Business and union organisations were initially slow in
responding. This reduced the success of reforms.
Overseas constraints
Effective microeconomic policy can be undone by overseas
factors. For instance, protectionist measures adopted by some
foreign governments (e.g. EU, Japan and the US) have undermined our improved competitiveness resulting from domestic
reforms. Clearly, not all countries believe in the level playing field
as a basis for international trade.
TRY SHORT ANSWER EXERCISE
4, p. 278
7.6 Using microeconomic policy to
improve efficiency in resource
allocation
Nations that use resources efficiently enjoy better material living
standards. These productivity improvements can arise from
many sources including allocative, technical, dynamic and intertemporal efficiency. As we have seen on previous occasions, allocating resources more efficiently mostly involves cost-cutting
policies designed to improve structural or supply-side conditions,
rather than measures to regulate the demand-side of the
economy. With this in mind, let us briefly review the top five
microeconomic reforms that have perhaps made the largest contribution to improving efficiency in resource allocation.
264
Economics Down Under Book 2
Labour market reforms to lift
allocative efficiency
Microeconomic reforms have increasingly deregulated the
labour market. Between 1991 and 2007, this involved mainly the
extension of workplace agreements and the reduced influence
of the minimum wage system. It means that rather than most
wages being set by government regulation, workers are increasingly paid according to the market value of their services
(reflecting demand for staff relative to their supply). Also,
workers are increasingly rewarded according to their perfor-
mance or productivity, and the profitability of the particular
business. This means that allocative efficiency is increased and
there is more incentive for staff to work hard. Also, other labour
market reforms involving the encouragement of union amalgamation, the extension of multiskilling, and the easing of
unfair dismissal laws, may have helped to significantly reduce
industrial strikes, again improving worker efficiency (i.e. more
GDP per hour worked).
Commercialisation and corporatisation
Many of the remaining GBEs have been corporatised so that they
operate more along the lines of a private company. Some are
expected to contribute to their own operating costs by the commercialisation of their services (e.g. the ABC, ABS).
Other measures to reform government efficiency
Other measures to reform government efficiency include contracting out, competitive tendering, changes to Commonwealth–
state relations and the establishment of the National Competition
Council to oversee the National competition policy.
Trade liberalisation to lift allocative
and technical efficiency
During the 1970s, 1980s, 1990s and 2000s, significant tariff cuts
and trade liberalisation forced local firms to use resources more
efficiently. During the 40 years between 1967 and 2007, general
tariff rates have come down from around 40 per cent, and are
now effectively zero for most items. What this has done is cause
natural, labour and capital resources to be allocated into areas
of comparative cost advantage. Clearly, this would strengthen allocative and dynamic efficiency. Moreover, not only do tariff cuts
force local firms to reduce costs to remain competitive, but also
they make imported capital equipment relatively cheaper. This
promotes technical efficiency by improving local access to new,
more efficient technology that may reduce time and waste in
production. There are also the efficiency benefits associated
with the development of an export culture or orientation among
firms exposed to international competition. Businesses, which
succeed in breaking into overseas markets, can also gain from
improvements in economies of larger-scale operation (i.e. their
fixed costs per unit produced are lower because these are
spread over a bigger volume of output).
National savings reforms to promote
intertemporal and technical efficiency
Public sector reforms to lift efficiency
In Australia, the public sector produces about 20 per cent of
GDP. It is, therefore, important that governments are efficient
users of resources. In this area, there have been numerous
microeconomic reforms.
Privatisation
Some government businesses enterprises (GBEs) have been partially or fully privatised (e.g. the Commonwealth Bank, Qantas,
Telstra, some shipping ports like Geelong and airports). Various
arguments have been used to justify privatisation. For example,
it is often claimed that:
■ the private sector is a more efficient user of resources than
the public sector because it tries to maximise profits by minimising costs
■ private firms have superior management and more committed staff
■ private shareholders demand increased efficiency to raise
their share price and dividends or returns
■ private firms put more emphasis on R&D and marketing
■ private firms have better access to capital and technology
■ private firms are exposed to greater competition.
Without adequate national savings, Australian firms would lack
access to cheap credit or finance. Interest rates would be higher
than those overseas, discouraging vital investment spending on
new plant and equipment incorporating the latest technology.
With this problem in mind, the federal government initiated savings reforms, including the pursuit of fiscal balance, creating the
Future Fund, lowering tax rates and encouraging superannuation
using a range of strategies. This should tend to increase intertemporal efficiency. In addition, local businesses are currently enjoying
some of the lowest interest rates since the early 1970s allowing
them to more readily purchase new equipment, bringing about
capital deepening, and improving productive efficiency.
Financial sector reforms to improve
allocative efficiency
Since 1982, there has been considerable deregulation of
Australia’s financial system. This reform involved removing
unnecessary government restrictions and other impediments to
allocative efficiency by creating a more competitive financial system.
For example, deregulation has meant floating the A$, removing
controls on interest rates, and encouraging the entry of more
local and foreign banks to stiffen competition between lending
CHAPTER 7 Economic management using microeconomic policy
265
institutions. There is some evidence that these reforms have narrowed bank profit-lending margins by 1–2 per cent, making local
credit more affordable to firms needing to borrow funds for
investment.
Tax reforms to improve efficiency
Lower rates of personal, company and capital gains taxes have
been introduced as part of government reforms. The idea is that
cuts in PAYG rates create greater personal motivation and incentive to work hard. In addition, lower rates of capital gains and
company taxes, for example, mean higher returns and bigger
after-tax profits. This should mean there is a greater willingness
and ability to increase investment in new plant and equipment.
This could lead to capital deepening (i.e. a rise in the value of
equipment per worker) and better labour productivity.
HAS MICROECONOMIC POLICY
PROMOTED EFFICIENCY IN
RESOURCE ALLOCATION?
An obvious question to ask is, how effective has microeconomic
reform been in improving Australia’s efficiency in resource allocation during the past 10 to 15 years to 2006–07? Unfortunately,
we cannot be absolutely certain. There are statistical limitations
to our data, and there are so many local and international
factors affecting efficiency, other than government policy. Even
so, let us start by looking at figure 7.7 that compares statistical
data for two periods of time: one before the pace of microeconomic reform accelerated (i.e. 1982–92), and one after
(i.e. 1996–2006).
Labour productivity
(GDP per hour worked)
Multifactor productivity
3.5
Annual % change
3
2.5
2
1
0.5
1982–92
(before
microeconomic
reforms accelerated)
1996–2006
(after
microeconomic
reforms accelerated)
Figure 7.7 Comparisons of labour and multifactor
productivity in Australia, 1982–92 (before
accelerated microeconomic reforms) and 1992–
2006 (after acceleration of microeconomic reforms)
Source: Data derived from ABS 5204.0 for multifactor (national
accounts), 2004–05 (November 2005), p. 37.
266
Exponents of microeconomic policy are quick to seize on the
upward productivity trends shown in figure 7.7. Notice that both
labour and multifactor efficiency grew faster in the more recent
years between 1996 and 2006 (i.e. during and after the full
impact of accelerated microeconomic reforms), than in the
earlier period, 1982–92 (i.e. before reforms gathered pace). In
addition, commentators note:
■ there was greater allocative efficiency across many specific
markets (e.g. labour, capital, raw materials)
■ a dramatic cut in the level of disruption to production caused
by industrial strikes (as shown in figure 7.8) after labour
market reforms.
1980–1992 — before
labour market reforms
1992–2006 — during and
after labour market reforms
0
100 200 300 400
Number of working days
lost per 1000 employees
Figure 7.8 Average annual strike levels in
Australia (working days lost per 1000 employees)
Sources: Data derived from ABS 1350.0; RBA Occasional Paper,
No. 8A.
■
much lower inflation rates due to greater efficiency and
reduced cost pressures
■ the 32-year low in unemployment or idle resources
■ quite strong rises in company profits
■ lower production costs including interest rates and RULCs
■ a rise in the sustainable rate of economic growth
■ near record rises in material living standards (i.e. GDP per
head).
In addition, microeconomic reform is the government’s preferred policy when it comes to measures to increase efficiency. It
certainly has the edge over budgetary and, especially, monetary
policies for its directness in tackling the structural supply-side of
the economy.
Some weaknesses of microeconomic
policies
1.5
0
Some strengths of microeconomic
policies
Economics Down Under Book 2
Despite its apparent success in improving efficiency, microeconomic policy has its limitations. Critics note that some of the
claimed benefits of reforms have been exaggerated, while others
have failed to appear.
Australian productivity peaked and is slowing
Data show that, after the cyclical peak between 1994 and 1999,
average productivity slowed towards 2006 and is now only marginally above our long-term average. Perhaps this reflects:
■ the reduced pace of microeconomic reform between 2001
and 2004
■ the limits to microeconomic policies and the fact that the easiest and most obvious reforms were completed some years ago
■ the effects of previous reforms are now wearing off
■
the fact that large improvements in efficiency require far more
investment in new technology than has occurred to date
■ that domestic and international factors, other than government reforms, are now slowing efficiency.
Overseas productivity is much stronger
Perhaps one of the main criticisms of recent microeconomic
policy from an efficiency standpoint is that it has been far too
slow by comparison with developments overseas. This means
that, today, we find that most sectors of the Australian industry
have inferior productivity to levels abroad and, in some specific
industries, efficiency has actually decreased. Figure 7.9 shows
that in terms of GDP per hour worked (i.e. which has been
adjusted in terms of purchasing power parity to reflect differences in the cost of living in different countries), Australia
ranked only fifteenth amongst 24 OECD nations in 2004. This
was well behind countries like Norway, Ireland, France, Germany, the United States and the United Kingdom.
While recent policies may have helped to improve resource
allocation, they have not made up for the decades of neglect,
nor are they stimulating structural change as rapidly as in some
countries. This is causing us to fall even further behind.
1 — Norway
2 — Luxembourg
3 — Belgium
4 — Ireland
5 — France
6 — Netherlands
7 — United States
Index base
8 — Germany
9 — Denmark
10 — Sweden
11 — Austria
12 — United Kingdom
13 — Finland
14 — Switzerland
15 — Australia
(80% of US)
16 — Spain
17 — Italy
18 — Canada
19 — Iceland
20 — Japan
21 — Greece
22 — New Zealand
23 — Portugal
24 — Korea
0
20 40 60 80 100 120 140
Index (US base = 100 points)
Figure 7.9 International comparisons of labour
productivity (Index number, US = 100 points)
Source: OECD Productivity Database, January 2006.
The conflict with other government objectives in the
short term
Especially in the short term, the pursuit of greater efficiency
through government microeconomic policies like tariff cuts, privatisation and market deregulation, has been in conflict with
the achievement of some other government economic objectives like full employment and equity in income distribution.
For instance, tariff cuts certainly decimated some areas of manufacturing industry and caused some firms to close down or scale
back Australian operations. This added to structural unemployment. Likewise, performance-based workplace agreements have
enabled some firms to produce more output with fewer staff,
again swelling structural unemployment in the short term. The
knock-on effect is that unemployment typically lowers the
income and purchasing power of individuals, making some
goods and services less affordable. However, hopefully in the
long term, greater efficiency and competitiveness should lower
unemployment and even improve equity.
The other conflict issue is that the non-economic well-being
of some workers has been undermined by the pursuit of
greater efficiency. It has come at a cost. The downside is that
average hours of work have increased and leisure time with
families has diminished. Furthermore, it is likely that staff
stress levels have increased and unions no longer act to counterbalance the increased power of employers. So, although
workers may now be richer, they may not necessarily have a
better quality of daily life.
Time lags caused by resource immobility
It is unrealistic to believe that resources can be moved or redeployed from one use to another, more efficient one, in a short
space of time. Some resources are immobile, such as specialised machinery. In order to respond to microeconomic policy,
time (perhaps five, 10 or even 20 years) may need to be
allowed. The gains from reform may take years to emerge fully.
A related problem is that of the reluctance by some institutions
(e.g. business, unions, governments) to move with the times. In
some ways, Australian production methods and work practices
have changed only slowly relative to the pace overseas.
Political restraints
Many things could be done to reform the production process.
However, adverse voter reaction and the short time between
elections, prevents some of the harder reforms from being tried.
This was especially the case when a government lacked a
majority in both Houses of Parliament. For example, the
Howard Government initially found it very difficult getting the
Workplace Relations Acts passed. Well over 160 amendments were
required in 1996 to get Democrat support in the Upper House.
Another obstacle to the privatisation of Telstra, which was
designed to further lift efficiency, was the lack of Senate
numbers between 1996 and 2005. Similarly, the introduction of
a GST and other tax reforms in 1999–2000 proved difficult at
the time because of the Coalition’s absence of an Upper House
majority.
The limitations of specific policies
Some specific policies have limitations and have not fully
achieved their aims.
CHAPTER 7 Economic management using microeconomic policy
267
■
Reforms to increase national savings. Although the government
has done what it can to increase national savings (to help
keep domestic interest rates and foreign borrowing lower
than otherwise), the measures do not appear to have prevented the continued slide in the household savings ratio to
negative 2.9 per cent of GDP (2005–06). While this may have
been worse without savings policies, success has been limited.
■ Labour market reforms. Labour market reforms have probably
helped to lift worker efficiency by extracting greater personal
effort and motivation from employees. However, there are
physical limits to how much further this can go and how
much more leisure time staff are prepared to sacrifice, given
the substantial rise already, in average hours worked during
the past 10 years. Ultimately, greater staff efficiency now
depends on higher levels of investment in new equipment,
along with greater emphasis on education, skills and training.
These, rather than the labour market reforms we have seen
recently, would help to bring about capital deepening and
even larger rises in labour efficiency.
■ Deregulation of other markets. Up to a point, free and deregulated labour and other markets can bring about greater
efficiency in the allocation of resources. Sometimes, however,
market failure occurs and this can only be corrected by
government regulation or intervention. For instance, some
aspects of the operation of the financial market involving prudential supervision of non-bank financial institutions have
been reregulated to help ensure stability and efficiency. In
addition, the government attempts to regulate the level of
economic activity because improved stability also helps to
increase efficiency. Adopting a non-interventionist approach
268
Economics Down Under Book 2
■
■
■
■
in this area was shown to be dangerous during the Great
Depression of 1929–33.
Tariff cuts and trade liberalisation. For most industries, cuts have
reduced tariffs to zero. They have gone as far as they can to
promote greater efficiency. In addition, trade liberalisation by
our government is partly frustrated or made less effective by
the failure of other countries to do likewise. Some claim that
while reduced protection may make surviving Australian
industry more efficient, the continued use of tariffs and subsidies by some overseas nations (e.g. Japan and some
members in the European Union) has not opened up the
new markets we expected, nor delivered such huge benefits.
Reform of the public sector. Privatisation of some government
business enterprises is seen as an efficiency measure. During
the 1990s and 2000s, this has been extensive but, by 2007, few
possibilities remain for the government.
Competition policies. Promoting competition generally helps to lift
efficiency among rival firms. However, preventing price collusion and other tactics is very difficult and there are some who
feel that preventing company mergers and takeovers in particular circumstances might actually reduce efficiency by preventing firms from gaining economies of large scale where fixed
costs can be spread more thinly over bigger output volumes.
Tax reform. Cutting personal, capital gains and company tax
rates can help lift the incentive to work hard and expand
investment. However, given the acceptance of fiscal balance
as a medium-term aim of budgetary policy, further reductions
are limited by financial constraints.
TRY SHORT ANSWER EXERCISE
5, p. 278
7.7 Using microeconomic policy to
improve equity in income
distribution
The Australian Government’s objective of an equitable distribution
of income means that everyone should have access to basic goods
and services (e.g. food, housing, clothing, health and education) and enjoy reasonable living standards. Normally, we
think of budgetary policies as the main instrument to promote
equity. This is because fiscal measures like progressive taxes,
direct welfare benefits and indirect benefits or services (e.g. free
or cheap public health and education), redistribute final
income from the rich to the poor very efficiently, directly and
precisely. However, it is still important not to underestimate the
vital role played by microeconomic reform in helping individuals enjoy improved access to goods and services, and better
material living standards. In the long term, there are at least four
main ways that this can happen (even though in the short to
medium terms, structural unemployment caused by these policies can reduce purchasing power and equity).
1. Reforms can lift GDP and average incomes per head
Cost-cutting efficiency reforms should mean that the Australian economy can produce a bigger level of national
output from the same resources. Put another way, these strategies grow Australia’s capacity to produce goods and services
and, hence, grow our production possibility frontier. Providing that our GDP expands at a faster rate than the growth
in population, Australians should enjoy higher average material living standards (i.e. indicated by the average value of
GDP per person a year) and improved access to goods and
services, of which previous generations could only dream.
2. Reforms improve competitiveness, lift profits and
create more jobs
By lifting efficiency and cutting production costs for local
firms, business profits grow faster than otherwise. Strong
profit growth is vital for business expansion and survival. In
the long term, fewer firms close down, resulting in a reduction in structural unemployment. With more individuals
Table 7.11
1. Labour
market
reforms
working, incomes are higher than on welfare, and goods and
services are more affordable. For example, in late 2006,
average full-time weekly earnings were around $1050 and the
minimum weekly wage was $511, compared with, perhaps,
$200–250 per week for a single person on government
income support.
3. Reforms can lower production costs and slow inflation
Greater efficiency in our use of resources means lower unit
production costs. This helps to keep inflation down and the
real purchasing power of incomes up. This improves general
access to basic goods and services, along with equity in the
distribution of income.
4. Reforms help grow the government’s income and the
affordability of welfare and government services
As explained already, improved efficiency helps to grow GDP
and real incomes per head. In turn, this causes government
tax revenues in the annual budget to grow faster. As a result,
government outlays on direct welfare benefits (e.g. for the
aged, sick, unemployed and families) and indirect services
(e.g. public health and education) are much more affordable than otherwise.
By contrast to these long-term benefits for equity, if efficiency
fails to grow strongly because of the absence of effective microeconomic reforms, average per capita incomes fall, goods and
services are dearer and less affordable, unemployment rises due
to poor business profitability and the closure of firms, and
falling budget revenues force the government to cut back even
more on welfare and services for the poor. Clearly, income distribution in this case would become less equitable.
During the past 10–15 years to 2007, table 7.11 shows some of
the most important microeconomic reforms that have been
especially important in improving equity and raising material
living standards.
Six microeconomic reforms that help increase equity in income distribution
Australia’s labour market reforms have included the extension of the decentralised,
productivity-based wage system, the reduced importance of the centralised minimum wage
system that failed to encourage efficiency, the promotion of union amalgamation to reduce
strike levels, and the exemption of small firms from unfair dismissal laws. These changes
may have helped equity in several ways:
■ stronger productivity has meant that RULCs have fallen making goods and services
cheaper and more affordable
■ employees on workplace agreements, have generally enjoyed bigger increases in their
take-home pay than workers on the minimum wage, again making goods and services
more affordable.
(continued)
CHAPTER 7 Economic management using microeconomic policy
269
Table 7.11
(continued)
2. Trade
liberalisation
The past 15 years, to 2007 in particular, have seen most tariffs abolished and free trade
extended. These changes have been important for equity in several ways:
■ freer trade has forced Australians to allocate resources more efficiently to areas of
comparative cost advantage and away from industries where we have a cost disadvantage.
This means that the same inputs can produce a bigger GDP leading to higher real incomes
per person.
■ freer trade has meant much lower inflation for the period 1992 to 2007, than for the
1970s and 1980s. Many goods and services (e.g. clothing, appliances, cars) are now far
cheaper and more affordable for ordinary households. It also means lower costs for local
firms importing inputs and equipment, allowing them to enjoy better profits, improved
competitiveness and stronger sales. Firms have expanded rather than closed down, again
helping to lower structural unemployment that would otherwise undermine equity.
3. Tax reforms
In general, the period 1999–2007 saw the introduction of significant reform involving lower
tax rates on personal incomes, capital gains and company profits. This helped equity in
several ways:
■ households are encouraged to work harder and end up with more disposable income. This
increases their purchasing power and access to goods and services.
■ firms have larger after-tax profits. This encourages business expansion and investment,
that creates even more jobs for the unemployed and higher incomes. Again, equity should
benefit.
4. Competition
reforms
Competition reforms have involved the ACCC, tightening of the Trade Practices Act,
increased prices surveillance, and the supervision of mergers and takeovers. This should
help promote equity:
■ basic goods and services should be cheaper and more affordable if there is no price fixing
and competition is fierce
■ businesses, buying inputs from other firms, find that their costs are lower if there is
competition rather than if there is price collusion. This means better profits, the expansion
of firms, reduced unemployment and, hence, higher real incomes.
5. Reforms to
promote
national
savings
Savings reforms introduced between 1991 and 2007 have included the creation of many
surplus budgets, the launch of the Future Fund, the introduction and expansion of a
compulsory superannuation scheme for employees and other incentives to encourage
private superannuation. By promoting national savings and tending to increase the supply of
credit in financial markets, interest rates (i.e. the cost of credit) have tended to be lower. This
helps cut costs, increase profits and bring about business investment and expansion. If firms
grow (and cause our GDP to expand) rather than close down, incomes will be higher and
unemployment lower. This helps to improve equity.
6. Welfare
reforms
Although welfare reforms have had some negative effects, the tightening of access to
government benefits and the extension of the idea that individuals must try very hard to be
financially independent, may indirectly improve equity. For example:
■ unemployment benefits are only paid on condition that individuals are ‘actively looking for
work’, working for the dole, or alternatively, are enrolled in education or training
programs. Improving the skills of the unemployed should make them more employable
and allow them, in the future, to gain better incomes. In addition, it helps to reduce
welfare dependency that can sometimes lock them permanently into lower incomes.
■ the relaxation of rules relating to the amount of income that can be earned before welfare
benefits are lost has allowed recipients to enjoy higher incomes. Again, it has also reduced
the welfare trap that keeps some people on low incomes.
270
Economics Down Under Book 2
HAS MICROECONOMIC POLICY
PROMOTED EQUITY IN INCOME
DISTRIBUTION?
■
You may recall that, although there is evidence of growing
income inequality between 1996 and 2005–06, it seems that the
poor (and rich) have never been richer, and general living standards have increased. However, it would be interesting to know
the extent to which microeconomic reform has brought about
this trend. Unfortunately, this is not easy to judge because there
are so many local and international events that could have
played a role, other than government policies. All we can do
here is to look at a few of the possibilities.
Interestingly, part B of figure 7.10 shows that after taking
inflation and rising costs of living into account over the eight
years to 2002–03 when microeconomic reform was in full
swing, even the poorest quintile gained a greater than 10 per
cent increase in their real purchasing power (relative to the
richest quintile with around 16 per cent). This should have
allowed low-income earners to access more goods and services than previously and enjoy better material living
standards.
Of course, these observations may just be a coincidence, but
supporters of reform dismiss the suggestion. In addition, relatively recent microeconomic policies have been associated with
significantly lower unemployment and inflation rates than previously. Again these improved conditions are beneficial for equity.
Some strengths of microeconomic
policies
Some weaknesses of microeconomic
policies
To establish the success of microeconomic reforms in promoting equity, we would expect to see a rise in the sustainable
rate of economic growth leading to faster increases in average
real GDP per head per year since the introduction of microeconomic reforms. In addition, individuals should now have
higher incomes (purchasing power) and the benefits shared
equitably so that all people can be better off materially (not just
the rich). These outcomes can be seen in parts A and B of
figure 7.10.
■ As indicated in part A of figure 7.10, it is clear that real
annual incomes and GDP per capita have grown much faster
in the 14-year period since government microeconomic
reforms accelerated, than in the 14 years prior to reforms.
It is difficult to hide from the observation that, especially in the
short term, some aspects of microeconomic policy have not
helped to promote equity.
The conflict with full employment and equity in the short term
In the short to medium term, structural unemployment rose
following some microeconomic reforms. This tended to erode
equity. For instance:
■ tariff cuts in the years up to 2005–06 caused business closures,
especially in manufacturing (e.g. in the textiles, clothing, automotive industries and footwear — Blundstone Boots, 2007)
■ there were staff cuts in the federal public sector designed to
lift efficiency following corporatisation, privatisation and
contracting out
Part A — Total % rise in real GDP or income per capita
(% over the two, 14-year periods)
before and after government microeconomic reforms
Total % rise 1992–93 to 2005–06
(at the peak of reforms)
Total % rise 1979–80 to 1992–93
(largely before reforms)
0
20
40
60
80
100
Total % rise over the period
120
Part B — Comparison of rise in annual real
equivalised disposable income by quintile — Australia,
1994–95 to 2002–03
Total real % rise in equivalise median disposable
household income for the ‘highest’ quintile
Total real % rise in equivalise median disposable
household income for the ‘lowest’ quintile
0
5
10
15
20
Total % rise in
income over the period
Figure 7.10 Indicators of improving equity in income distribution — Australia.
Sources: Data derived from RBA Occasional Paper No. 8A; ABS, 1350.0 and 6523.0 for 2002–03.
CHAPTER 7 Economic management using microeconomic policy
271
■
productivity-based workplace agreements (i.e. where higher
wages were traded for improved worker efficiency) allowed
some firms to downsize their staff numbers
■ industry restructuring was undertaken by most firms to cut
costs (e.g. in banking, there was the closure of less efficient
branches and cuts to staff levels)
■ many markets were deregulated to strengthen competition
and reduce production costs, including labour. This caused
some firms (e.g. Ansett Airlines, 2002) to close, leading to
unemployment and reduced incomes.
When there is a rise in structural unemployment, there is usually a
dramatic cut in incomes for workers who are forced to survive
on meagre welfare benefits. In turn, basic goods and services
become even less affordable, despite the fact that some of these
272
Economics Down Under Book 2
items may now be cheaper due to microeconomic reforms.
Unemployment also causes households to run down their stock
of assets or wealth (e.g. sell their house or car, run up debts), further cutting living standards for the unemployed relative to
those with jobs. The main hope in the long run is that microeconomic reforms will create more jobs in Australian industry
through increased international competitiveness.
Increasing wage differences in society
A number of microeconomic policies tended to increase income
inequality:
■ The extension of workplace agreements has meant that some
workers are now in a relatively weaker position when negotiating pay rises. For example, wage rates among females, the
unskilled and poorly educated, part-time workers, some nonEnglish speaking workers, employees in firms where
productivity is low and the wages of workers where union
membership is low, have often fallen behind those received
by skilled, unionised, articulate, efficient, full-time workers in
profitable businesses.
■ Tariff cuts and stronger competition have squeezed profits
and wages in some manufacturing industries, relative to
others.
■ For some families, the restructuring of private firms and the
public sector has meant cutting staff, increasing structural
unemployment and diminishing incomes.
■ In recent years, general pay rates for staff on workplace agreements have risen faster than those on minimum wages. This
has increased inequality in the distribution of income.
■ The tax system has become less steeply progressive due to
cuts in rates of capital gains, company and PAYG taxes. These
changes have benefited the rich more than the poor.
TRY SHORT ANSWER EXERCISE
6, p. 279
School Assessed
Coursework
As mentioned previously, there are two SACs to be completed
for VCE Economics Unit 4, one for each of the two outcomes.
You will recall that SAC 1 covered macroeconomic policy.
However, SAC 2 will cover microeconomic policy (chapter 7)
and the government’s current policy mix (chapter 8). With
this in mind, you are advised to wait until you have covered
the final chapter of this text (chapter 8) before tackling this
last SAC for the year. This final task could involve one of the
following:
■ an essay
■ a written report
■ a problem-solving exercise
■ a test with multiple-choice and short-answer questions
■ an evaluation of print and/or electronic media.
To help prepare you for the end-of-the-year examination and
to provide some guidance for SAC 2, several sample tasks have
been included in this section of your text. For instance, chapter 7
(about microeconomic reform policy) contains:
■ multiple-choice test items
■ short-answer test questions
■ an essay question
■ some possible questions relevant for completing a written
report
■ a problem-solving exercise.
Finally, this section of your text also contains a wide range of
other learning activities (e.g. web quests, debates, concept maps,
quiz, etc.), to help make learning more effective, interesting
and relevant.
MULTIPLE-CHOICE test questions
Instructions: You may like to complete the following questions.
Using the multiple-choice answer grid below, select the letter
(A, B, C, D) that represents the most appropriate answer for
each question by marking this with a tick (✓).
Answer grid
QUESTION
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
A
B
C
D
QUESTION
A
B
C
D
Question 1
The immediate and main priority of microeconomic policy is
most probably:
A full employment
B increased equity
C efficiency in resource allocation and more rapid and sustainable rates of economic growth
D external stability and equity.
Question 2
In the 1980s and early 1990s, microeconomic reform was desperately needed because:
A Australia’s material living standards were falling relative to
those of many other comparable countries and there was a
severe problem with the CAD
B Australia had a slower rate of economic growth than some
countries caused by severe supply-side constraints on rises in
productive capacity
C Australia’s productivity was very poor and cost inflation was
common
D all of the above were applicable.
Question 3
Concerning recent changes in tariffs, which statement is correct?
CHAPTER 7 Economic management using microeconomic policy
273
school assessment tasks and learning activities
7.8
A Australia’s general rate of tariffs is lower than most comparable Western nations but higher than most in Asia.
B By 1996, Australia’s general tariff rate was only 5 per cent
and has since been further reduced.
C Tariffs on imported cars into Australia fell to zero by 2006.
D Australia is yet to create a free trade zone with New Zealand.
Question 4
Which statement about microeconomic policy in Australia is
incorrect?
A Import quotas still exist for the TCF and car industries.
B Reforms of the public sector to increase efficiency in government include council amalgamation, contracting out and
competitive tendering.
C The operations of the ACCC help to increase price competition in various markets.
D The National Competition Policy seeks to accelerate the
pace and degree of microeconomic reform by state governments.
school assessment tasks and learning activities
Question 5
In order to promote greater efficiency in the government’s
delivery of goods and services to the community, federal microeconomic reform has not involved:
A the introduction of a scheme to boost and revitalise government business enterprises by massive capital spending to
upgrade productive capacity
B subjecting government business enterprises to prices surveillance and the payment of taxation like private corporations
(competitive neutrality)
C collaboration with state governments to reduce service
duplication and to encourage the creation of national
markets for some services such as power
D the commercialisation and corporatisation of many
remaining government businesses that have not been privatised.
Question 6
Which statement is false? The federal government has moved to
increase national savings by:
A the delivery of a ‘fiscal balance’ over the economic cycle
B the establishment of the Future Fund
C the abolition of all taxes on superannuation contributions
D the progressive extension of compulsory superannuation
contributions by employers on behalf of their employees.
Question 7
Currently, which Australian market is probably the least competitive and least deregulated market in Australia?
A The labour market
B The market for TCF
C The capital market
D Primary industry markets
Question 8
Microeconomic reform mostly slows inflation by:
A slowing AD and the pressures created by expenditure
B reducing imported inflation
C easing cost pressures on prices through greater efficiency
D reducing inflationary expectations.
274
Economics Down Under Book 2
Question 9
Microeconomic reform is believed to encourage more rapid,
long-term economic and employment growth by:
A stimulating sales of Australian-made goods and services by
making them more competitively priced in domestic and
foreign markets
B boosting the productive capacity of our resources through
allocating them more effectively and using them to produce
more output with fewer inputs
C enabling firms to access cheaper inputs, thereby raising business profitability and supply
D all of the above.
Question 10
The most likely way that recent microeconomic reform should
help to promote improved external stability in Australia is
through:
A restrictions on imports
B controls on foreign borrowing
C cuts in production costs which improve domestic and
external competitiveness of local firms
D all of the above.
Question 11
Microeconomic policy designed to improve efficiency in resource
allocation is unlikely to include the following constraint.
A Increases in unemployment, especially in the short term
B Reduced equity in the short term
C An adverse impact on the rate of economic growth
D Unpopularity among the voting public in some electorates
Question 12
Especially between 1994 and 1999, Australian statistics show that:
A labour, capital and multi-factor productivity were stronger
than in the 1980s or early 1990s
B industrial unrest has increased, slowing productivity
C labour productivity has generally fallen but capital productivity has risen
D productivity levels have remained fairly constant since the
early 1980s.
Question 13
The reasons for believing that microeconomic reforms may
have been effective since the early 1990s include:
A fairly low inflation and even falling costs for some goods and
services
B the attainment of fairly rapid economic growth without an
inflationary breakout
C an increase in GDP per head per year
D all of the above.
Question 14
The main constraint of recent microeconomic policy in
Australia is:
A large time lags in implementation and impact of policy
B rising cyclical unemployment generated by the reforms
C short-term inflationary consequences arising out of structural change
D the financial constraints for government arising out of
privatisation.
Question 16
The main aim of labour market reform has been the promotion
of:
A external stability and efficiency in resource allocation
B price stability and improved equity
C full employment in the short term
D political popularity for the federal government.
Question 17
Which of the following is not normally seen as an advantage of
workplace or enterprise agreements?
A Uniformity in wages and conditions
B Improved flexibility in staffing and cost cutting by firms
C The maintenance of minimum safety net wages for low
income earners
D An emphasis on productivity-based pay rises to help avoid
inflation
Question 18
The extension of workplace agreements during the 1990s and
2000s is expected to improve price stability and external stability
by:
A lifting worker productivity by offering more incentive for
hard work
B promoting greater competition among workers in the labour
market so that wages more closely reflect the market value of
what is being produced by each employee
C reducing the central role previously taken by unions in wage
negotiations
D all of the above.
Question 19
Which of the following has not been a significant constraint of
recent labour market deregulation?
A The limited coverage of firms and workers in Australia by
enterprise agreements
B The time taken to successfully complete wage negotiations
on a firm-by-firm basis
C The political constraint until 2005, due to a lack of numbers
in the Upper House to pass federal legislation
D Opposition to reform caused by the strong growth in unionisation of Australia’s labour force
Question 20
In general, the spread of enterprise agreements until 2007 as
part of labour market reforms, may be expected to lead to
increased income inequality because of:
A the reduced role of trade unions in representing otherwise
fairly powerless individual workers
B the unequal bargaining strength of different types of
workers in different firms, combined with unemployment
rates in excess of 7 per cent
C both (A) and (B) above
D the removal of minimum legal wages and protection offered
against unfair dismissal.
Question 21
A constraint in using higher tariffs is:
A they are politically difficult to remove
B they are a handicap for other import-competing and export
businesses which use foreign goods in their production
process
C they weaken competition and domestic efficiency, misallocate resources into areas of non-comparative cost advantage
and cause higher demand and cost inflation
D all of the above.
Question 22
Which of the following is not a constraint of tariff cuts and
reduced industry protection?
A Adverse political consequences are likely in some regions of
the country.
B Increased bankruptcy levels are likely, due to import penetration.
C Other nations will retaliate and raise their tariffs on our
exports.
D Income inequality will probably worsen for some individuals.
Question 23
Which of the following is not a general constraint of reducing
tariffs?
A Cyclical unemployment rises.
B Long time lags are needed to implement the cuts and to see
the resulting benefits.
C The CAD generally gets worse before it improves.
D Government revenue falls, creating a financial limitation.
Question 24
Reforms promoting freer international trade will tend to direct
more resources into areas of comparative cost advantage. This
necessarily means that:
A surviving industries can produce more cheaply than any
other producer in the world
B resources should move into areas where, relatively, there is
the least cost disadvantage in production
C there will be full employment
D there will be price and external stability.
Question 25
Which of the following reforms is likely to help promote fuller
employment in the long term?
A The signing of bilateral and multilateral trade agreements
which raise exports
CHAPTER 7 Economic management using microeconomic policy
275
school assessment tasks and learning activities
Question 15
Reform of Australia’s labour market during the 1990s and 2000s
has involved which combination of the following?
(i) A reduction in the number of allowable matters covered
in federal awards covering pay and conditions of work
(ii) The splitting up of large unions into smaller ones with less
power
(iii) Making the AFPC (previously AIRC) less important in the
regulation and supervision of wages and working conditions
(iv) The encouragement of workplace or enterprise agreements on a firm-by-firm basis
(v) Retention of minimum wages as a ‘safety net’
A Answers (i), (ii), (iii), (iv) and (v)
B Answers (i), (iii) and (v)
C Answers (i), (iii), (iv) and (v)
D Answer (v)
B The increased discouragement of foreign investment and
takeovers of local companies
C Cutting R&D grants and tax concessions
D Abolishing import quotas and subsidies
Question 26
Regarding the impact of microeconomic reforms involving the
external sector, which statement is false ?
A Reduced tariffs tend to redistribute incomes away from
importers.
B Trade agreements may lift the income share of exporters.
C The existence of tariffs can cause some basic goods and services to be less affordable for low income families.
D Bounties paid to local producers redistribute income in
their favour, typically at the expense of taxpaying individuals
and companies.
Question 27
Which of the following statements about the Workplace Relations
Act is generally false ?
A It makes some strikes illegal, along with secondary boycotts.
B It makes all employee dismissals fair, no matter what the
circumstances.
C It reduces the roles of the AFPC and unions and establishes
an Employment Advocate to help improve fairness and settle
disputes.
D It restates the principle of voluntary unionism and makes
closed shops illegal.
Question 28
Concerning microeconomic as compared with macroeconomic
policy, which statement is correct?
A Microeconomic policy seeks to lift efficiency, cut costs and
expand AS, while macroeconomic policy is about regulating
the growth in AD.
B Microeconomic policy helps affect the long-term capacity or
speed limit for economic growth whereas macroeconomic
policy helps affect the extent to which a nation’s productive
capacity is utilised.
C Both (A) and (B) are correct.
D Neither (A) nor (B) are correct.
Question 29
In relation to financial reforms, which statement is false ?
A The supervision of financial sector liquidity needed for customer confidence and stability is now the responsibility of
APRA.
B The Wallis Inquiry recommended a substantial deregulation
of the financial sector.
C Licences were extended to allow some building societies to
become banks in an attempt to increase competition.
D Reforms have not meant efficiency rises and lower real
interest rates.
Question 30
A microeconomic policy solution to the worry of high structural
unemployment which is currently running at perhaps 5–6 per
cent of Australia’s labour force is:
A expansionary monetary measures
B budgetary tax cuts and increased government outlays
C government strategies that increase AD
D cost-cutting, productivity-promoting measures that increase
Australia’s competitiveness.
school assessment tasks and learning activities
STRUCTURED SHORT-ANSWER test questions
Instructions: You may like to try a selection of the following
structured short-answer questions. These questions may enable
students to practise in readiness for the end-of-year examination.
Question 1
A What is meant by microeconomic reform or policy? (2 marks)
B Distinguish between the following types of efficiency:
(a) Allocative efficiency and technical (productive)
efficiency. (2 marks)
(b) Intertemporal efficiency and dynamic efficiency.
(2 marks)
C What do you consider to be the three most important objectives of microeconomic policy? (3 marks)
D In general terms, explain how microeconomic policy might
affect any three of the following:
(a) economic growth
(b) inflation
(c) unemployment
(d) the CAD
(e) efficiency in resource allocation
(f) the distribution of income. (2 + 2 + 2 = 6 marks)
276
Economics Down Under Book 2
Question 2
A Concerning the policy of trade liberalisation:
(a) Explain what is meant by the policy of free trade, outlining
the extent to which it has currently been adopted by the
Australian Government. (6 marks)
(b) Identify and explain one strength and one weakness of
pursuing this policy. (2 + 2 = 4 marks)
B Concerning deregulation and other reforms of the labour market:
(a) Define what is meant by labour market deregulation, giving
specific examples of reforms. (4 marks)
(b) In what ways are enterprise or workplace agreements different from the traditional minimum wage system?
(6 marks)
(c) List and outline two important strengths and two weaknesses
of labour market deregulation in Australia during the
1990s and 2000s. (4 marks)
C Concerning reforms to promote national savings:
(a) Explain what national savings means. (2 marks)
(b) Outline two reasons why is it important to lift the level of
saving in Australia. (4 marks)
(c) Suggest three specific ways this has been encouraged by
government microeconomic reform. (3 marks)
(d) the abolition of tariffs. (4 + 4 = 8 marks)
F Outline one weakness of microeconomic reforms aimed at
increasing the sustainable rate of economic growth.
(4 marks)
G In general terms, how might the creation of a more efficient
and competitive economy using microeconomic reform,
eventually help to lower unemployment?
H Explain how any two of the following microeconomic
reforms might affect the rate of unemployment:
(a) the exemption of small firms employing fewer than 100
staff from unfair dismissal laws
(b) trade liberalisation including the signing of FTAs with
China and Japan
(c) the future privatisation of Medibank Private, the ABC
and the Snowy Mountains Hydro Scheme
(d) a reduction in the rate of company tax from 30 to 20 per
cent
(e) the abolition of the minimum wage system
(f) a reduction in welfare assistance paid to the unemployed
(g) a rise in the minimum age for receiving the pension to
70 years
(h) welfare and other reforms to increase the participation
rate. (4 + 4 = 8 marks)
I Apart from microeconomic reform, suggest one other
category of government policy used to help lower Australia’s
unemployment rate. (4 marks)
Examine figure 7.11 showing trends in Australia’s unemployment rate between 1992–93 and 2005–06.
In April 2007, the unemployment rate reached a 32 year low
of only 4.4 per cent. Suggest and explain two important
microeconomic reforms that could help to lower this rate
even more. (4 marks)
J Examine figure 7.12 (p. 278) showing trends in Australia’s
employment by industry.
(a) Identify and explain two important government microeconomic policies that could account for the trend in
‘manufacturing’ employment between 1997 and 2006.
(4 marks)
(b) How would you expect these employment trends to alter
Australia’s distribution of income? (2 marks)
Question 3
A In general terms, how does microeconomic reform help to
lower inflation? (4 marks)
B Explain how any three of the following microeconomic reforms
introduced during the 1990s and 2000s, may help to lower
Australia’s inflation and promote price stability:
(a) the move towards free trade with lower subsidies and
tariffs
(b) labour market reform including the encouragement of
enterprise or workplace bargaining
(c) reform of the public sector
(d) tightening of the TPA and broadening of prices surveillance by the ACCC
(e) tax reform
(f) the promotion of national savings
(g) deregulation of the financial sector and transport
reform. (2 + 2 + 2 = 6 marks)
C Giving an example, identify one important constraint on the
effectiveness of microeconomic policy, when it is used to slow
inflation. (4 marks)
D ‘Between 1992 and 2006, Australia enjoyed more rapid economic growth than during the 1970s and 1980s. There were
also much lower rates of inflation and unemployment.’ In
general terms, explain how microeconomic reform can help
to achieve all three aspects of domestic stability simultaneously. Illustrate this on a fully labelled AD–AS diagram,
showing the ‘before’ and ‘after’ effects of microeconomic
reforms. (6 marks)
E Selecting two reforms from the list below, explain how each
microeconomic policy can be used to help increase Australia’s sustainable rate of economic growth?
(a) tax reform
(b) workplace agreements
(c) competition reforms
12
% unemployed
10
8
6
4
2008–09
2007–08
2006–07
2005–06
2003–04
2004–05
2002–03
2001–02
2000–01
1999–2000
1998–99
1997–98
1996–97
1995–96
1994–95
1993–94
0
1992–93
2
Figure 7.11 Australia’s unemployment rate (percentage of labour force)
Source: Data derived from ABS 1350.0.
CHAPTER 7 Economic management using microeconomic policy
277
school assessment tasks and learning activities
D Concerning reforms to the public sector:
(a) What is the difference between privatisation and corporatisation? (2 marks)
(b) Why can privatisation lead to greater efficiency in the
operation of a business? (3 marks)
(b) reduced industry subsidies
(c) tax reform involving further reductions in personal,
capital gains and company tax rates
(d) further privatisation and corporatisation of government
business enterprises
(e) banking deregulation
(f) the extension of enterprise or workplace agreements
and other labour market reforms
(g) further reforms to increase national savings
C Giving an Australian example, outline one constraint or
weakness of using microeconomic reforms to improve
external stability. (2 marks)
Property and
business services
Construction
Retail trade
Health and
community services
Education
Government
administration and defence
Transport and storage
Accommodation and
cafes etc.
Finance and insurance
Personal and other
Mining
Cultural and recreation
Communication services
Electricity, gas and water
Manufacturing
Wholesale trade
Agriculture, forestry
and fishing
–100
0
100
200
300
400
Figure 7.12 Change in Australia’s employment
numbers by industry — 1997–2006
school assessment tasks and learning activities
Source: Data derived from ABS 1350.0.
Question 4
A Outline how two structural problems currently help to cause
Australia’s large CAD:GDP ratio and NFD. (4 marks)
B By 2005–06, Australia’s CAD equalled $54.4 billion, while the
NFD had grown to $494 billion. Faced with this sort of
external problem, select any three of the following government microeconomic reforms and outline how each might
improve Australia’s external stability. (2 + 2 = 4 marks)
(a) tariff cuts and the signing of additional FTAs with China
and Japan
Table 7.12
Question 5
A Define clearly what is meant by an efficient allocation of
resources. (2 marks)
B Identify the two types of statistical evidence that you would
use to confirm whether or not there has been an improvement in Australia’s efficiency in resource allocation in recent
times. (2 marks)
C From the following list, select and explain one important
microeconomic reform that has helped to improve allocative
efficiency and one reform that has helped to improve intertemporal efficiency:
(a) relaxation of unfair dismissal laws
(b) tariff cuts and trade liberalisation
(c) welfare reforms
(d) deregulation of the financial market
(e) deregulation of domestic and international aviation
carriers
(f) savings reforms
(g) tax reforms. (4 + 4 = 8 marks)
D Explain how the Workplace Relations Act (1996) and or the
more recent Work Choices Act (2005) might help to increase
labour efficiency. (3 marks)
E Explain two constraints of microeconomic policy that is
designed to increase efficiency in resource allocation.
(4 marks)
F Examine table 7.12 showing annual average changes in
productivity across selected Australian industries, 1998–2004.
(a) How is productivity generally measured? (2 marks)
(b) Suggest two likely reasons why productivity grew strongly,
especially in areas like manufacturing, and agriculture,
forestry and fishing. (4 marks)
Annual rates of productivity change in selected Australian industries
INDUSTRY
PRODUCTIVITY,
1998–99 TO
2003–04
INDUSTRY
PRODUCTIVITY,
1998–99 TO
2003–04
Agriculture, forestry and fishing
4.8
Health and community services
1.7
Manufacturing
4.1
Cultural and recreational services
1.6
Wholesale
3.9
Accommodation, cafes and restaurants
1.3
Transport and storage
3.4
Construction
Finance and insurance
3.0
Mining
–0.6
Total change overall
2.0
Electricity, gas and water
–2.4
Source: Data estimated from ABS, 5204.0.
278
Economics Down Under Book 2
0.6
(f) the further encouragement of enterprise or workplace
bargaining
(g) further tightening of welfare eligibility
(h) an extension of superannuation by a rise in the levy on
employers, from 9 to 15 per cent of a worker’s wage.
(2 + 2 + 2 = 6 marks)
C ‘Microeconomic reform may increase economic efficiency,
but this is at the expense of equity.’ Discuss this statement.
(4 marks)
D Explain how budgetary policy can compliment or support
microeconomic reform in increasing equity in the distribution of goods, services and incomes. (6 marks)
E Quoting specific policy examples, explain how microeconomic reforms may help to achieve better material living
standards for Australian citizens. (4 marks)
A PROBLEM-SOLVING exercise
A possible task for Unit 4, SAC 2 is a problem-solving exercise.
The following may provide you with practice for this type of
question.
Imagine that you have been appointed to the position of
Head of the Economic Task Force set up to advise the government of Atlantis about microeconomic reform. This action was
prompted by the fact that economic conditions had deteriorated seriously over the ten years to 2009. Table 7.13 summarises the dire economic problems faced by Atlantis.
A Using the following headings, briefly outline the economic
conditions that had developed in Atlantis between 2000 and
2009.
(a) Domestic conditions
(b) External conditions
(c) Efficiency levels in resource allocation
(d) Equity conditions
Table 7.13
B In general terms, how could microeconomic policy help to
correct the economic problems experienced by Atlantis,
2000–2009?
C Select any three of the following microeconomic reforms. For
each policy, outline the changes that should be made to help
correct Atlantis’s economic problems.
(a) Labour market reform
(b) Promotion of national saving
(c) Promoting stiffer competition
(d) Shift away from industry protection towards freer
trade
(e) Reform of the public sector
(f) Reforms implemented by firms in the private sector
following the government’s move towards freer trade
(g) Tax reform
D Outline two constraints or weaknesses of applying the policies you selected for your answer to part C above.
Economic indicators for Atlantis — 1990–99 to 2000–2009
ECONOMIC INDICATOR FOR ATLANTIS
1990–1999
2000–2009
(1) Annual average growth in GDP per capita (%)
3.1
0.2
(2) International ranking for GDP per capita ($ per year)
3rd
15th
(3) Unemployment rate (% labour force)
5.8
7.1
(4) Productivity growth (% GDP per hour worked)
2.4
−0.5
(5) Inflation (%)
2.2
5.7
(6) RULCs (% per year)
0.2
4.8
(7) CAD:GDP ratio (%)
2.9
5.5
(8) Domestic interest rates (% on business overdrafts)
4.5
8.4
20
55
0.3
0.4
3
9
(9) NFD:GDP ratio (%)
(10) Gini coefficient for final income distribution
(11) General tariff rate (%)
(12) Company tax rate (% profits)
30
40
(13) Number of working days lost per year per 100 employees through
strikes
10
190
(14) Household savings (% of income)
(15) Level of business concentration in ownership by industry
(16) Size of government sector
(percentage of GDP)
10
1
low
high
20
30
CHAPTER 7 Economic management using microeconomic policy
279
school assessment tasks and learning activities
Question 6
A In general terms, outline three important ways whereby
microeconomic reform can promote a more equitable distribution of income. (6 marks)
B Explain how any three of the following microeconomic policies may affect the degree of equity in the distribution of
income:
(a) the move towards a user-pays principle in the provision
of government services and social infrastructure
(b) complete privatisation of Telstra (2006)
(c) toughening of the Trade Practices Act
(d) further tariff cuts in the TCF and car industries
(e) reducing rates of personal, company and capital gains
taxes
OTHER learning activities
Have you tried the following learning activities in your class
recently?
1. Web Quest
Visit the website for this book and click on the Weblinks for
this chapter (see Weblinks, page 310).
Use the Internet for researching some of the following:
– projects of the Productivity Commission
– the AFPC decisions about rises in award wages
– the ACTU’s campaigns over pay and conditions
– the ACCC’s investigations into companies
– the Office of Employment Advocate, and Workplace Relations and Small Business
– government tax reform
– current debates in federal parliament or statements by the
Prime Minister
– wider aspects of microeconomic reform in Australia
reported in Australian newspapers (e.g. magazines using
various search engines.
As always, teachers are strongly advised to check all website
addresses listed in this text for suitability, appropriateness of
content, operation and accuracy, before asking students to
conduct research.
school assessment tasks and learning activities
2. Class debate
Select one of the following topics or create your own:
■ ‘That in the 1990s and 2000s, Australia’s microeconomic
policy has brought more pain than gain.’
■ ‘That microeconomic reform faces so many constraints as
to make it ineffective.’
■ ‘That labour market reforms are exactly what the doctor
ordered for improving our economic performance.’
3. Data show or video
Students could be asked to use either a video camera to
make a 3–4 minute documentary OR a computer to create a
PowerPoint presentation about one of the following aspects
of recent microeconomic reform:
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■
■
■
■
■
■
■
■
■
the car industry
the TCF industry
the power industry
social welfare reform
tax reform
tariff cuts
reform of government
banking deregulation
labour market reform.
4. Newspaper reports
Photocopy a newspaper report about a recent change in
microeconomic policy or use the Internet for research. Students could then summarise the report, possibly identify
bias, or expand on what has been said in the article.
5. Role play
The government announced that it would again review
tariffs applying to some areas of Australian manufacturing.
Set up a mock meeting between the government and representatives from the ACTU, the Industry Commission, the
Employer’s Federation and a consumer group lobby. Each
group is given a chance to put their case about future tariff
cuts for the TCF and automotive industries.
6. Crosswords
Construct a crossword using terminology and knowledge
about recent microeconomic policy. Use the Internet for
access to software that makes this task easy.
7. Team quiz
Divide the class into teams. When it is their turn to answer
questions about microeconomic policy (that the teacher and
or students have previously written), team members can act
as a brains trust before the final answer is given. Perhaps the
winning team could be awarded a prize. A variation of this is
the Economics Wheel of Fortune using numbered questions and
token prizes.
summary
Summary
chapter 7
What is microeconomic policy?
Microeconomic policy involves a range of supply-side efficiency
reforms designed to improve the way particular firms, industries,
markets and sectors of the Australian economy are structured
and operate. Specific measures include tariff cuts and trade liberalisation, competition-promoting strategies, labour market
reforms including the encouragement of workplace agreements,
banking reform, transport reform, telecommunication reform,
reform of government businesses and operations, welfare
changes, tax reform and promoting national savings.
The aims of microeconomic policy
The key aims of microeconomic policy are probably domestic economic stability (i.e. especially stronger economic growth and
price stability), external competitiveness and stability and
increased efficiency in the allocation of resources. Unfortunately, equity in the distribution of income and wealth often
suffers in the short term following the implementation of
microeconomic policy. However, in the long term, rising production and real incomes resulting from reform, are beneficial,
providing that these gains are redistributed equitably using
budgetary policy (e.g. provision of welfare benefits and affordable community services, paid for out of progressive taxes).
Using microeconomic policy to promote domestic economic
stability
Theoretically, microeconomic policy can promote improved domestic
stability by means of efficiency measures designed to slow cost
inflation and increase national output from the same inputs,
improve competitiveness and, in the long term, increase
employment. Measures here could include:
– labour market reforms
– promoting national savings
– trade liberalisation
– tax reforms
– deregulation of financial and other markets
– reform of the public sector.
Unfortunately, in the short term, there may be an increase
in structural unemployment following microeconomic
reform. Between 1992 and 2007, recent policy has contributed to better price stability, economic growth and, perhaps
nowadays, to falling unemployment. However, there are
constraints including long implementation lags, conflict
between the objectives of policy, political obstacles and
institutional constraints.
Using microeconomic policy to promote external stability
Theoretically, microeconomic policy (e.g. the promotion of
national savings, competition reforms, reform of the government sector, tax reform, labour market reforms, competition
policy) can make an important contribution to external stability and a
lower structural CAD. The main approach is by strengthening a
nation’s international competitiveness in domestic and external
markets for goods, services and money capital through costcutting and efficiency reforms. Recent policy has probably
helped to do this, but the high CAD:GDP ratio is still a periodic
or cyclical worry. Constraints have limited its effectiveness
including time lags in implementation, unfavourable external
events, the conflict that exists between some government
objectives, the adverse short-term impact of trade liberalisation,
political obstacles and institutional constraints.
Using microeconomic policy to promote efficiency in
resource allocation
Theoretically, microeconomic policy (e.g. industry reforms,
labour market deregulation, deregulation of the financial
sector, and the promotion of fiercer competition through lower
tariffs and the ACCC) is extremely well suited to increasing allocative,
dynamic, intertemporal and productive efficiency in resource allocation.
Certainly, recent productivity has been at high levels (especially
in the 1995–2004 cycle), well above those in the 1980s and early
1990s. However, there are factors limiting policy effectiveness
including institutional constraints, time lags, overseas events
and adverse political considerations.
Using microeconomic policy to promote equity in
income distribution
Theoretically, microeconomic reform is likely to weaken equity in the distribution of income and wealth, in the short term, although there are considerable longer-term gains for equity arising from the impact of greater
efficiency on real production and national income. This extra production and income then become available (through taxation)
for redistribution and support of the needy (perhaps using
various budgetary policies like progressive taxes, welfare and
cheap services). In addition, equity is promoted through lower
inflation, cheaper and more affordable goods and services and
increased employment resulting from increased industry
competitiveness.
However, constraints operate to limit the effectiveness of microeconomic reform. These constraints include conflict between
some government objectives, political constraints, long time lags
in implementation and impact and financial considerations.
CHAPTER 7 Economic management using microeconomic policy
281
using microeconomic policy
Microeconomic policy
Government reforms that increase structural efficiency and lower production costs so that more output can be
gained from the same inputs of resources. These supply-side structural reforms increase AS and productive capacity.
1. Aims of microeconomic policy:
Recent measures have emphasised the following objectives
— Domestic stability by promoting greater output (GDP) from the same inputs and by cutting cost inflation
— External stability (by promoting greater international competitiveness among local firms)
— Efficiency in resource allocation by promoting greater technical, allocative, dynamic and inter-temporal
efficiency
— Better equity by reducing costs and prices, increasing GDP and incomes per head per year, government
tax revenues and provision of welfare and services.
2. Instruments/aspects of microeconomic policy:
Efficiency reforms include
— Deregulation of the labour, capital and other markets by reducing government controls and increasing
competition
— Tax reforms that cut tax rates
— Reform of the public sector (e.g. privatisation, corporatisation)
— Promotion of stiffer competition
— Encouragement of higher savings
— Trade liberalisation.
3. Using microeconomic policy to promote internal/domestic economic stability:
— Microeconomic reforms (e.g. deregulation of the labour market) are very effective in increasing economic
growth by lifting the economy’s productive capacity (more output from the same inputs) and AS
— Reforms (e.g. tax cuts, lower tariffs, promotion of competition) also help lower cost inflation by increases
in efficiency and by strengthening the level of competition in the market.
4. Using microeconomic policy to promote external stability:
— Microeconomic reforms (e.g. tariff cuts, tax reforms, government deregulation of various markets) are
very effective in increasing the international competitiveness of local producers (in terms of price and
quality) of goods and services relative to overseas firms. This helps increase exports relative to imports
— Reforms that increase national savings (e.g. encouragement of superannuation by tax incentives,
acceptance of fiscal balance) can help lower our reliance on foreign borrowing that adds to our CAD/NFD
and weakens the exchange rate.
5. Using microeconomic policy to promote efficiency in resource allocation:
— Microeconomic reform policies are most effective in lifting efficiency in resource allocation (i.e. they
strengthen allocative, technical, inter-temporal and dynamic efficiency)
— Here we think of the effects of tariff cuts, lowering of rates of personal, capital gains and company tax,
tighter welfare access, stiffening of competition-promoting measures, reform of the public sector
measures to promote savings and labour market reforms.
6. Using microeconomic policy to promote a more equitable distribution of personal income:
— Microeconomic reforms are less effective and direct in the short-term in promoting greater equity in
income distribution than, say, budgetary policy
— Even so, microeconomic reforms are very effective in the long-term in lifting the volume of goods and
services produced and general income levels. They also lower the cost or price of basic goods and
make welfare and government services more affordable thus promoting equity.
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