The_Objectives_of_Economic_Policy

Chapter 13- The Objectives of Economic Policy 13.1 Introduction • Major objectives of economic management o Economic growth o Internal balance – UE and inflation o External balance – CAD and foreign liabilities and exchange rates 13.2 Objectives of Economic Management • Economic Growth – measured by GDP o Increase in Growth, to provide benefits o Increase standards of living o Improved job prospects for labour force o Opportunity for increased investment in infrastructure and public services through higher govt tax revenues • Full employment o Get economy to reach the Natural Rate of Unemployment o NAIRU is caused by supply side factors, rather than deficiency in demand – because doesn’t include cyclical UE o Benefits of Full Employment: o Maximise economy’s capacity to produce, maximising living standards o Minimising adverse economic and social problems associated with UE • Price Stability - Inflation o Sustain inflation at a level that will cause minimal distortion to economy – NOT eliminate in total o High inflation may: o Reduce real value of income and wealth o Reduce international competitiveness o Depreciate interest rates o Create uncertainty about future costs and distort economic decision making o Distort patterns of resource allocation • External Stability - CAD o Achieving external stability involves a country meeting its long term financial obligations to the rest of the world o Sustainable position on CA – i.e. sustainable CAD o International confidence in Aust economy – reflected in $A o Acceptable level of foreign debt • Distribution of Income and Wealth o Putting eco growth before inequality o Recent policies have aimed to reduce – higher tax rates for high income earners • Environment Management o Ecologically sustainable development 13.3 Goals of government policy in 2009 • Maintaining sustainable rate of eco growth in short to medium term – 3-4% • Keeping inflation low, between 2-3% • Boosting Australia’s productivity growth – aging population • Increasing sustainable rate of in longer term • Sustaining low unemployment • Boosting workforce participation • Improving Australia’s international competitiveness – exports & access to overseas markets • Maintaining international confidence in the economy – especially true at times of eco uncertainty – reliance on overseas savings to fund Aust investments • Promoting environmental sustainability 13.4 Conflicts in government policy objectives • Achieving a simultaneous reduction in inflation and unemployment- Phillips Curve • Achieving economic growth and external balance – balance of payments constraint – reflects extent to which a high CAD limits the speed at which an economy grows • Eco growth and environmental damage • Eco growth and greater inequality • Short and long term objectives • Longer term objectives – structural change and rise in UE and inequality • Govt may be more focused on short term objectives because of political considerations such as the desire to be re-elected 13.5 The economic policy mix • Macroeconomic policies – influence level of aggregate demand and have impacts on overall level of economic activity o monetary and fiscal o influence AD o minimise fluctuations in business cycle o stabilise inflation rates and unemployment o Counter cyclical policies = macroeconomic policies o ↑tax or ↓spending, ↓disposable income, ↓spending & AD, ↓inflation and CAD o ↑interest rates, ↓spending, ↓inflation • Microeconomic – influence level of aggregate supply by improving productivity and efficiency o Improve resource allocation between firms and industries, in order to maximise output from scarce resources o microeconomic reform – central to govt’s long term aim of addressing potential constraints on growth such as CAD and inflation o influence Y o Supply side economics o improve efficiency and productivity, raise workforce participation o Overall aim – encourage efficient operation of markets o Lift productivity, improve flexibility, responsiveness to change and encourage Australian producers to take on “world best” practices Chapter 14- Fiscal Policy 14.1 The meaning of fiscal policy • Fiscal policy is a macroeconomic policy that can influence resource allocation, redistribute allocation, redistribute income and reduce the fluctuations of the business cycle. • Instruments include govt spending, taxation and budget outcome • Can affect overall level of eco activity and can also target specific sectors • Fiscal policy affects eco growth, inflation, unemployment, and external indicators • Revenue o Direct tax (personal and company) o Indirect tax (GST) o Other revenues (dividends from public trading enterprises) • Expenditure o Social welfare o Health o Education o Defence and public administration • Full costing of decisions are set out afterwards – in next budget or in statement released in December (Mid Year Economic and Fiscal Outlook statement) which also includes revision forecasts for the economy and the budget 14.2 Budget Outcome • Surplus – Revenue > Expenditure – Result in reducing growth • Deficit – Expenditure > Revenue – Lead to growth • Balance – Revenue = Expenditure • Fiscal outcome – deficit or surplus – uses accrual accounting method. Includes superannuation and excludes one-off items – e.g. Privatisation of Telstra – most accurate long term indicator of fiscal policy • Underlying cash outcome – cash accounting method – underlying cash surplus or deficit gives the best indicator of the impact of fiscal policy on level of eco activity this year • Fiscal policy aim to achieve fiscal balance, on average, over course of economic cycle • Excludes one-off transactions – which are shown on headline cash budget outcome • E.g. selling govt assets simply transfer ownership from public to private sector, does not affect the effect of the Budget on the economy 14.3 Changes in Budget Outcomes • Discretionary changes in fiscal policy – govt deliberately changes spending/revenue, influences structural component of budget outcome • Non-discretionary changes in fiscal policy – caused by changes in level of eco activity – unplanned by govt – influence cyclical component • Counter-cyclical policies – economic policies designed to smooth fluctuations in business cycle (e.g. Fiscal and Monetary policies) • Automatic stabilisers – policy instruments in the govts budget that counterbalance eco activity • Progressive tax rate system - ↑ growth, ↑ incomes, ↑ tax, ↑revenue, ↑surplus, reducing growth • Unemployment benefits - ↓ growth, ↓ incomes, ↑ spending through benefits, ↑ expenditure, deficit, boosting eco growth • When growth is high, demand is slowed by increasing revenue • When in recession, it is given a boost by increasing expenditure • Automatic stabilisers act on their own and merely reduce the severity of the problem – counter cyclical role. • BUT they are not strong enough to counter effects of economic cycle – govt still need to rely on discretionary policy measures. Fiscal policies affect: • Economic activity – expansionary (↑ eco growth) or contractionary (↓) – effects spread through economy through multiplier, affecting AD • Resource use – direct and indirect influences, subsidies – tax and spending • Income Distribution – tax, transfer payments, community services, social expenditure. Govt spending cuts tend to have greatest impact of low income earners • CAD – budget deficit reflections public sector deficit, reduction of national savings – crowding out effect 14.4 Methods of Financing a Deficit • Borrowing from domestic private sector o selling treasury bonds under a tender system – govt sets value of bonds o advantages: govt can always be certain that it will fully finance deficit and market will set interest rate on newly issued bonds o crowding out effect – where govt spending is financed through borrowing from private sector, puts upward pressure on interest rates and crowds out private sector investors who cannot borrow at the higher o recession – crowding out will be less significant, because private sector will be discouraged from consumption and investment • Borrowing from overseas – but stopped since late 1980s to ensure a reduction in govt’s share of foreign debt • Borrowing from RBA (monetary financing) – monetising the deficit – printing money. But may increase money supply and therefore inflation • Selling government assets – headline budget surplus. But that means private sector needs to borrow – shift of deficit from govt to private sector. Using Budget surpluses • Deposit with RBA • Pay off public sector debt • Placing money in specially established, govt owned investment fund • 2008-09 budget – future fund – building Australia fund, education investment fund, health and hospitals fund • All funds managed by Future Fund Board of Guardians Public Sector borrowing and Debt • Public Sector also consists of local and state governments and public trading enterprises – e.g. Australia Post, City Rail • Impact of public sector on economy is reflected in public sector underlying cash outcome – shows surplus/deficit from all levels of government, and government authorities and public trading enterprises • Running a public sector deficit results in accumulation of public sector debt (national debt). 14.5 Current (2008) stance of fiscal policy • Rather than influencing key eco objectives, main role of budget has been to minimise extent of public borrowing and to implement specify policy changes in targeted areas of the economy • Budget is affected by cyclical and structural factors • Cyclical – resources boom - ↑terms of trade, ↑revenue, ↑tax revenue, ↑surplus • Structural – policies to reducing income tax rates and increasing spending measures to reduce potential surplus • Growing reliance on company tax • Howard 1st term – reduction in spending: abolition of labour market programs, tighter eligibility tests for UE benefits, cuts in education spending • Howard 2nd term – rebound in spending: shift from direct tax to indirect tax, GST, spending on health, roads and welfare benefits • Howard 3rd and 4th terms – modest budget surpluses: commodity boom, ↑tax revenue and ↑spending • Rudd 1st budget – continued budget surplus and slowdown in growth of spending: 3 new funds • 2009-10 budget – budget deficit due to economic turndown: increased expenditure on programs to boost eco growth and reduce UE 14.6 Impact of Fiscal Policy • Historically, fiscal policy has played a major role in stimulating eco growth through increased spending and reduced taxation • This role has changed, and government aim to avoid deficits • During times of high economic growth in recent years, government has used budget surpluses to reduce govt debt and accumulate surpluses in new investment funds • In recent years, fiscal policy has had a mild expansionary impact on the economy, as the govt has used the large increase in company taxes resulting from the resource boom to fund increased spending and reductions and personal income tax Economic Growth • Keynesian economic theory – expansionary budget would accelerate eco growth, contractionary budget would reduce eco growth • However, could be more complicated • Tighter fiscal policy can sometimes increase eco growth in medium term, if it helps to achieve lower interest rates, improves business confidence and makes domestic funds more easily available • Late 1990s – reversal of crowding out effect • E.g. contractionary policies that aim to reduce budget deficit can increase eco activity. ↓spending, ↓inflationary pressures, ↓interest rates, ↑ spending and consumption, ↑eco activity • In considering impact of fiscal policy, it is important to evaluate any simultaneous impact of fiscal policy and monetary policy • Since 2005, resource boom, ↑revenue gain, so ↓personal income tax, increasing consumption and adding to demand pull inflation, leading to increased interest rates. Unemployment and Workforce Participation Rate • 2001 – expansionary fiscal policy helped Australia to avoid recession – UE rose only moderately to 7% • 2009 – same situation + tax rebate + cash bonuses • Australia’s aging population will reduce tax revenues, increase spending on health care, aged and pensions • 2005-06 Future fund for govt budget surpluses which will be used to offset govt’s future superannuation payments to retire public servants • 2009-10 Budget – proposal for increasing retirement age to 67 by 2013. National Savings and Current Account Deficit • 1980s-90s – main goals of fiscal policy to increase national savings and reduce CAD • In recent years, role of fiscal policy in these fields have gained much attention • Focus on increases in surplus in past few years – not because of CAD • Rather than using the budget directly to address the large current account imbalance, govt’s policy has been to ensure it is not directly adding to Australia’s savings imbalance by running a budget deficit Distribution of Income • Tax cuts to reduce income inequality • Reduce number of tax brackets from 4 to 3 by 2013-14 • Increase family tax benefits for low to middle income earners • 2008-09 means test so households with incomes exceeding $150000 no longer receive benefits such as baby bonus, child care benefit. Chapter 15- Monetary Policy 15.1 Introduction • Monetary involves action by RBA on behalf of govt (without direct control of govt) to influence the cost and availability of money and credit in an economy • Monetary policy is used to o Smooth effects of fluctuations in business cycle o Influence level of economic activity, employment, prices • Main instrument – DMO’s – Domestic Market Operations • Tightening - ↑interest rates, ↓spending, ↓eco activity and growth • Loosening - ↓interest rates, ↑spending, ↑eco activity and growth 15.2 Objectives of Monetary Policy • Monetary policy – primary macroeconomic policy used to control growth • Policy stance – contractionary (tightening), Expansionary (loosening) • Tension between economic objectives – high economic growth and inflation (loosening), low economic growth and unemployment (tightening) • Therefore, must priorities objectives • Reserve Bank Act 1959 states objectives of monetary policy: o Stability of Australia’s currency – low inflation and minimize fluctuations of $ o Full employment in Aust – reduce UE o Promote economic prosperity and welfare of the people of Aust – to promote sustained level of growth • In recent years, RBA has focused on achieving low inflation, while the govt has used other policies to achieve other objectives Inflation Targeting • Australia followed other countries (Canada and NZ), where RBA sets target range for inflation and acts independently from govt. • This reflects important aspects of monetary policy o MP (monetary policy) is particularly suited to fighting inflation, since it is often related to monetary factors o MP is unsuccessful in achieving a number of simultaneous goals o Political influences can affect interest rates – i.e. just before elections, govt wants interest rates to be low. If RBA is independent from govt, it will eliminate such damaging political influences o Target bands for inflation have achieved low inflation without necessarily increasing UE • Target of 2-3% [formalised in 1996, statement issued in 2007] • However – RBA still has 3 goals – but primary goal is price stability • Recognised that inflation can emerge due to shocks and events out of RBA’s control, and that such natural fluctuations should be accepted, as long as inflation is kept with target over course of business cycle • One-off developments, e.g. introduction of GST, 250% rise in prices of banana after cyclone in North QLD in 2006, increasing inflation by 4% • RBA makes decisions based on forecasts about following indicators: o Inflation Rate o Inflationary Expectations o Wages Growth o Rate of UE o Rate of Eco Growth o Interest Rates o Exchange Rate o Balance of Payment • Wage growth > labour productivity – add to inflation [in general, wage growth in excess of 4.5% is a threat] – cost push inflation • Depreciation of Exchange Rate adds to inflationary pressures though higher prices for imports and imported inputs to production – imported inflation • Growth when natural rate of UE is reached can only produce rise in general price level NOT increase in output and employment 15.3 The implementation of monetary policy • MP influences cost and availability of money in the economy. There are 2 possible ways: • Monetary Targeting – Control growth in money supply by control over money base (currency in hands of public and deposits of banks and other financial institutions with RBA) • Rate-setting MP – influence general level of interest rates in the economy by setting the short run cash rate • Mid 1970s-80s, when financial markets were regulated, used Monetary Targeting. Abandoned in 1980s. • Monetary Targeting was unsuccessful, as targets were regularly missed, money supply figures distorted by movement of funds from banks to other financial institutions that were not subject to RBA regulation and controls. • Now, MP in Aust is implemented through an interest rate instrument • RBA does not directly control or regulate market interest rates • Instead, RBA attempts to set a short run interest rate (cash rate) through its domestic market operations How Domestic Market Operations (DMO) Work • Cash rate – interest paid on overnight loans in the short term money market – market for short term loans between banks and other financial institutions • Banks must hold a certain proportion of funs in Exchange Settlement accounts in order to settle payments with other banks and RBA • DMO – when RBA buys or sells second hand commonwealth government securities, increasing or decreasing supply of loanable funds in banks’ ES accounts, thus decreasing or increasing the cash rate • By selling or buying govt securities, RBA creates a shortage or surplus of funds in short term money market, thus affect the cash rate of interest • Recent years, with declining debt levels, so less CGS, RBA has shifted from purchase and sales of CGS to using repurchase agreements to conduct DMO • Repurchase Agreements (repos) are where RBA buys or sells a security from financial institution and commits itself to sell or buy the security back from the same financial institution at a later date Loosening of Monetary Policy • RBA buys securities • $ goes from RBA account to ES accounts • ↑ Cash held by banks • ( money supply • ↑ borrowable funds in overnight money market • ( cash rate • ( interest rate- to maintain margins • borrowers borrow more funds • ( consumption and investment spending • ( inflation • (economic activity Tightening of Monetary Policy • RBA sells securities • $ goes from ES accounts to RBA accounts • ( Cash held by banks • ( money supply • ( borrowable funds in overnight money market • ( cash rate • ( interest rate- to maintain margins • borrowers borrow less funds • ( consumption and investment spending • ( inflation • ( economic activity 15.4 The impact of changes in Interest Rates • Main effect – change demand for credit • Transmission mechanism – explains how changes in the stance of monetary policy pass through the economy to influence economy to influence economic objectives such as inflation and economic growth • RBA sells government securities → Decrease Interest Rates → depreciation of currency [pic] • Impact of Interest Rates on Inflation: o ↓Rates, ↑AD, ↑Consumption, ↑Eco Growth, ↑Demand Pull Inflation o ↓Rates, ↓Costs of production, ↓Cost Push Inflation o ↓Rates, ↓Exchange Rate, ↑Imported Inflation • ↑ in Demand pull and Imported Inflation wipe out effects of ↓ in Cost push Inflation, leading to an overall ↑ in Inflation Rate • Thus monetary policy can be tightened or loosened depending on whether the government wishes to dampen or boost the level of eco activity • While a change in monetary policy can be implemented almost immediately, change to bring about desired impact on eco growth, inflation and UE will take considerably longer • Time lag between 6 and 18 months before full impact can be felt • This is while RBA needs to focus on the likely economic conditions in 12 to 18 months time when it sets interest rates 15.5 The Current Stance of Monetary Policy • RBA meet every Tuesday of each month (other than January) – announce decision at 2.30pm of the day of meeting • Stance of monetary policy is revealed by interest rate changes in an economy • 1980s – main target was high inflation and CAD problem – rate = 18% • 1990s – recession – UE 11%, cash rate 4.75% by 1993 • 1994 – eco growth resumed, CAD blowout and emerging inflationary pressures. Increased rates to 7.5% to prevent inflation • Pre-emptive approach – RBA raises rates before inflation takes off • 1996-1997 – stable inflation between 4 to 7% • 2000 – with Asian Financial Crisis, GST prompted RBA to adopt pre-emptive policy • By 2001 – mild domestic contraction and onset of global recession dropped interest rates to 30 year lows • Between 2002 and mid 2008 – rate was raised 12 times to 7.25% • 2008 – banks also raised variable interest rates by 0.55% in addition to cash rate increases as tighter global credit markets increased the cost of international borrowings • September 2008 – signs that higher interest rates were dampening eco activity, RBA began to loosen monetary policy with cash rate falling for first time since 2001 • After 17 consecutive years of eco growth, economy is running at full capacity, meaning even small increase in AD will put upward pressure on inflation • Recently with surges in global oil prices and substantial volatility of Australian dollar in 2008 – RBA is likely to take more cautious approaches to promote growth to insure that inflation stays low 5 main factors that explain the stance of monetary policy • Low inflation objective • Inflationary Expectations – if low expectations, then businesses will plan for low price increases and unions will push for lower wages • Wage Growth – must remain below 4.5% per annum. Best indicator: Wage Price Index • Economic Growth and Lower unemployment – if UE is close to natural rate, RBA will tighten, so there will be no continued growth which contribute to inflation rather than higher output and employment • External Factors – Maintain interest rate differentials because of Australia’s low level of domestic savings. E.g. if world interest rates increase, RBA might tighten to continue attracting capital inflow and prevent depreciation of dollar, and also will prevent increase in imported inflation Chapter 16- Structural Change and Microeconomic Policies 16.1 Structural Change and Microeconomic reform • Structural change refers to the process of change in the pattern of production in an economy over time. • Microeconomic policies are policies that are aimed at individual industries, seeking to improve the efficiency and productivity of producers – supply side policies • Structural change can be caused by: o Changes in patterns of consumer demand – influenced by changing tastes and preferences and rising per capita incomes o Technological change • Both affect consumer tastes and preferences, so need to restructure to change the types of goods and the way goods are produced and delivered • Speed with which factors of production can move from one area to another represents an important constraint on the speed of structural adjustment • Structural change is important for competitiveness – If economy is slow to change: o Demand for exports fall – because it is no longer producing the most advanced products, or because other economies have a comparative advantage o Domestic consumers may shift spending on imports, that are cheaper, better quality and more advanced o Lower productivity growth, lower economic growth, higher inflation, lower competitiveness, higher external liabilities, slower growth in read incomes and lower living standards • Over recent decades, govt has blamed many of Aust’s eco problem to be caused by structural change o CAD – result of low international competitiveness o Unemployment – mismatch of skills • Microeconomic policy – action taken by government to improve resource allocation between firms and industries, in order to maximise output from scare resources • Shift from macro to micro • Shift from AD to Y • Increasing supply, lowering prices – supply side economics • Aim: encourage the efficient operation of markets – lift productivity, improve flexibility and responsiveness to change Allocative Efficiency – shift resources to most valued • Refers to economy’s ability to shift resources to where they are most valued and can be used most efficiently • In free markets, resources will shift to producers with highest capacity to pay, reflecting their efficiency and value to economy • By minimising distortions to the market economy (e.g. impact of govt regulations on prices and wages, tariff barriers) • Movement of Bonds to Asia Pacific Technical Efficiency – max output for given inputs • Ability of an economy to achieve the maximum level of output for a given quantity of inputs • Maximise efficiency and minimise production costs • Involves purchasing latest production technology and use “least cost combination of resources” to produce • Minimising resource use to produce same level of output also frees up resources for other areas or sectors of production • Internet Banking & ATMs Dynamic Efficiency and Innovation – shift resources for consumer demand • Refers to the economy’s ability to shift resources between industries in response to changing patterns of consumer demand • Eliminations of distortions such as govt regulations and subsidies accelerates positive structural change • Producers that are dynamically efficient are able to adopt new technologies and innovative business practices • Govt can increase level of competition, force producers to be more responsive to changes in supply and demand • While there are 3 types, many microeconomic reforms will have effects on all 3 simultaneously, blurring distinction between concepts • E.g. reforms to Australia’s telecommunications industries have increase competition, forcing companies to become more technically efficient to maintain and improve market share. Forces of competition also encouraged dynamic efficiency, attracting more investment to telecommunications sector (a sign of allocative efficiency) • Since 1980s, great improvement in allocative efficiency by reduction of relative size of public sector, halving in relative size of manufacturing and strong growth of services in the economy. • Micro economic reform: deregulation, reforms to public trading enterprises, National Competition policy, tax reform, labour market reforms. 16.2 Microeconomic reform and individual sectors • Microeconomic reform aims to promote structural change – efficiency • ↑competition, ↑efficiency, ↑productivity, ↓production cost, ↓prices • Perfect competition not possible – theoretical market structure where there are many buyers and sellers. They each sell a homogeneous product and there are no barriers to entry into the industry – they are price takers. • Governments work towards workable competition • Workable competition – to achieve maximum level of competition within an industry that is compatible with market structure and specific conditions of the industry – where all markets are contestable • For markets to be contestable, entry barriers must be kept to a minimum • May involve decreasing number of firms in an industry, so remaining firms can operate on larger scale and achieve the lowest possible long run average costs of production • Goal of promoting competition needs to balanced against the need for economies of scale in that industry • TPA 1974 set out code of behaviour that obstruct competition and diner process of structural change – enforced by ACCC – Australian Competition and Consumer Commission Business Practices that are outlawed by the TRADE PRACTICES ACT 1974 (TPA): • Monopolisation – only 1 firm • Price discrimination – sells same stuff for different prices • Exclusive dealing – set conditions for supply that excludes retailers from dealing with other suppliers • Collusion and market sharing – set prices Deregulation • Deregulation involves the simplification or removal of rules that constrain the operation of market forces, and it aims to improve the efficiency of industries. • Shift towards industry regulation since early 1980s has seen extensive structural change across many industries • Financial Sector – Floating of AUD, removal of barriers to foreign banks, increasing investment. Great competition in mortgage market and credit card market, forced smaller lenders out of market. Benefits of more competitive financial sector – pay lower prices for access to finance • Agricultural industries – deregulation of domestic dairy, wool and wheat. Replacing monopoly regimes by competitive systems – wheat export marketing in 2008 • Transport Industries – Australia’s domestic aviation industry, privatisation of government owned freight businesses – Pacific National and QLD Rail • Telecommunications Industry – Telecom (Telstra) domination, then opened up to Optus, Vodafone then full competition in 1997 • Continuing regulation – excessive regulation can constrain growth and undermine competitiveness, but inadequate regulation can lead to market failure, inefficiencies and excessive volatility • Government still regulate specific sectors by monitoring prices and making sure there is access to a minimum set of services – e.g. telecommunications and Victorian electricity industry Reforms to public trading enterprises (government business enterprises) • Corporatisation of PTEs – encourage PTEs to operate independently from governments as they are private business enterprises – Sydney Water, Energy Australia • Privatisation of PTEs – takes corporatizing further – sell off PTEs, that they DO become privatised. E.g. QANTAS, Commonwealth Bank, Telstra • Implement privatisation to increase competition and encourage more rational management and pricing behaviour and forcing businesses to become more efficient National Competition Policy Reforms • National Competition policy – an agreement between Australia’s commonwealth and state governments signed in 1995 to encourage microeconomic reform throughout the Australian economy • Hilmer Report 1993 recommended that changes to increase competitive forces in these sectors would result in substantially higher productivity, fewer distortions to resource allocation and lower costs for business and consumers • Govt agreed to Increase competition in sectors where there are monopolies • Agreed to remove special provisions to PTEs that gave them an advantage over other private sector competitors (competitive neutrality principle) • ACCC – Australian Competition and consumer Commission was formed • Establishment of national regime to regulate cost of access to infrastructure • Natural monopolies had to give competitors access to network at reasonable prices, then turn into privately owned companies • E.g. Telstra and Qantas Future Reforms • COAG Reform Agenda 2006 – regulatory reforms and competition reforms – boost productivity – through improving health and education policies • Reform aims to remove impediments to raising productivity, increase workforce participation and mobility and improve service delivery by govt • Also aims to contribute to broader goals of social inclusion – closing gap on Indigenous disadvantage and environmental sustainability • Competition – anti-dumping laws, national transport policy, further reforms to infrastructure access • Regulatory – occupational health and safety, national occupational trade licensing, business reporting requirements and national regulation of consumer credit • While benefits of reforms are only realised in the long term, they are an important component of govt policies to raise living standards in the Australian economy Overall Impacts • ↑ efficiency and productivity • ↑eco activity, ↓UE, ↑living standards • ↑competitiveness, ↑exports, ↑growth • ↑competitive pressures, ↓inflation • ↑work intensity – longer hours without extra pay |BENEFITS |COSTS | |↑ efficiency and productivity growth |↑ UE in short term | |↑ businesses and job opportunities |Closure of inefficient businesses | |↑ eco growth and living standards |↑ work intensity | |↓ inflation |↑ inequality | 16.3 Improving Australia’s Trade Performance • Direct policies – protectionism and measures to encourage export growth e.g. export promotion programs • Indirect policies – microeconomic reforms, trade agreements Microeconomic reform for trade • Protection: o Protection and industry assistance fostered inefficiency, increased prices, misallocated resources, made Australia less internationally competitive and damaged trading performance in the long run. o Reduction of trade barriers between 1989 and 2000 o ↓ protection, free trade, ↑ efficiency and productivity • Trade Negotiations o Bilateral (CERTA SAFTA AUSFTA) implemented through Market Development Task Force, which coordinates govt activity and sets targets for improved market access, trade promotion and development o Australia has lodged several complaints with the Disputes Settlement Body of the WTO, when overseas countries have affected Australia’s exports to overseas markets o ↑ bilateral, regional and multilateral trade agreements, ↑trade o Trade agreements are not the major policy to improve Australia’s trade performance, as Australia’s major trade problem is more a lack of globally competitive exports, than a lack of access to export markets • Trade promotion and export assistance programs – o Austrade – assists exporters through financial assistance, information on potential export markets and marketing advice o Export Market Development Grants – EMDG – reimburses exporters for some of their costs in promoting exports in new markets o Membership in WTO can impose constraints on policies we use – e.g. criticised for using quarantine arguments to protect local agricultural and food processing industries – to prevent entry of exotic diseases – 2008 – challenge over NZ apple imports • General industry assistance programs – o Strategic industry policies – outward looking approach of finding overseas export markets – Australia does not adopt o Some argue it is not appropriate for govt to take active measures to assist specific industry sectors, because it distorts allocation of resources towards inefficient industries • Australia adopts special assistance packages for some industry sectors o ACIS (Automotive Competitiveness and Investment Scheme) - $4.2 billion 10 year program to assist automotive industry until 2015 as tariffs on imports are reduced – tax breaks for research and development o strategic investment program, 10 year, $747m, will assist TCF industries until 2015, as tariffs on imports are reduced – investment subsidies, tax incentives, export assistance o Ethanol industry receives subsidies to sell ethanol blended fuel, tax free produce – advantage over petrol and imported ethanol, benefiting environment, rural employment and reduce dependency on foreign fuel sources o High tech industries – grants and substitution for industries with advanced technologies – e.g. biotechnology, renewable energy Exchange Rate Policies • Indirect instrument of trade policy • ↓ AUD, ↑ competitiveness • For over 15 years, China didn’t have flexible rate, so it can maintain an undervalued currency and assist exporters • However, govt is limited to its influence, as dollar floats • But RBA can adjust interest rates to influence demand and supply of $A • Govt can also buy and sell currency itself, dirtying the float – RBA cannot influence long term, but can smooth out volatility in short term • RBA do not target exchange rate, as they do not have a preferred level, and only occasionally attempt to influence exchange rate • To that extent, scope for exchange rate policy in Australia today is limited Chapter 17- Price and Incomes and Labour Market Policies 17.1 Introduction • Government intervene in labour market to influence process of outcomes of wage determination. It does this to: o Achieve macroeconomic objectives such as low inflation and stability o Achieve microeconomic objectives such as productivity growth and improved competitiveness for Australian businesses and resolve disputes that arise in the workplace o Achieve objectives in relation to distribution of income and wealth – fair minimum standards • Government plays important role in influencing wage outcomes either directly or through independent industrial courts and tribunals 17.2 Prices and Incomes Policy • Prices and incomes policy is a government macroeconomic policy that seeks to control the growth rate of prices and/or wages and expand employment by imposing restraints on wages growth • Influence terms of pay and conditions under which Australians work as well as prices of goods and services • To control inflation and achieve fairer distribution of income • Australia does not have prices and incomes policy • Last used in 1990s – Prices and Incomes accord – policy in the form of an agreement between govt and Australian Council of Trade Unions (ACTU) on guidelines for wage determination Reasons for Prices and Incomes Policies • Reducing inflation and Unemployment – free functioning labour market may allow wages breakout – large wage rises in 1 part of economy triggers a rush of similar wage claims and inflationary spiral. Policy can moderate wage increases, lower inflation and give unemployed a better opportunity to rejoin workforce • International Competitiveness - ↓wages, ↓production costs, ↑ competitiveness • Reduced Strike Levels – policy minimise industrial conflict over wage levels, maintaining Australia’s reputation • Fairer Distribution of Income – wage earners with greater bargaining power could get higher wages, increasing inequality. Also, businesses in less competitive markets can increase prices and generate excessive inflation, disadvantaging lower income earners the most. • Achieving Specific policy objectives – e.g. Keating govt used policy to introduce superannuation as part of aim to raise national savings Possible Prices Policies • Prices policy involves govt controls and guidelines concerning size of price adjustments in an economy – main role: control inflation • But govt doesn’t not have const. Power to control prices. It can only influence prices through actions of ACCC • ACCC’s main focus – ensure genuinely competitive forces are operating in each industry sector – competition = low prices Petrol Prices • Rising petrol prices since 2004, but govt can’t do much • ACCC taken initiative to: monitor prices, inform motorists and promote competition by enforcing trade practices act • Since 1980s deregulation, ACC can no longer set max wholesale price of petrol • 2007 – ACCC recommenced formal monitoring of petrol prices • 2008 – Govt appointed petrol commissioner and FuelWatch – all metro petrol stations have to notify petrol prices of next day. This informs consumers and fosters greater competitive pressures Possible Incomes Policies Centralised Wage Determination • Govt does not have power to set income levels, but can establish framework for determining wage levels • Under centralised system, wage rises and other labour market outcomes are primarily determined by govt or govt appointed body • E.g. FWA, AFPC, AIRC • Centralised system is needed to protect interests of those on low wages, prevent excessive wage increases, minimise cost-push inflation and possibly decrease UE • Centralised incomes policy is a system in which govt or industrial tribunal determines wages for all employees, regardless of which firm they work for • Wages or Incomes policy sets criteria for tribunal to make decisions about wage adjustments. Under such system – criteria for wage adjustment: o Needs-based principle – adjusted to satisfy needs of employees – according to changes in CPI – wage indexation o Capacity to pay principle – ability for economy or firm to increase wages without passing on costs to consumers. Could be due to increased productivity or profit levels o Employee outcomes – supply and demand and issue of whether lowering wage rates will decrease unemployment o Sustaining wage growth at the level of major trading partners – to avoid erosion of Australia’s international competitiveness o Productivity Increase – may give wage increases based on overall productivity growth – if high productivity growth, economy can afford higher wages without upward pressure on inflation • Advantages o Help achieve key economic objectives o Gives govt an additional tool with which to achieve economic objectives o Allow for trade off of tax cut in exchange for lower wage increases • Disadvantages o No incentive – lower productivity growth o Higher levels of inflation o Slow down pace of structural change – across the board increases will lead to less incentive to improve/change structurally Decentralised Wage Determination • Decentralised incomes policy is a system in which wages and working conditions are determined through negotiations between individual firms and their employees (or unions) • Market forces of supply and demand as well as individual firm’s capacity to pay determine size of wage increases • More wage flexibility, wage levels can change between firms and industries • Australia shifted to decentralised wage determination system in 1990s • Advantage – o More efficient allocation of resources and structural change. o Encourages labour movement to more efficient firms which have the capacity to pay more o Has incentive and increases productivity growth o Reduce inflationary expectations and increase competitiveness o Wage flexibility can also reduce impact of recession on UE – reduction of wages rather than to cut staff • Disadvantage – o Greater inequality – low income earners with less bargaining power/less union support o Wage increases may reflect greater bargaining power of employees rather than increase in productivity o Increase in industrial disputes – argue for more wages without increase in productivity → wage push inflation → inflationary spiral Degree of Government Regulation • Regulation is the collection of government rules and institutions that influence the operation of markets and the participants in markets • Not deregulated if enterprise bargaining and content of agreements are still substantially affected by industrial relations laws • Early 1990s – employees still covered by awards. Any enterprise agreements introduced by employers was required to meet stringent requirements to ensure no individual employee was made worse off by enterprise agreement – known as Disadvantage Test • Industrial Relations Commission also retained power to intervene in workplaces and resolve disputes – decentralised by not highly deregulated • Changes in workplace relations act in 2006 – further deregulation – minimum requirements for workplace agreements were reduced, BUT many aspects of negotiating wages were still regulated • Rudd govt confirmed it will introduce new set of industrial relations laws to come in effect in 2010 – give employees greater power in bargaining for wages and stronger minimum protections 17.3 The shift from incomes to labour market policies • Labour market policies – microeconomic policies aimed at influencing operation and outcomes in the labour market, including industrial relations policies that regulate process of wage determination as well as training, education and job placement programs to assist the unemployed • 1980s – centralised system with wages determined by prices and incomes policies – achieved low inflationary wage rises, halved level of industrial disputes, but did not provide adequate incentives for raising productivity • 1990s – decentralised system – waged determined by workplace bargaining • 1991 – enterprise bargaining as an add on to centralised wage increases • 1994 – changes in industrial relations system shifted to collective enterprise agreements • 1996 – workplace relations act further decentralised and created formal stream of individual contracts • WorkChoices legislation in 2006 – dismantled much of award system with aim of shifting workers into individual contracts – allowed work place agreements to not comply with awards • 2007 restored most provisions in awards as minimum standard – restored safety net test for workplace agreements • 2008 restricted use of individual contracts within the formal industrial relations system • Awards were used, but award wage growth were below average wages growth, so centralised awards became less relevant • Rudd govt will keep awards, but will be modernised with the 2010 changes to industrial relations system • Inconsistent trends of policies due to changing governments • Australia formally abandoned incomes policy in 1996 • In current policy framework, instead of directly influencing wage outcomes, govt have made structural changes to industrial relations system that encourage wage growth to be determined at the individual enterprise level • Thus shift meant that incomes policy is no longer a macro, but micro reform • Govt now use monetary policy as major macro eco policy to prevent excessive wage rises 17.4 The Current Industrial Relations Framework • Individual Agreement (common law contract or Australian workplace agreement) – 35% • Collective Agreement – 41% • Industrial Awards – 19% Minimum Employment Standards • Fair Pay and Conditions Standards state there are 5 guaranteed employment conditions: o Minimum wage rates - $543/week o Annual Leave: 4 weeks of annual leave, but may cash out 2 weeks of that leave entitlement o Personal/sick leave: up to 10 days of paid leave per year for sickness or carers leave o Parental Leave: Primary caregiver of a child can take up to 1 year of unpaid leave o 38 hour week: employees are entitled to work a standard 38 hours per week, averaged over the year • Australian Fair Pay Commission (AFPC) sets the level of the Federal Minimum Wage – through Safety Net Wage Case hearing • Before 2006, Safety Net Wage Case involved AIRC listening to submissions of employers, unions and govts and taking arguments into account then making decision • Now, Safety Net Wage Case involves AIRC conducting own research before making wage decision. • Workplace Relations Act requires that AFPC must take into account the needs of both unemployed and low pay workers, reflecting belief that high minimum wages can discourage employers from hiring additional employees. • Since 2006 – there have been 3 increases in Federal Minimum wage • Govt will abolish AFPC and give its power to FWA in 2010 Industrial Award (the safety net) • Awards are a set of pay and conditions that are specific to an employee’s work or industry sector, which establish minimum wage and working conditions for employees who are not covered by workplace agreements • Australia has different minimum pay rates in different awards • Awards now cover 16 key principles (allowable matters): job classifications, public holiday pay, pay rates, piece rates and bonuses, annual leave loading, long service leave, overtime, shift and casual loadings, penalty rates, notice of termination, redundancy pay, stand-down provisions, dispute settling procedures, employment type, jury service, superannuation, and outworkers’ pay and conditions • In 2008 – AIRC began modernising award system, simplifying for 2010 – will have 10 legislated minimum standards and awards will have 10 industry-relevant provisions Collective Enterprise Agreements • Collective Enterprise Agreements are a workplace agreement that is negotiated between an employer and a group of employees, usually through a union • Before 2006 – called Certified Agreements • AWA – Australia Workplace Agreement – last for up to 5 years • ITEA – Individual Transitional Employment Agreement – expire by 2010 • AWA’s are a form of individual employment contracts between an employer and an individual employee • Workplace Authority administered the minimum requirements for workplace agreements – must comply with Australian Fair Pay and Conditions Standard and “No disadvantage Test” • Collective Agreements normally cover issues such as wage increases, loadings for additional work hours changes to workplace practices and other changes that are intended to increase productivity Individual Contracts • 2 types: Common Law Contracts and Australian Workplace Agreements and Individual Transitional Employment Agreements • Common Law Contracts – o Most common form of individual contract o not part of formal industrial relations system o cannot offer pay and conditions below equivalent award o generally enforced through ordinary law courts o e.g. short term work contract – labour companies • AWA’s and ITEA’s – o part of formal federal industrial relations o cover around 3% of workforce o Registered with govt agency – Workplace Authority o Easier for employers to change work conditions through AWA than collective agreements, because employer has greater bargaining power o ITEA’s introduced when extensive changes to industrial relations system • 2006 – surge of AWA’s, because of removal of “No Disadvantage Test” – favoured employers • 2007 – re-instate “Fairness Test” for salaries less than $75,000 – ensure workers receive compensation for removal of entitlements 17.5 Changing Work Practices • Shift towards decentralised wage determination system has significant impact on operation and outcome of wage determination system • Impact of shift towards bargaining: o Employees have longer shifts but more days off o Employers have greater say in organising work patterns of employees – overtime o Employees working weekend, holiday and night hours at same rate as ordinary work hours, or at a rate only marginally higher o Reduced break times during work o Performance based pay o More flexible job descriptions with higher pay – “multi-skilling” o Changed entitlements to recreational leave o “cashing out” sick leave o Introduction of paid maternity leave o Giving employees greater flexibility to take time off without pay for personal or family reasons o Employee share ownership schemes, where shares are issued to employees to give them a stake in the company 17.6 Dispute Resolution • One of the most important roles of industrial relations system is to resolve disputes • An industrial dispute occurs when employers or employees take action to disrupt the production process in order to highlight a disagreement between employers and employees • Disputes can lead to strikes (stop work), work bans (stop certain aspect of work) and lockouts (employers refuse to give employees access to place) • Industrial Dispute can become particularly controversial and take on wider significance, e.g. waterfront dispute in Australia in 1998 • Industrial Relations Commission, which played the central role in bringing parties to a dispute together – 2 main processes: o Conciliation – firms and employees meet to discuss differences in the presence of 3rd party to bring parties to an agreement o Arbitration – when Conciliation is unsuccessful, industrial tribunal hands down a legally binding ruling to firms and employees • Employee make a claim → employer reject claim → employees take industrial action (e.g. strike) → Commission intervene → negotiation and ruling • Since 1990s, with introduction of enterprise bargaining, where employers and employees are responsible of solving their own problems, IRC’s power to resolve disputes was reduced, so it can only step in on special circumstances – if dispute may cause disruption to economy • 2006 – all workplace agreements must include a dispute resolution procedure – common feature: if there is a dispute, they must refer to a third party organisation • This means IRC no longer has power to settle disputes and can no longer exercise arbitration powers unless parties agree it should • Under Workplace Relations Act, most forms of industrial action are prohibited unless if they comply with specific rules set down for “protected action” • Measure of industrial disputes is number of working days lost in industrial disputes 17.7 Evaluating the outcomes of the industrial relations system • Australia’s industrial relations framework is a hybrid system of wage determination that has an emphasis on market forces through enterprise bargaining and non-market forces such as the AFPC and AIRC Enterprise Bargaining • Moderate wage increase, low inflation, relatively strong eco growth • Wage growth and inflation: o Despite low UE, shortage of skilled workers and trade boom, there has not been wages breakout or inflationary wages growth. o Enterprise Bargaining/flexibility of decentralised system allowed larger wage rises in specific areas but not spill over to across the board rises • Work Practices and Productivity: o Enterprise bargaining and deregulation in 1990s eliminated old, outdated work practices o Enterprise bargaining encouraged employers and employees to trade off specific productivity improvements for wage increases o Productivity growth – 2% in 1980s, 3% 1990s, 1% - now • Unemployment: o Successful in combining falling UE with rising wages and productivity in early 1990s o But increase in underemployment – growth of part time and casual employment • Income Inequality: o Decentralised wage determination → increase in wage dispersion (i.e. widening gap between higher and lower income earners) • Debates on the role on market forces and non-market forces in Australia’s wage determination system • Market forces – employers have greater bargaining power • But through non-market institutions, e.g. industrial tribunals, govt has ensured fairness to employees + minimum working conditions • The processes for determining wages, work conditions and work practices are among the most important aspects of economic policy because they have such wide impacts on the economy on peoples’ lives 2006 Industrial Relations Changes – Work Choices • Against: Removal of safety net, increased inequality, employers exploit employees as they have more bargaining power [in favour of employers], discourage collective agreements by eliminating arbitration and awards • For: AWAs had higher rates of pay than other awards, productivity gains in construction, mining and knowledge sectors are where AWAs were most adopted, no negative effect on employment, intended to increase flexibility between employers and employees, not exploitation of workers. Higher wages, higher labour force participation, higher productivity and lower unemployment. If removal of flexibility, it can lead to threat of excessive union demands not based in increases in productivity, leading to wages breakout and higher inflation 17.8 Employment, Education and Training Programs • Govt contribute to structural change through education and labour market programs • Aimed at facilitating entry of new members of labour force into jobs and retraining people who have lost work because of structural changes in the economy Education and Training • Vocational and industry training – shifted to national system of training qualifications, e.g. New Apprentices Scheme • Entry level training programs – wage subsidies to provide incentive for employers to provide training, and stronger links between edu institutions • In response to skill shortages and youth unemployment • 2001 Budget – Australians Working Together package – reduce UE by improving job search assistance and increase financial incentives to return to work: expanded Job Search Training places and Training credits for mature age/indigenous job seekers Labour Market Programs • Address UE related to supply side factors – to reduce NAIRU • Programs integrated with income support, so continued income support is tied to them making genuine efforts to find paid work – moving individuals off welfare and into work – Centrelink • Job Network – group of charitable and private sector org that have contracts with govt to provide training and jobs search to UE • 2008 – new system - $3.7b over 3years to establish single integrated service that focuses on individual assistance for job seekers, enhancing skills and providing greater assistance for employers to find suitable job seekers • Recent years – shift to provide greater incentives to find work. “Work for the Dole” program – impose job seeking requirement for welfare support. Years 18-49, after UE for 6months, must do community service/study/work. • 2008-09 Budget: Skilling Australia for the Future – $1.9b to provide 630,000 training places over 5 years – retrain people in areas of skill shortage • This employs “demand driven” approach to address structural UE – also reducing wage increase pressures by moving excess people from areas with no skill shortages to areas with highest skill shortages • Work for the dole – originally intended for young long term UE, but now for people under 50 to improve skills and job prospects. Refusal in participating = losing welfare support/UE benefits • 2006 – Welfare to Work o Move welfare recipients into workforce – “carrot and stick approach” o 20% of Australians of working age rely on welfare for their income o 3 decades ago on 5% o Disability support pension, Single parent payments – must do 15hrs/week if possible o Work capacity test – job seekers are provided with assistance in looking for work o Newstart – wage subsidy for employers to hire people who have been on UE benefit for more than 2 years (very long term unemployed people) o Very long term UE people required to work full time on Work for the Dole program to keep receiving benefits o Welfare payments are phased out at a slower rate as income rises, so retain more of welfare payment • 2009-10 Budget: “Jobs and Training” Package o Aimed at reducing the possibility of long term structural unemployment, thus sustaining the natural rate of unemployment. The extension for $4000 incentive for employers to take on apprentices, targets to reduce the youth unemployment problem, where school leavers, are more prone to become unemployed. o The payment of $1158 for ‘Training and Learning’ sign on bonus to those at risk of long term unemployment, also helps those in the secondary labour market. o Both policies allows for cheaper labour for employers, create jobs in the short term and also reduces the number of unskilled workers in the economy, sustaining Australia’s unemployment rate in the long term. Chapter 18- Effectiveness and Limitations of Economy Policy • 6 objectives: eco growth, inflation, UE, external balance, equal distribution of income and wealth, intergenerational equity 18.1 An Overview of the Effectiveness of Economic Management • Macroeconomic policy – achieved 3-4% growth but balance with 2-3% inflation, low UE and avoiding blowout of CAD • Microeconomic policy – improve productivity and competitiveness – achieving long term high eco growth (lifting sustainable rate of growth) • Prosperity Index ranks countries according to material wealth and life satisfaction. Improvement compared to other economies. 7th in 2006, but 11th in 2007 • Unlike 1970s/80s, govt has been able to strike balance between economic objectives • Aust benefited from commodities boom, rapid growth of China, rising commodity demand and prices, surge in terms of trade, low global interest rates – CAD • Eco growth – sustained for 17 years (before GFC). Last recession 1991 • Inflation – 10% in 1970s, 8% in 1980s, 2.5% since early 1990s. Influenced by new monetary framework, lower tariff barriers, increased competitiveness, price reductions from cheaper imports and technologies, moderate wage growth and high productivity growth • UE – 4% - lowest in 35 years, but still high levels of underemployment • CAD – still large external imbalances – heavy reliance on commodity exports and constant inflow of overseas borrowing. Foreign debt grown to over 50% of GDP • Distribution of income and wealth – no improvement – while greater welfare payments, also wages increase of high income earners and greater returns on assets and properties • Environment – no improvement – poor record in preserving biodiversity 18.2 Limitations on Policy Implementation Time Lags • Monetary Policy – meet first Tuesday of each month – long time lag, limiting govt, as they need to predict future movements of inflation and implement policies 6-18 months ahead • Fiscal – major changes occur on annual basis of May each year – most changes need to go through complex process of budget committee meetings and need approval from several govt departments • Microeconomic policy – extensive planning and detail, often occurring in response to inquiries and also need secure of support from various levels of govt. Impact time will take a long time, as benefits of structural change takes long to pass through economy |Policy |Implementation |Impact Time Lag | |Fiscal |Medium term (annually) |Short term (few months) | |Monetary |Short term (monthly) |Medium term (6-18 months) | |Microeconomic |Long term (years) |Long term (up to 20 years) | Political Constraints • Govt will take into account whether a policy direction will be supported by their own political party, other stakeholders, including influential businesses or union groups that contribute to party’s campaign funds • 3 year political cycle is a constraint on long term eco policy • Generally – first year – long term decisions, halfway – prepare for election, final year – pressure to implement policies that will be popular to earn votes, but may not have long term eco benefits • Unpopular policies – major consideration for economic management. E.g. Japan and France resist cuts in agricultural protection because of political influence of rural communities. Howard took major risk with GST. • Legislations must be passed through senate. 2004 – Howard had majority in House of Reps AND senate, which allowed him to pass through many policies. Now – Rudd = 32, Coalition = 37, Other = 7 – Rudd must get a minimum of 38 votes to pass through • Australia’s system of Federalism – shared responsibilities between Commonwealth and state govts. To implement changes, commonwealth must seek agreement with state govt – e.g. education, health, and infrastructure. • COAG Council of Australian Governments - established to facilitate agreements • If govts don’t agree, commonwealth can legislate over states, leading to lengthy constitutional challenges in high court. • 2006 – Commonwealth won a case to takeover industrial relations powers • Special interest groups – political parties have strong relationships with supporters. Large businesses employ lobbyists to influence govt decisions because of financial impacts. • Special interest groups, e.g. Greenpeace will launch campaigns to influence environmental policies Global Factors • As more integration with world economy, global factors become constraint • Australia may surrender some freedom in economic policy to win concessions from other nations, e.g. trade agreements • Govt place high priority on maintaining confidence of international investors and global financial markets, to stabilise exchange rates and decrease vulnerability to sudden shifts of financial flows • Policies that encourage open investment: reduced trade barriers, deregulation of most sectors (increase competition), deregulation of financial sector (foreign investment), deregulation of labour markets (work practices), reduced govt spending, privatisation of PTEs, low rates of corporate rates and capital gains tax, and less progressive income tax rates. • Creates difficult environment for govt to pursue policies that differ from generally accepted formula for good eco management • Global financial markets can restrict policy options available to governments • Global financial flows and overseas interest rates also influence – Australia must raise interest rates in response to rising global interest rates, but may lead to inflation and undermine confidence • International business cycle – difficult for country to growth when rest of economies are in downturn – increased imports but decreased exports will result in blowout of CAD • International organisations, e.g. WTO, influence individual trade policies because of enforcement powers – e.g. Australia forced to ban fresh salmon imports from Canada • Other influences include G8 – unofficial coordinator of global macroeconomic policy setting 18.3 Evaluating the effectiveness of Specific Policies • Challenge in evaluating policies: difficult to isolate specific effects of 1 policy • Assess effectiveness of policies by analysing: o specific objectives o effectiveness of implementation – whether they were implemented – govt voted out of office/political constraints/distracted by other developments o relevant eco outcomes and how they compare with objectives – might be hard sometimes, because no target – e.g. low UE o any other factors affecting outcome, especially from overseas – e.g. policies effective in reducing UE, but recession wipe out effects o Whether there were any side effects associated with the implementation of particular policies – conflicting objectives' – e.g. 1990s, reduction of inflation = 5% increase in UE • Factors affecting economic outcomes: o Change in growth rates of major trading partners o Overseas interest rate movements o Sharp movement in value of currency o Developments/crisis in particular region o Changes in commodity prices, e.g. large increase in oil prices o Seasonal factors, e.g. drought o Industrial unrest – e.g. major dispute between union and Aust company o Shift in sentiment relating to Australian economy, e.g. credit rating Economic Management in Australia: Past, present and Future Macroeconomic Management • Proved effective in achieving short term goals • 1991 – recession • 1990s – expansionary policies to bring about recovery • 1994 – threatening inflation and CAD – tightening monetary policy • 1996-1998 – high UE – loosening monetary policy to increase eco growth • 1999 – inflationary pressures rose, rates rose again • 2001 – global economic recession, Aust exp fiscal and monetary policy – lowest rates in 30years to avoid recession • 2007 – contractionary policies to high inflationary pressures • Monetary Policy: o Worked well since 1990s to contain inflation between 2-3% o Risk of relying to achieve too many objectives – short term growth, inflation, UE, exchange rate o Weakness of 1990s – over reliance on MP to slow growth – side effects of discourage investment and increase value of exchange rate – heavy reliance on imports and makes exports less competitive – CAD o Argument between Treasury and RBA about whether RBA should play a role in influencing dollar. RBA – falling dollar will risk a higher level of imported inflation. Treasury – if RBA gives priority to both dollar and inflation – will cause sharp eco downturn o Main limitation – demand management policy – influence aggregate demand, but not structural (supply side) causes of certain problems o E.g. Capacity constraints have caused high inflation. Monetary Policy can’t address this. Nor can it address CAD, because it cannot improve competitiveness o Thus, even though main objective of MP is inflation, it cannot influence many of the causes, e.g. rising oil prices, or depreciating currency because of loss of confidence in Australia economy o MP can still influence inflation by interest rates, but that means it is tackling something other than its cause o In absence of incomes policy, most effective tool to limit inflation and wage rises is tighter monetary policy • Fiscal Policy o Main role of supporting eco growth, but limited to periods of economic downturns – less effective in slowing down economy o Keating 1992-94 to recover economy. Howard 2001 avoid recession o High budget deficit = long term high interest rates, low national savings and increase CAD o Late 1990s – main aim of fiscal – smaller deficits/ bigger surplus – CAD and national savings – not anymore o Not effective enough as evident from mid 1990s • Incomes Policy o Since deregulation in 1990s, outcomes of wage determination outside control of government – can no longer used to achieve specific inflation or other objectives • Macroeconomic policy mix been successful in sustaining long period of economic growth, reducing UE, kept low inflation and rose living standards • But has not been able to address structural problems – CAD, high foreign liabilities, low national savings, under utilisation of working age Australians. • In addition – long term threats from climate change and water shortages Microeconomic Management • Extensive Microeconomic reforms since 1980s have been successful – allow economy to grow at faster rate for longer period of time, improving living standards, productivity and reducing UE. • Trade off between goals of equity and efficiency • Hard to calculate impact – but report by Access Economics, “The Reform Dividend”: 1983 to 2004 raised sustainable growth rate by 0.5% • Professor John Quiggin from University of QLD, argued that micro reform has not been all that successful – no impact on external imbalances and only raised growth slightly • Not enough micro reforms recently – Push for more – between 1990s and 2000 - growth went from 4% to 3%, productivity growth 2.4% to 1.1%, slip in competitiveness ranking and large external imbalances • In long term, success or failure of Govt Policy mix is based on capacity to sustain growth and external balance, UE, standards of living and environment