HSC TOPIC 4 - Economic Policies and Management

Economic growth and quality of life

Economic growth involves increasing the economy’s production of goods and services over a period of time measured by increases in real GDP. The Australian government aims for sustainable growth to ensure increases in standard of living. Full Employment

Full employment refers to the non-accelerating inflation rate of unemployment, also known as the natural rate of unemployment which eliminated cyclical unemployment, only structural & frictional unemployment. This generally occurs between 5-6%. The government attempts to maintain NAIRU to approx. 5% by containing inflation.

• Okun’s Law states that the rate of economic growth (%) must exceed the sum of productivity growth and the growth in labour force for unemployment to fall.

𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐺𝑟𝑜𝑤𝑡ℎ > 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝐺𝑟𝑜𝑤𝑡ℎ + 𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒 𝐺𝑟𝑜𝑤𝑡ℎ Price Stability

Lowering inflation because it reduces real income and living standards. The RBA aims to sustain inflation that will cause minimal distortion to the economy, usually between 2-3%. External Stability

External stability refers to an economy’s ability in meeting its short-term and long-term financial obligations with the rest of the world.

• Ensure external sector is sustainable (CAD, foreign debt, and exchange rates). Keep CAD below 5% of GDP to stabilise net liabilities and net foreign debt.

• Maintaining stability in the exchange rate through international confidence and conduct of government policies.

Environmental Sustainability

The economic objective is to ensure Ecologically Sustainable Development, where current economic activity does not compromise future generation’s ability to meet their own needs. This requires maintaining environmental quality and preserving both renewable and non-renewable resources. Distribution of Income

• Overall Australia attempts to maintain an equitable distribution of income and to alleviate absolute and relative poverty.

• Social responsibility to redistribute income from high income earners to low income earners.

Potential conflicts among objectives 1. Price Stability & Full Employment – In the short run economic policies (e.g. Budget

deficit or tax cuts) may be unsustainable and lead to inflationary pressures and lack of price stability. Alternatively, government policies designed to reduce growth and inflation may lead to rising unemployment and inability to achieve full employment.

2. Economic Growth/Full Employment & External Balance – May conflict in the short run if

unsustainable growth leads to increasing import spending and deterioration in CA of BOP. CAD imposes external threat on domestic growth may lead to depreciation and rising inflation.

3. Economic Growth & Environmental Sustainability – May lead to depletion of natural

resources if economic growth is not ecologically sustainable.

Rationale for macroeconomic policies – stabilisation and shifts in aggregate demand

A major rationale of macroeconomic policies is to stabilise fluctuations in the business cycle to target long term economic growth and increase in standards of living. Australian does not have an economic development objective because the economy is currently ranked 2nd in the world.

• Macroeconomic policies target the demand side of the economy since fiscal and monetary policy affect aggregate demand, which is the total spending in the economy. (C + I + G + X - M)

Fiscal policy

Fiscal Policy – Refers to the government’s use of the federal budget to affect the level of economic activity income distribution and resource allocation in the economy, achieved through the control of taxation and government spending.

• The Annual Budget is delivered in May every financial year

- Total Revenue for 2018-19 is estimated to be $486.1 Billion, an increase of 6.6% on estimated expenses of 2017-18.

- Total Expenses for 2018-19 expected to be $488.6 Billion, an increase of 4.2%

from previous year.

• 2016-17 Federal Budget

- Increasing personal income tax threshold from $80,000 to $87,000 → Increases household disposable income especially for low income earners which reduces income inequality.

- Tobacco excise tax to increase by 12.5% per year → Addressing

environmental sustainability, tax lowers consumption.

- Youth Job Internship Programme will increase 120,000 jobs for youth job seeks over next 4 years → increases opportunity which reduces unemployment.

- Small business instant asset write-off extended for business with turnover of less than $10m → Encourages investment which creates more employment opportunities. Effect on BOP: more exports, lower prices and improves international competitiveness.

Federal Government budgets and budget outcomes

Budget Outcome = Taxation (T) – Government Spending (G)

• Budget Deficit G > T

• Budget Surplus T > G

• Balanced Budget G = T

Stances of Fiscal Policy Refers to overall effect of budget outcome on economic activity.

• Contractionary Stance (T > G) – Smaller deficit or larger surplus

• Expansionary Stance (G > T) – Larger deficit or smaller surplus

• Neutral Stance (G = T) – Neutral effect, no change in budget outcome Components of Budget Outcome

• Cyclical Component – Refers to non-discretionary changes in government expenditure/taxation caused by changes in the level of economic activity.

• Structural Component – Refers to discretionary (deliberate) changes in government expenditure/taxation policies that affect the budget outcome.

Automatic/Inbuilt Stabilisers Automatic stabilisers are counter-cyclical mechanisms in the government’s budget that counterbalance economic activity by offsetting changes in the business cycle. Two main automatic stabilisers are:

• Progressive Taxation – Tax payers pay an increasing proportion of their income in tax as income rise in a boom and pays lower proportion during a recession. Paying a higher Marginal Rate of Taxation reduces the increase in disposable income, which automatically restrains the rate of growth in consumption expenditure.

• Expenditure on Welfare Payments – Job Search Allowances & unemployment benefits increase during a recession which automatically increases government expenditure.

Final Budget Outcome

• A result of planned discretionary outcome in government policy but also reflects non-discretionary outcomes influenced by the state.

Effects of budgetary changes on resource use, income distribution and economic activity

Expansionary Fiscal Policy Contractionary Fiscal Policy

• Higher disposable income, higher consumption.

• Lower disposable income, lower consumption.

• Increased government spending increases aggregate demand which raises economic activity and growth.

• Lowers inflation.

• Decrease in government spending can reduce aggregate demand and economic activity & growth.

• Effective for structural unemployment because funds are allocated in areas such as re-training or higher education.

• Lower inflationary pressures

• Raising unemployment

Stances of Fiscal Policy

• Neutral Stance implies a balanced budget, no change in budget outcome

• Contractionary Stace implies T > G leading to a smaller deficit or larger surplus

• Expansionary Stance implies G > T leading to a larger deficit or smaller surplus Impact on Resource Allocation

• Influences resource allocation through changes to the tax system and spending decisions.

• Changes in taxes rates/type of taxes will impact resource allocation between various types of production.

- Howard Government (2001) abolished indirect wholesale sales tax, replacing it

with a 10% GST on retail price of g & s. The GST removed inefficiency by applying a broader indirect tax, helping to raise revenue and increase allocative efficiency.

- Abbott Government repealed the carbon tax in 2014 and adopted a policy of

Direct Action in 2015 to reduce emissions by 5% by 2020 (i.e. Solar panels instead of fossil fuels).

• Changes to superannuation encouraged more resource flow into super contributions to raise private savings.

- 2002-03 Budget: Compulsory employer contributions set at 3% rose to 9% and aims to raise this to 12% by 2020. However, the Liberal party stopped it at 9.5%, but it will gradually increase to 12% by 2025.

Impact on Income Distribution

• Income distribution is affected by the budget through changes in taxation and social/welfare systems.

• Progressive income tax system is designed to create a more equal distribution through transfer payments, community services and other types of social expenditure, to assist lower income earners.

- Narrows inequality gap via vertical equity. - Vertical Equity – Redistributes income using progressive taxes. High income

earners pay more tax while low income earners pay less tax.

- Horizontal Equity – Everyone is taxed the same rate. People in the same income group will pay the same level of tax.

• Transfer Payments such as family allowances, job search allowances, pensions etc.

• Social Security and Welfare including government expenditure on subsidising public transport, health, and education to improve standards of living.

Methods of financing deficits

• Borrowing from the Private Sector

- Borrowing by selling Commonwealth government securities (CGS) and Treasury Bonds in domestic financial markets.

- Market determines the interest rates for these loans.

- Advantages of debt financing is that there is no change in the money supply as money borrowed causes a fall in bank deposits but returns to private sector through government expenditure.

- No net increase in foreign debt from overseas

• ‘crowding out’ effect

- Means that selling government securities will only be successful if the interest rate offered is competitive with prevailing market interest rates on other securities.

- High interest rates increase the cost of borrowing for businesses undertaking

investments.

- The government finances its deficit through borrowings from the private sector, which puts upward pressure on interest rates and ‘crowds out’ private sector investors who cannot borrow at the higher rates of interest. This may lead to lower output.

• Borrowing from the RBA

- ‘Print money’ or Quantitative easing to cover the shortfall in budget revenue. - Advantage is that there is no change in interest rates and accumulation of

public debt.

- Disadvantage is that there is an increase in the money supply and risk of rising inflation if the economy is at full employment. (Reason why it is avoided since 1982).

• Borrowing from Overseas

- Involves the sale of new government securities in return for foreign currencies. - Advantage of this method is that there is no increase in domestic interest

rates.

- However, the government accumulates foreign debt which worsens the CAD in future years due to increases in the NPY of CA.

• Use of a surplus

- Retiring Public Debt - Reduce debt incurred within private sector by repaying past borrowings to both Australian and foreign lenders.

- Improves external stability.

- During the 1990s and early 2000s, the government used surplus funds to pay

off public sector debt which reduced the size of public debt, and frees up funds for other purposes such as private sector investment, which may lead to economic activity that offsets the contractionary effect of a fiscal surplus.

• Accumulate surplus to finance future expenses or fund tax cuts in the present.

• Establish special saving funds – ‘Future Fund’ $117bn and Higher Education Endowment Fund $5bn.

Recent Trends in Australian Fiscal Policy Fiscal Consolidation – Policy aimed at reducing government budget deficits and overall debt accumulation over the long-term.

• Underlying cash deficit of -$37bn in 2016-17 expected to fall to -$26bn by 2017-18.

• Medium term fiscal strategy aimed to invest in a stronger economy by redirecting

spending to improve productivity and labour force participation. Supporting revenue by

supporting policies that drive earnings and economic growth.

Intergenerational Reports

• Helped to lengthen the horizon of public policy analysis beyond short term political gains,

enabling the government to focus on longer-term implications of policies and population

changes.

• Intergenerational Report 2010: Assessing the fiscal and economic challenges of an

ageing population and includes a discussion on environmental challenges and social

sustainability over the next 40 years.

• Ageing Population: 25% increase in government spending over the next century.

However, the proportion of working age to support each Australian aged over 65 by

2050. Improvements in fiscal sustainability, but ageing population still imposes threat.

- Pressure on the government to provide healthcare, age pensions and aged

care infrastructure.

• The charter provides a framework for the conduct of Fiscal policy.

The Current Stance of Fiscal Policy

• Since 2010, the stance of fiscal policy has been mildly contractionary to reduce the

budget deficit.

• A long period of sustained economic growth, and a boom in tax revenues from the

mining boom contributed to sustained budget surpluses and reductions in public

debt.

• During the GFC, expansionary fiscal policy was used aggressively. A combination of

discretionary stimulus spending and a cyclical fall in taxation revenue shifted the

fiscal balance by $75 billion, or 6% of GDP and widened the deficit

• Domestic and global cyclical factors which affect the fiscal outcome:

- During the GFC, automatic stabilisers decreased government revenue and

increased government expenditure (unemployment benefits).

- Between 2003-04 and 2011-12 the TOT exerted a strongly positive impact on

the fiscal balance.

• Domestic and global structural factors which affect the fiscal outcome:

- The economic stimulus plan in 2008-09 and 2009-10 involved a $77 billion

package of expenditure to stimulate economic growth. This involved a large

boost to capital investment, which included investment in school infrastructure

and social housing. These measures were estimated to have added 2

percentage points to economic growth in 2009-10.

- Tax revenues have not recovered as quickly due to large structural cuts in

personal income tax rates.

Monetary Policy

Monetary Policy – Refers to the government’s ability to affect the level of interest rate in the

Australia economy, through RBA.

• Purpose of monetary policy

The main objectives of monetary policy:

• Contain inflation between target band of 2-3%

• Maintain full employment of the labour force based on minimising the rate of

unemployment close to NAIRU.

• Sustain long-term economic growth to improve living standards – consistent with

rising real incomes and employment opportunities without deterioration in CA and

high foreign debt.

• Attempts to create non-inflationary growth.

• Implementation of monetary policy by the Reserve Bank of Australia.

• Monetary policy implemented by RBA through domestic open market operations in

the cash market.

• RBA influences the daily cash rate through the buying or selling of Commonwealth

Government Securities (e.g. Treasury Notes and Bonds).

• Monetary policy is used in a pre-emptive manner to avoid excessive inflation in

booms/recession.

Two Instruments:

- Controlling growth in money supply (monetary targeting)

- Influencing interest rates (Rate-setting monetary policy)

1. Monetary Targeting: RBA controls the supply of funds through its ability to print

money (QUANTITATIVE EASING). However, monetary policy was largely

unsuccessful be as figures of money supply are often distorted and targets were

missed.

2. Rate-Setting monetary Policy – RBA can influence the level of interest rates using

domestic market operations (DMOs) to influence cash rate. This method was

abandoned since the 1980s in favour of rate-setting monetary policy which is more

successful, particularly in achieving price stability.

3. Domestic Market Operations (DMOs) – Actions by BA in the short-term money

market to buy and sell second-hand CGS to influence cash rate & interest rates.

Monetary Policy Stances:

• Contractionary Stance – Cash rate is raised to slow down economic activity and

reduce inflation.

- RBA sells CGS to financial intermediaries in the short-term money market to

decrease the supply of funds on the bank’s exchange settlement account

(ESAs).

- Decrease in supply will increase the price of funds, increasing the cash rate.

- To remain competitive, banks will increase interest rates.

• Expansionary Stance - Cash rate is cut to stimulate economic and raise

employment prospects to reduce unemployment.

- RBA buys CGS to increase the supply of funds in bank’s ESA.

- To remain competitive, banks will lend their excessive liquidity and earn

profits through commercial lending which reduces interest rate.

• Neutral Stance – No change in cash rate.

- Designed to create a stable cash rate and daily liquidity management

operations.

Summary:

Stance DMOs Overnight Money Market

Cash Rate Interest Rates

Inflation

Contractionary Selling Shortage borrowable funds

Increases Increases Decreases

Expansionary Buying Excess borrowable funds

Decreases Decreases Increases

• Impact of changes in interest rates on economic activity and the exchange rate.

Impact of changes in interest rate

• Changes in interest rate is known as the transmission mechanism.

Effect Change in Interest Rate

Consumption, investments, and savings

• Higher interest rates will discourage borrowing and spending, but encourage savings.

• Lower interest rates will encourage borrowing and spending, but discourage saving.

Cash Flows

• Higher interest rates will reduce cash flows for households, businesses, and governments.

• Lower interest rates will increase cash flow as less money is paid to existing debt.

Cost of Credit

• Higher interest rates will raise the cost of credit & purchases made on credit.

• VICE VERSA for lower interest rates.

Asset Prices

• Higher interest rates lead to a fall in asset prices such as property and share prices.

• Lower interest rates lead to high asset prices → Wealth effect.

Exchange Rate

• High interests encourage capital inflows, increasing the demand for $A and appreciation.

• Lower interest rates → depreciation

Inflationary Expectation

• Higher interest rates → reduces inflationary expectation by reducing wages and price demand.

• VICE VERSA

Recent Trends in Monetary Policy

• Australia has experienced 3 contrasting interest cycles between 2008 -2017

1. Low interest rate/Easing cycle (Sep 2008 to April 2009)

- Global economy deteriorated during second half of 2008 due to collapses in

the sub-prime mortgage market in the US.

- RBA cut the cash rate by -0.25% to support economic activity, followed by

the expansionary monetary policy.

- These cuts in cash rate were used to support consumer confidence and

reduce costs for borrowers.

- Overall the RBA cut the cash rate by -4.25% between which represented a

significant amount of monetary stimulus.

2. High interest rate/Tightening Cycle (October 2009 to November 2010)

- Seven rises in cash rate during this period each of 0.25%.

- Tightened credit conditions to avoid inflation and inflationary expectations

associated with a stronger than expected recovery and rising house prices.

- 2010 renewed resource boom → tightening economy.

- Debt crisis in Europe led to increased financial market volatility in 2011,

Cyclone Yasi hitting Australia also reduced economic growth.

- Worsening Euro Debt Crisis and uneven pattern of growth due to high

interest rates (uncertainty).

3. Low Interest rate/Easing Cycle (November 2011 to August 2016)

• Uncertainty in global economic outlooks & uneven economic recovery in Australia led

RBA to cut 0.25% to support cost of borrowing and maintain consumer confidence.

• May 2012 – Lowered cash rate by 0.5% as the Euro debt crisis caused volatility in

financial markets.

• Australia transitioned to non-mining sources of growth in 2012.

• Reduction of 3.25% between 2011 – 2016 led to an historic low cash rate of 1.5% in

2016-17.

Effectiveness of Monetary Policy

• More effective instrument than in the past due to the floating of the Australian dollar.

• Effective at maintain price stability. Unlike fiscal policy, it is a “blunt instrument” that

affects all regions and industries equally.

• Interest rates are independent therefore political considerations are generally not

considered.

• Has ‘long and variable lag’ – Takes time for changes in cash rate to flow to other

short and long-term market interest rates.

• Takes between 6-9 months to affect real economic activity (i.e. demand, Real GDP,

employment).

• Quick and easy to implement compare to fiscal policy.

• Lagged effect is also variable as different sectors of the economy will be affected to

certain degrees depending on their sensitivity to interest rates or interest rate

elasticity.

- e.g. Housing and investment spending are more interest elastic/sensitive and

react quickly to changes in interest rates than consumer spending which

takes more time to adjust.

Microeconomic Policies

- Rationale for microeconomic policies including shifts in aggregate supply,

efficiency

Microeconomic Reforms – Refers to policies aimed at individual industries to improve

productivity and international competitiveness.

• Targets aggregate supply (total volume of an economy’s output at various price

levels).

• Used to address specific structural issues in makers which cannot be addressed

through macroeconomic policies → improves productivity and efficiency.

• Complementary to the use of macroeconomic policies, micro policies operate

simultaneously to improve the efficiency of resource allocation in the economy in the

short & long run.

• Less government regulation of markets (i.e. Deregulation).

• Involves raising labour productivity – encouraging firms to adopt latest technology &

efficient work practices.

• Competition policies to promote price competition & greater efficiency in markets.

Efficiency:

• Allocative Efficiency – Involves firms charging prices which reflects the marginal

cost of production, so resources are allocated in such a way that reflects consumer

preferences for goods and services. *Lowest opportunity cost

• Dynamic Efficiency – Refers to firms adapting to changes in the economy by using

latest technology which accelerates structural change.

• Technical Efficiency – Refers to firms producing maximum output using least

combination of resources. (Producing to point of technical optimum in theory).

Productivity:

• Refers to the output per unit of input over time.

• Measures of productivity:

Strong Growth in Australian labour productivity during 1990s & 2000s reflected:

- Effects of microeconomic policies on individual product and factor markets,

individual industries, and the economy

• Product Market – Refers to the market where final goods and services are bought and

sold.

Type Steps Effect Result

Competition Policy

• 1995 National Competition Policy.

• Agreement between Commonwealth & State governments to encourage microeconomic reform throughout the Australian economy.

• Removal of special provisions giving Publicly Owned Enterprises advantages over private sector competitors.

• Formation of ACCC.

• Regulation of the cost of access to infrastructure.

• Directly impacts the demand and supply of final goods/services.

• Previous monopoly industries now give competitors access to infrastructure at a fair price creating greater competition.

• ACCC acts as watchdog to monitor abuse of market power.

Tax Reforms

The New Taxation System was introduced on 1 July 2000:

• Goods and Service Tax (GST) replaced the Wholesale Sales Tax (WST) and a range of narrowly-based indirect state taxes.

• More efficient and equitable tax system → easier for consumers and suppliers to understand the taxation system.

• Higher levels of productivity, saving and investment in the economy due to a simpler tax system.

• Factor Market - A market for any input into the production process (land, labour,

capital & enterprise)

• Cost reductions for businesses through the removal of the inefficient indirect taxes.

• Exports to be exempt from the GST.

• States and Territories to receive the GST revenue

- company taxation rates reduced to 30%.

This affected the demand and supply of goods, therefore affecting the product market.

Tariff Reforms

• The average tariff levels have now been reduced to around 5%, which is very low by world standards. However, the motor vehicle and textile industries have been given special considerations to save jobs and promote investment.

• Free trade agreements with more countries in 2014, expanding our export/import ability.

• Increases efficiency of manufacturing imports.

• Greater competition → Greater investment → Greater products available→ interaction of the demand and supply of goods change.

• Promote import competition, increase efficiency and the level of exports.

• Made capital importing industries more efficient.

• Encourage Australian firms to seek a global market to increase profits.

Type Steps How is it a

factor

market?

Result

Financial markets

• Floating of the dollar in

1983.

• Removal of RBA’s direct

monetary controls over

banks.

• Removal of barriers to

entry for foreign banks (16

new foreign banks

introduced).

• This reform aimed

at ensuring the

efficient allocation

of capital

resources and

minimising costs

through financial

and technological

innovation.

• Highly

competitive

environment for

financial

services.

• Greater choice

for consumers in

mortgages &

credit cards.

• Lower prices to

access funds.

• However,

excessive

deregulation can

be dangerous →

GFC

Labour market

reforms

• 1996 Workplace Relations

Act

• 2005 Workchoices

• 2007 Workchoices

Amendment

• 2008 Forward with fairness

• 2009 Fair Work Australia

Act

• Improving

productivity of

labour improves

an input into the

production

process and

therefore improves

the factor market.

• Encourages

greater labour

market flexibility.

• Productivity

related to

increases to

wages.

• Inequality in

payment for

workers.

Privatisation of PTEs

• The scrapping of the Two

Airline Agreement in 1991,

which allowed Qantas to

access domestic routes in

1994. Increased

competition from other

carriers such as Virgin

Blue has led to lower

airfares and increased

services.

• Improves capital

and enterprise

within Australia →

factor market.

• Ansett collapse.

• Introduction &

collapse of

Compass.

• Introduction of

Virgin Blue &

Tiger airways.

• Qantas still

dominates the

Australian airline

industry due to

the limited traffic

in Australia.

Carbon Tax

• Implement a set price

($26) on carbon for 3

years, and for it to be

reviewed after that time.

• Taken away in 2014

before the effect of the

reform could be seen → it

did lower carbon

emissions in its time in

use.

• Taxes part of the

production

process.

• Unknown result

but the first step

in aligning with

most developed

countries steps

towards

environmental

policy.

Tariff Reform

• Reduction of tariffs for

manufacturing to 5% by

1996.

• Abolition of quotas and

reduction of tariffs for car

• Promotes

efficiency

• Leads to

structural

change.

• Increases

domestic

competition.

Privatisation – Refers to the full or partial sale of public trading enterprises (PTEs) to the

private sector. (e.g. Qantas, Commonwealth Bank, Telstra, Medibank).

Corporatisation – Refers to partial sale of a PTE where the company is largely operated by

the private sector and the government still retains part of the profits generated. (e.g.

Australia Post, Energy Australia, Sydney Water)

- Regulation and deregulation – competition policy

Reasons for Competition Policy in Australia:

1. Competition is essential for a mature and functioning market

2. Markets may experience a monopoly, oligopoly, or monopolistic competition and

hence the government must intervene to prevent abuse of market power.

Structural Change – Changes to the patterns of production, the product processes over

time.

• Changes in the pattern of production such as changes in technology, consumer

demand, global competitiveness, and other factors, resulting in some products,

processes, or entire industries disappearing or emerging (Sunset/Sunrise Industries).

Reasons for Structural Change:

1. Consumer Preferences – e.g. Australia’s ageing population demands better health

and education leading to growth in those sectors.

2. Technological change – Improved communications (May cause some industries to

decline such as media and retail).

3. Globalisation – Allowed industries to specialise in certain areas such as export

markets. e.g. Australia specialises in exporting primary goods.

Deregulation – Refers to the removal of government restrictions on operation of markets.

• Telecommunications was partially deregulated in 19992, with the entry of Optus to

compete with Telecom on phone calls and mobile market.

• With deregulation, the telecommunications market & industry quickly grew.

• Agriculture, the government lifted embargo on sugar, tobacco, dried fruits in 1995.

Wheat market was deregulated 1989 and milk marketing support removed in 2000.

• Airline Industry deregulated in 1991, provided competition for Qantas which had

previously been a monopoly.

manufacturing industry to

15% by 2000.

Competition Policy

• The Australian Competition and Consumer Commission (ACCC) is an independent

statutory authority – administers the Competition and Consumer Act 2010 The act

promotes:

- Competition, fair trading, consumer protection.

- Fair market practices, industry codes of conduct, mergers and acquisitions of

companies, product safety, fair pricing.

• ACCC also regulates national infrastructure industries and ensure compliance with

the act.

Effects of Microeconomic Reforms:

Benefits Costs

• Greater competition and a more ‘consumer driven’ economy.

• Changes in work & management processes may cause dislocation especially if the reforms are implemented too quickly.

• Raising national productivity by improving productivity and efficiency of labour and capital.

• Structural unemployment due to greater competition.

• Lower inflation through more competitive product and factor marker.

• Improvements in efficiency may lead to ‘labour shredding’ as workers with redundant or low skills are no longer needed.

• Reduce CAD by increasing competitiveness of exports.

• Cost or retraining & relocation of displaced workers.

• Reduce unemployment through job creation in industries and assist with structural change.

• In the short-term microeconomic reforms could result in structural unemployment because inefficient industries shut down. However, in the long term make industries more productive.

• To address the problem of structural unemployment the government may need to increase expenditure on Job Allowance and Labour Market adjustment programmes.

• Achieve higher standards of living through rising incomes.

• Monopoly industries may lose profit whilst consumers gain from lower prices.

Labour Market Policies

• Role of national and state systems

- Industrial relations - refers to the system used to determine wages and

working conditions between employees and employers in Australia.

- Historically, used a centralised system of wage determination either directly

or through independent industrial courts and tribunals.

- Awards sets minimum wages and conditions of employment according to

occupation, industry, or nature of work.

- Fair Work Commission administers state industrial commissions and federal

awards.

- Australian Government determines legislations that underpins the industrial

relations system, to achieve:

• Controlling wage demands.

• Promoting comparative wage justice through regular adjustments of

the National Minimum Wage.

• Mechanism for resolving industrial disputes.

• Promoting labour market reforms.

Rudd Government introduced the Fair Work Act, which was implemented in 2010 and saw

the abolition of the previous Work Choices.

• The national system for determining:

- Minimum employment standards

Minimum Employment – Australian employees have 10 guaranteed minimum employment

conditions in the National Employment Standards.

Minimum wage

• The National minimum wage acts as a safety net for employees in the national

workplace relations system by providing minimum rates for employees not covered

by awards or workplace agreement.

• Fair Work Australia is responsible for setting the minimum wage annually, taking into

consideration both economic and social factors when before reaching a conclusion.

• Currently $18.93 per hour or $719.20 per 38-hour week.

Awards

• Awards refers to pay and other conditions applying to a specific employee.

• Provides a safety net of minimum pay and conditions which extend the protections

of the National Employment Standards.

• Because modern awards are less tailored to specific industries and occupations,

these awards often include a flexibility clause which enables employers & employees

to vary the effect to meet their individual needs.

Enterprise agreements

• Most common method of wage determination in Australia.

• Refers to the collective agreement between an employer and a group of employees

usually represented by a union to negotiate terms and conditions of employment.

• Workplace agreement must pass the “Better Off Overall Test” (BOOT), requiring

employees to be made better off than under standard award.

• Since the 1990s, collective agreements have produced annual wage increase

averaging around 4% per annum.

Employment contracts for high income earners

• High income earners such executives of businesses and companies usually have

individual common law employment contracts with their employers.

• Common law contracts for high income earners may include a statement of annual

salary, bonuses or profit-sharing entitlements, fringe benefits and salary sacrificing

arrangements.

• This is because the national awards system is intended to provide a safety net for

lower income earners, and high-income earners generally do not require this

protection.

Dispute resolution

Industrial Disputes – Occurs when employees or employers act to disrupt the production

process in order to highlight a disagreement between employers and employees.

Different Forms of Action:

• Strikes – Where employees withdraw their labour.

• Work bans – When employees refuse to undertake a certain aspect of their work.

• Lockouts – Where employees refuse to give employees access to the workplace.

Forms of Dispute Resolutions:

• Collective Bargaining – Occurs when conflicting parties attempt to reach an

agreement through direct negotiation by their representatives.

- May lead to more protracted industrial disputes if an agreement cannot be

reached.

• Conciliation – Occurs when a third party or conciliator/mediator (usually an industrial

tribunal) tries to get the conflicting parties in a dispute to an agreement.

- If achieved, the agreement is usually legally binding.

• Arbitration – Occurs when a third part (arbitrator) makes a legally binding decision

on the parties to a dispute.

- Employees and employers must adhere to the solution applied by the Fair

Work Commission; however, this kind of dispute resolution is extremely rare.

Number of conditions apply to streamline the dispute resolution process:

• Compulsory Dispute Settlement Terms: Requires any industrial agreements

include terms about how a dispute will be resolved if one arise.

• Bargaining in good faith: Sets rules about how employees and employers can

conduct themselves when at the negotiating table attempting to resolve a dispute →

consider ground rules.

• Resolving Industrial Action: On rare occasions the Fair Work Commission may

suspend or terminate industrial action if it believes there is threat of significant harm

to the economy, the population, or any other party.

• Arguments for and against the use of centralised, decentralised, and individualised

methods of determining employment contracts.

The shift to a decentralised industrial relations system has contributed to Australia’s

economic outcomes:

• Wages growth and inflation have been consistent and large wage increase have

been confined to industry sectors and occupations.

• Australia experienced its best sustained productivity growth performance during the

1990s, as enterprise agreements eliminated old, outdates work practices.

• Australia has experienced lower unemployment with rising wages and productivity

since the early 1990s despite minimum wage being higher in Australia than other

countries.

• The labour market has proven to be flexible during economic crises, controlling

unemployment through decreased work hours or reducing wage increases.

• Workers with greater skill and belong to stronger unions tend to receive larger wage

increased under enterprise agreements.

Centralised Wage Determination – A centralised labour market outcome are primarily

determined by a government or government appointed tribunal such as the Fair Work

Commission, giving employers and employees little enterprise bargaining ability.

Advantages Disadvantages

• Government has greater control over wages which helps the management of the economy.

• Institutionalised inflation by largely ignoring the importance of productivity as a wage fixing principle.

• Comparative Wage Justice meaning that there were regular costs of living adjustments made into award wages to protect low income earners and low bargaining power.

• Large industrial disputes as many trade unions also made ‘ambit’ claims for wage increases which were unrealistic and pushed up wage expectations. → ‘Leap frogging’ if one union was successful in gaining an increase, other unions will increase their claims. May lead to wage price spiral.

• Creates certainty for wage earners, because wages were adjusted regularly without workers resorting to industrial action.

• Less flexibility in how organisations could use employer’s relations to meet their needs

Decentralised Wage Determination

Advantages Disadvantages

• More flexible in operation and leads to efficient allocation of resources & thus assists structural change.

• Market determines wage outcomes based on worker’s productivity and skills which can lead to a widening of wage and income inequality.

• Reduces the likelihood of cost-push inflation.

• Government has less control thus more vulnerable to wage-push inflation.

• Provides a greater incentive for employees to undertake skills training and education to earn higher wages.

• Greater industrial disputes during periods of wage negotiation, if agreement cannot be reached between conflicting parties.

• Increase flexibility in terms of employment contracts → enterprise agreement to argue for certain employment conditions.

• Greater inequality through increased ‘wage dispersion’ between skilled and unskilled workers.

Similarities:

• Both systems determine conditions of employment and wages

• Both use awards

• Government still sets the minimum wage

Individual Wage Determination – Individual bargaining through common law contracts.

Advantages Disadvantages

• Flexibility for employees and employers.

• Low skilled workers with low bargaining power have a risk of receiving below minimum wages and working conditions if a safety net of legally enforceable minimum standards is weak or absent.

• Opportunity for highly skilled and qualified workers to earn higher incomes.

Education, training, and employment contracts

• Governments influence labour market outcomes through their policies relating to

education, training, apprenticeships, social security, and employment services.

• These policies address supply by aiming to increase participation in the workforce

and improve the productivity of the workforce.

Education and Training Programs:

• 2018-19 Budget: Delivering the $24bn ‘Quality Schools Package’ to ensure

genuine needs-based funding for Australian schools to achieved the best outcome

for all Students.

- Provide $28.2m to expand access to sub-bachelor programs in regional

areas and $14m to fund additional places for bachelor students.

- $440m to extend National Partnership Agreement on Universal Access to

Early childhood education.

• 2016-17 Budget: Additional $1.2bn funding for schools and job placements over 4

years to increase opportunity to work in the labour force.

- $33.6bn in recurrent and capital funding programmes provided by the

Department of Education and Training.

• 2015-16 Budget: $31.8bn by the Department of Education for schools, tertiary

education, vocational training, and student assistance.

- Higher Education Loan Programme (HELP)

- Growing jobs & small business packages + additional $1.48bn to vocational

training (i.e. TAFE courses).

• 2014-15 Budget: $9.8bn over 6yrs school funding commitment including

investment in facilities such as training centres and computers for senior students.

Benefits:

1. Increased Labour productivity due to improvements in skills.

2. Increased flexibility of workers resulting from a broad education in all area which

makes employees more employable thus improving allocative efficiency.

3. Reduced industrial disputes.

National and global context for environmental management

• Regulations

Regulations – Laws or rules that govern economic behaviour

• They may prohibit a person’s actions that causes environmental damage, or specific

how a good or service is produced or consumed (such as rules relating to agricultural

or mining techniques).

• Regulations can impose requirements that the quantity of goods meet environmental

standards.

- For example, the Fuel Quality Standards Act 2000 regulated the quality of

fuel for Australia, and aims to reduce the levels of pollutants and emissions

from fuels that may cause environmental and health problems.

• Regulations can require firms and individuals to follow certain environmental

procedures.

- For example, the Environmental Protection and Biodiversity Conservation Act

provides framework for the protection and management of the national

environmental matters such as the protection of World and National Heritage

sites, Commonwealth marine areas, and nationally threatened species.

• Market-based policies

Market-based policies – Refers to policies that involve financial incentives (subsidies) or

disincentives (taxes) to influence the behaviour of household and businesses.

Taxes

• Government imposes 5c/L levy on new oil to assist with the recycling of old oil.

• Australia’s revenue from environmental taxes is at 6%.

Subsidy

• Governments can provide subsidies to consumers or producers to reduce the

production costs and encourage production of environmental beneficial goods and

services.

- For example, the government’s Solar Towns Programme committed $2.1

million in funding from 2014 to 2017 to subsidies the installation of renewable

energy systems, such as solar panels or solar hot water on existing

community buildings.

- Clean Energy Future Plan – Funding of $330m on the Low Carbon

Communities Programs which subsidises the installation of solar hot water

services and provide ways for small businesses to improve energy efficiency.

• Targets

Targets – Refers to certain statistical goals that the government aims to reach/achieve.

• The government uses many targets to guide environmental policies.

- For example, Renewable Energy Target (RET) is a legal obligation of

sourcing 20% of Australia’s electricity supply from renewable energy sources

such as solar and wind by 2020

• Emission Reduction Target, 26-28% of 2005 levels by 2020.

• International Agreements

International Agreements – Collective action is required to address global pollution issues.

• Environmental policies require international cooperation to be successful.

• Individual nations may be reluctant to impose strict environmental management

policies if other nationals are unwilling to do the same.

• International agreements are required to prevent overuse of common international

resources, called the tragedy of the commons.

- For example, Australia is a signatory to the United Nations Fish Stocks

Agreement was developed to ensure the long-term conservation and

sustainable use of highly migratory fish stocks.

• Montreal Protocol

- The depletion of the ozone layer is related to the emissions of

chlorofluorocarbons in the atmosphere from industry refrigeration units and

aerosols, and the Montreal protocol successfully phased out the production

of many ozone depleting products.

• Kyoto Protocol

- Aimed to limit emissions of carbon dioxide and other greenhouse gasses.

- Requires industrialised countries to set international binding emission

reduction targets.

- Expired in 2012

Australia participated in international agreements such as:

• CITIES Conventions 1976 for protection of endangered species

• Vienna Convention 1987 for protection of Ozone Layer

• Stockholm Conventions 2004 addresses issue of pollution

Limitations of economic policies

Time lags

• Policy lags are the length of time that passes between a change in the

stance of an economic policy and its effect on real economic activity and

behaviour.

Implementation time lag

Monetary

• The RBA meet on the first Tuesday of each month. Once the decision is

announced, it has an immediate effect on the cash rate.

Fiscal

• The process of developing each year’s budget starts early in the year and is

finalised in May.

• It can take several months for budget legislation to pass through parliament.

• Most spending and revenue changes need to go through a complex process of

budget committee meetings before being approved.

Microeconomic Reforms

• Microeconomic policies can take a long period of time because of extensive

planning and detail that is involved.

• The price on carbon emissions took was implemented 4 years after 2008

because the government needed to finalise the policy and then achieve majority

support in parliament.

• Many bigger issues require the support of the six states and two territory

governments including reforming school funding and introducing a National

Disability Scheme.

Impact time lag

Monetary

• Changes in the level of interest rates take time to feed through changes in

borrowing and savings behaviours of consumers and businesses.

• It is difficult for the RBA to make the right adjustments to monetary policy

because it needs to take into account the anticipate level of inflation and other

economic conditions in a year-18 month.

• In 2015, the RBA reduced the cash rate even though underlying measures of

inflation were still in the 2-3% range because it was anticipating the likelihood

inflation falling over the following months (and it happened).

• In 2010, the RBA raised interest rates even though inflation was below target

range.

Fiscal

• Changes can have a quick effect on economic activity.

• A tax reduction can immediately affect income levels or prices, and an increase in

government spending can immediately boost aggregate demand.

• This is why fiscal policy is the most effective during a downtown.

• Expansionary fiscal policy was used after the GFC.

Microeconomic

• The full effects of structural change can take several years to become apparent as

resources are reallocated form one sector to another within the economy, and those

changes are felt in terms of costs, business profits, export growth and productivity.

• It can be difficult to accurately measure the impact of microeconomic policies as

several of them might be implemented at the same time and it may be hard to

distinguish the impacts of one reform form another.

Global influences

• Changes in the international and regional business cycles have impacts on output &

trade; investment and financial flows; confidence and expectations in world financial

markets.

• Globalisation leading to a greater level of economic integration results in great

chances of transmission of changes in world economic activity → ‘contagion effect’

as seen during the GFC.

• Global Financial Deregulation leads to mobile capital flows in world financial markets,

however, changes in investor sentiments may cause a loss of confidence in

government policy responses.

• World economic policies such as multilateral agreements, WTO, APEC

- Decisions of the G7 and G20 can influence the domestic macroeconomic

policies of small countries like Australia as there is a limited scope to adopt

different macroeconomic policies that are adopted in major industrialised

economies

International Business Cycle

• May restrict policy making within individual countries depending on growth relative to

international conditions

- For example, if domestic growth is faster than global economy, imports will

be greater than exports resulting in a substantial increase in CAD → tighter

fiscal and monetary policy to address this

Global Interest Rates

• Influences the conduct of monetary policy

- Higher interest rate = higher potential return for investors

Political constrains

• In Australia, a major political party must firstly win enough public support for its policy

platform at a federal election to form a federal government.

• Governments tends to have short-run policies rather than more controversial long-

run policies. Abbott and his controversial changes to social welfare in the 2014-15

budget.

• New legislation must be introduced by the govt. as a bill passed through both

houses of parliament to become law.

• Australia has a 3-year policy cycle because MER takes a long time to implement.

Prime Minister Party Term of Office

Kevin Rudd Labour 2007-2010

Julia Gillard Labour 2010-2013

Kevin Rudd Labour 2013

Tony Abbott Liberal 2013-2015

Malcolm Turnbull Liberal 2015-2018

Scott Morrison Liberal 2018-Presend

Approval Process

• Must receive majority of votes in both the House of Representative and the Senate.

• Since 2013, passing legislation through the senate has become more complex due

to an increased number of independent and minor party senators.

- For example, in 2009 the Carbon Pollution Reduction Scheme (CPRS) was

not passed by the Senate where the bill was opposed by the Greens,

Independents, and Opposition parties.

- Another example: Opposition of the Abbott government experienced in

having unpopular measures in its May 2014 budget passed by the senate

where it did not have a majority.

Policy responses and their effects in dealing with the economic objectives

• Macroeconomic policies have aimed to achieve the maximum sustainable rate of

economic growth (3-4%) which requires a balance the objectives of stronger growth,

lower unemployment, maintaining inflation within the 2-3% target, and a smaller

current account deficit.

• Microeconomic policies have aimed to improve the productivity and competitiveness

to achieve a higher level of economic growth over a longer term.

• In comparison to similar economic, Australia has achieved a higher level of growth

and lower unemployment, whilst sustaining a low inflation rate and didn’t have to

sacrifice any of these to achieve the other.

• Australia has a consistently high rating on international comparative measures.

- HDI: ranked 2nd in 2016

- Global wealth report: ranked 2nd in 2016

- Prosperity index: ranked 6th

• Australia has benefited from relatively favourable economic circumstances including

the rapid growth in Chinese economy increased global commodity prices

significantly. Contributing to Australia’s increased TOT which added 13% to real per

capita household disposable income and raised real wages by 6%.

Economic growth and quality of life

• Australia recorded 25 years of consecutive economic growth between 1990-91 and

2016.

• Relative stability and moderate growth compared with the previous two decades.

• Successful macroeconomic policy stimulus and resilience of commodity prices

supported export revenue.

• With the commodities boom ending, Australia needs stronger productivity growth to

maintain success.

Full employment

• In 2016, 5.7% in Australia, 6.3% OECD average

• A steady underemployed rate of 8.7% reflects a structural problem that is greater in

Australia than in many other countries due to our high level of part-time and casual

jobs.

Price stability

• Australia’s inflation record has been outstanding.

• Annually 1.3% in 2016, average of 8% in the 1980s.

• Monetary policy, lowered tariff barriers, increased competition across many industry

sectors, price reductions resulting from new technologies, cheaper imports, moderate

wage outcomes and a period of strong productivity have contributed to a lower

sustained inflation rate.

• Australia has been more successful in controlling inflationary pressures than in

previous resources booms despite rising cost pressures and capacity constraints.

External stability

• CAD was 4.3% of GDP in 2015, 2.7% in 2016, CAD improved.

• Australia is heavily reliant on commodity exports, and a constant inflow of overseas

borrowing, which require high surviving costs and an increased primary income

deficit and an increased CAD.

• Australia’s primary income deficit has been constantly decreasing since 2011.

• Australia has one of the highest foreign debts compared to most major economies.

Distribution of income

• Australia has a high level of inequality in its distribution of income and wealth

compared to other advanced economies.

• While income levels for poorer socioeconomic groups have been boosted by rising

government benefits, and Australia has a lower unemployment rate, the incomes for

higher income groups have generally grown at a faster rate.

Environmental sustainability

• Australia has a poor record in preserving biodiversity, protecting natural

environments, managing scarce water resources, overusing agricultural land, and

adjusting to climate change.

• Australia is more vulnerable to climate change than most advanced economies

because of its exposure to drought and natural disasters.

• Australia faces challenges to reducing its carbon emissions because it currently

emits more greenhouse gasses per capita than any other OECD country, and it is

heavily reliant on carbon-intensive fossil fuels for both energy generation and export

income.