Economics HSC Topic 4 – Economic Policies and ManagementEconomics objectives in relation to: Economic growth and quality of life: aim of sustainable rates that are non-inflationary and resource efficient, 3-4%. Full employment: Approach NAIRU, full use of resources maximises capacity to produce and minimises the adverse economic and social problem of unemployment Price Stability: inflation at 2-3% on average over the economic cycle as high inflation reduces value of income, competitiveness, and causes uncertainty and loss of confidence External Stability: Meeting long term financial obligations to rest of world in terms of a sustainable current account, confidence in economy seen in $AU, sustainable foreign debt as by debt-servicing ratio( percentage of expose revenue that is spent on interest payments) Environmental sustainability: Economic growth creates negative externalities on environment but increased focus has been made since recognition of long term prosperity related to environmental challenges. Distribution of income: Promoting fair distribution of income as free market can produce unfair outcomes for those without opportunities.Potential conflicts among objectives: Inflation and unemployment, seen in Phillips.High AD less UE but higher prices. Since ’93 policy chosen low inflation targets over unemployment. Economic growth and external balance, in that strong growth can deteriorate current account as o/s inv rises and profit goes o/s, “balance of payments constraint” Economic Growth and Environment Economic growth and inequality of income distribution (privatisation and microeconomic policy leads to UEMacroeconomic Policies Macroeconomic policies have an impact on the overall level of economic activity. These policies tend to influence the level of aggregate demand in the economy. The main role of macroeconomic policy is to stabilise large fluctuations in the business cycle.Fiscal Policy Federal Government budgets and budget outcomesFiscal policy is a macroeconomic policy that implements government spending, taxation and thebudget outcome to achieve management of the economy. The budget shows the governmentsplanned expenditure and revenue for the next financial year. Three possible outcomes: a surplus, adeficit, or a balanced budget. Discretionary changes in fiscal policy are those that are deliberate influencing the structural component of the budget outcome. Non-discretionary changes in fiscal policy involve changes in revenue and expenditure caused by changes in the level of economic activity.
Automatic Stabilisers are policy instruments in the budget that counterbalance economic activity: Unemployment benefits Progressive income tax system Effects of budgetary changes on:Resource Use: May directly impact resource use by spending in particular areas of the economy orindirectly by specific taxing and spending policies to influence market decisions.Income Distribution: Increasing income tax for high income earners and increasing welfare paymentsEconomic Activity: Expansionary, contractionary or neutral stance to influence consumption andinvestment, influencing economic activity. Methods of financing deficits Borrowing from the private sector: Government borrows from private sector by selling Treasury Bonds under a tender system in which it sets the value according to the deficit. However the “crowding out effect” will reduce funds in Australia’s domestic savings, putting upward pressure on interest rates and leading to a reduction in private sector spending and investment. Borrowing from overseas: These inflows of funds will directly lead to an increase in Australia’s foreign liabilities. This will raise the net primary income deficit as the higher level of foreign liabilities is serviced with higher interest repayments. Borrowing from the Reserve Bank (Monetary Financing): This effectively involves the RBA printing money for the government to use to finance its expenditures. Printing additional money has the effect of raising the supply of money in Australia and hence causes inflation. Selling Assets: Selling such assets does not reduce the level of fiscal deficit but in effect allows for the government to borrow less in order to finance the deficit. Uses of a surplus Repay any government overseas loans, reducing net external debt To fund government expenditure on infrastructure and the purchase of assets Depositing funds with the Reserve Bank, earning low rates of interest Using it to pay off public sector debt Placing money in specially established, government-owned investment fundsMonetary Policy Purpose of monetary policy: Involves action by the Reserve Bank to influence the cost and availability of money in the economy. The RBA aims for stability of Australia’s currency by maintaining low inflation, reducing the level of unemployment and promoting a sustained level of economic growth. Aims for inflation of 2-3% on average over the economic cycle. Implementation of monetary policy by the RBAThe RBA uses Domestic Market Operations to conduct monetary policy. These are actions be the RBin the short term money market to buy and sell Commonwealth Government securities in order toinfluence the cash rate. As an increase in the cash market means it’s more expensive for financialintuitions to obtain funds in the short term money market, they will increase the general rate ofinterest for their customers to account for these payments. Similarly a reduction in cash rate willinfluence a reduction in the general interest rates.
Impact of changes in interest rats on economic activity and the exchange rateThe RBA can either tighten monetary policy, high interest rates deters consumption and investment,dampening economic growth, or loosen monetary policy, low interest rates means higherconsumption and investment increasing the level of economic activity.Higher interest rates will attract more foreign savings, which must be converted into $A. This willincrease the demand for $A and put upward pressure on the exchange rate causing an appreciation.Microeconomic policiesSEE SHEET (microeconomic policies)Labour Market PoliciesSEE SHEET (labour market policies)SEE SHEET (Dispute resolution)Decentralisation of the labour market refers to movements towards a labour market system wheredeterminations of wage outcomes are made at an enterprise or workplace level, with a more limitedrole for industrial tribunals. -------------------Centralisation -----------------------------------------Decentralisation --------------------Single national wage Awards with wages set Enterprise bargaining Individual Contractscase for all employees on an industry or occupational basisArguments in favour of Decentralisation Arguments against Decentralisation Efficient allocation of resources and Lead to greater inequality through increased structural change. Firms that are more “Wage dispersion”. This is because those efficient can afford to pay more and workers with larger bargaining power can therefore attract higher skilled workers receive higher wages Promote productivity since it gives May not be able to prevent the emergence of employees the incentive to work harder wage-push inflation when economic growth is due to direct rewards for productivity strong and the labour market is close to full Helps assist labour market adjust when employment the economy is affected by negative Centralised wage determination can be used by shocks, helping keep unemployment government as tool to achieve economic rate lower objectivesEducation and training programsGovernments can influence labour market outcomes through their policies relating to education andtraining, apprenticeships, welfare benefits and employment services. Education and training: A high performing education system should mean that when students join the workforce they have a higher level of productivity and reduced risk of unemployment. Increased early childhood programs, strengtheningliteracy and numeracy skills, investment in school facilities and computers, increasing training places, Skills Australia, Labour market programs: Help place unemployed people into jobs. Job Service Australia, imposing job seeking requirements on welfare recipients, Paid Parental leave.
National and global context for environmental managementSEE SHEET (Environmental management policies)Limitations of economic policies Time LagsPolicy Implementation time lag Impact time lagFiscal Medium term (annual budget) Short term (few months)Monetary Short term (monthly RBA) Medium term (6-18 months)Microeconomic reform Long term (few years) Long term (up to 20 years) Global influencesAs the Australian economy has become more integrated with the global economy, global factorshave become a greater constraint on economic policy .Australian government is now constrained bythe potential impact of policy on financial markets and in addition may voluntarily accept constraintson their own economic policy in order to win concessions from other nations, such as through tradeagreements.In a global environment in which exchange rates and economics are vulnerable tosudden shifts in financial flows, governments place a high priority on maintaining the confidence ofinternational investors and global financial markets. Global financial flows and interest rates mayaffect monetary policy in Australia. Finally international organisations influence domestic policies.The WTO enforces individual trade policies. Political constraintsBefore a government implements a policy they must be sensitive to whether the policy is likely tohave public support as well as the support of their own political party, and by other stakeholders,including influential business or union groups who contribute to campaign funds. The three yearpolitical cyal means governments often only implement short term policies as this will enable themto be in a better position to be re-elected.