Australia's Economy Over The Last Two Years - Essay Example

?(b) Macroeconomic policies include different rules and regulations, which the government of a country sets with the sole intention of having controlover the economy (Economic Times 2013). The indicators of an economy, which are influenced by macroeconomic policies involve the aspects of money supply, unemployment rate, national income, inflation, interest rate, and growth rate, among many others. In Australia, the Australian government and the Reserve Bank of Australia play a major role in the country’s economics, as these determine the macroeconomic policies in the country. According to the International Labour Organization (2013), a microeconomic policy that is aimed at achieving economic stability in a country, is a paramount condition for the achievement and sustenance of high levels of development tin a country. Nonetheless, this part of the essay explores the main macroeconomic policies used by the Australian Government and the Reserve Bank of Australia over the last two years. There are two core macroeconomic policies, which a country can use, and these include the monetary and the fiscal policy. Nonetheless, the Australian government and the Reserve Bank of Australia have in the past two years, used these to control the economy. Fiscal policy in Australia includes the level and composition of government revenues and outlays, methods of financing a budget deficit or using a budget surplus, the operation of automatic and discretionary stabilizers, and the provision of incentives to increase aggregate supply. According to Parkinson (2012), a major function of Australia’s fiscal policy is to ensure the maintenance of fiscal sustainability from a medium-term perspective. Parkinson (2012) also notes that monetary policy in Australia has the main purpose of maintaining inflation between 2 and 3 percent. The monetary policy in Australia has to do with the Reserve Bank of Australia interest rate, as well as the exchange rate policies, and transmission mechanisms. This serves to anchor inflation expectations, and has the responsibility of managing demand. This is with the aim of ensuring that the country’s economy remains on a stable path of growth, and maintains a low rate of inflation. Therefore, monetary policy and fiscal policy, as well as exchange rate, are three core aspects of Australia’s macroeconomic framework, which have been extremely important for the past two years, as these have provided a great level of flexibility for the country to deal with economic shocks that it experiences from time to time. Parkinson (2012) notes that the Australian macroeconomic policy framework is an asset and an endowment to the country, as it forms a core part of the country’s productive base. Nonetheless, for the past two years, these have been effective in ensuring that Australia addresses its economic problems, and the Australian government achieves its economic objectives. The Reserve Bank of Australia deals with all the issues pertaining the monetary policy. Nonetheless, a major aspect of the monetary policy, which the Reserve Bank of Australia utilizes is the interest rate. This interest rate influences differently other interest rates in the economy, so that the borrowers and lenders in the money markets come under the influence of the monetary policy. The Reserve Bank of Australia controls the interest rates in a manner that will ensure that the objectives of the Reserve Bank Act 1959 are attained. These include, and are not limited to ensuring a stable currency of the country, preventing unemployment, boosting living standards of citizens, and ensuring economic empowerment of the people (Reserve Bank of Australia 2013). In order to ease or loosen bonds, the Reserve Bank of Australia would buy bonds in order to create excess liquidity, putting downward pressure on interest rates, allowing increased consumer and investment spending, and finally lower the rate of unemployment. Similarly, when there is a possibility of the rate of inflation to increase, the Reserve Bank of Australia will consequently restrict the monetary policy. This is through selling of bonds, soaking up funds, and therefore, increasing the interest rates to control spending by consumers and investors. Nonetheless, the Reserve Bank of Australia continually tightens and loosens the monetary policy in order to prevent inflation from exceeding the 2-3% limit (Nguyen n.d). Fiscal policy in Australia involves the use of the government budget in order to influence the economic objectives by varying the amount of the government spending and revenue, in turn altering the level of economic activity, with a fiscal surplus, fiscal deficit, or a balanced budget (Nguyen n.d). A correlation exists between the budget and the economy, as one affects the other. Two major components, including the cyclical and structural components, influence the process of developing a budget. In the cyclical component, automatic stabilizers such as tax receipts, as well as government spending through transfer payments adjust to the economy. On the other hand, under the structural component, discretionary and proposed changes by the government alter economic activity purposefully. In order to stimulate economic growth, the government uses the expansionary fiscal stance, which includes increased government spending and reduced taxation, which lead to increased consumption and spending. Similarly, the use of the contractionary fiscal stance by the government, serves the role of controlling economic growth, such that the growth is slowed. Australia’s 2012-2013 Budget (see Table 2 in the appendices) provides an increase in taxes of $ 39 billion, and a reduction in expenditures of $ 7billion. This has reduced demand in the past two years by approximately 2% (Weber 2012). This therefore, is a strongly contractionary fiscal stance employed by the government, in order to slow economic growth. According to Weber (2012), the possible reason as to why the Australian government has used the fiscal policy in the past few years was to address the effects of the global financial crisis. This is also partly because Australia has a small government debt, as compared to other countries. This stands at less than 10% of the GDP, as compared to the United States’ 70%. In order for fiscal policy to be termed sustainable, the public debt should not increase relative to the GDP. However, it is permitted for the government debt ratio to increase during an economic contraction, but this must be adjusted after economic recovery. In Table 1 (refer to appendices), the government debt ratio increased in 2011-2012, and peaked at 9.6%. In the previous years, and before the global financial crisis, the government of Australia was a creditor, and not a debtor (Weber 2012). Therefore, the table proves that the fiscal stimulus was implemented by increasing government expenditures, and this led to increased taxes. Nonetheless, this is expected to improve by 2015-16, where the government debt ratio will fall from 9.6% to 7.3%. This is mainly because it is expected that in future, Australia will experience a high level of economic growth. Appendices Works Cited International Labour Organization 2013, “Macroeconomic policies and development,” Accessed 5 November 2013 < http://www.ilo.org/empelm/areas/macroeconomic-policies/lang--en/index.htm> Nguyen, D n.d, “Macroeconomic Policy in Australia,” Accessed 5 November, 2013 < http://www.kewpid.net/notes/macro_reform.pdf> Parkinson, M 2012, “Macroeconomic Policy For Changing Circumstances: Annual post-Budget address to the Australian Business Economists,” The Australian Government, The Treasury, Accessed 5 November 2013 < http://www.treasury.gov.au/PublicationsAndMedia/Speeches/2012/Post-Budget-ABE > Reserve Bank of Australia (2013). Monetary Policy. Accessed 5 November 2013 The Economic Times (2013). Macroeconomic Policy. Retrieved from Weber, E. J 2012, “Australian Fiscal Policy In The Aftermath Of The Global Financial Crisis,” University of Western Australia, Accessed 5 November, 2013 < Read More