Download economic policies and management

ECONOMIC POLICIES AND
MANAGEMENT
THE OBJECTIVES OF ECONOMIC POLICY
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In managing an economy, governments can choose to pursue a range of policy
aims and often the priorities of government policy change over time
The major objectives of economic management occur in the following three
ways:
o Economic growth
o Internal balance (price stability and full employment)
o External balance (CAD, FL, exchange rate stable)
THE OBJECTIVES OF ECONOMIC MANAGEMENT
ECONOMIC GROWTH
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Economic growth- occurs when there is a sustained increase in a country’s
productive capacity over time, commonly measured by the percentage increase
in GDP (real)
Real GDP- the total value of all final G/S produced in an economy over a
period of time, adjusted for changes in prices (inflation)
Economic growth offers the benefits of
o Increased standard of living
o Improved job prospects for the labour force
o Increased investment in infrastructure and public services through
higher GR
FULL EMPLOYMENT
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Full employment- occurs when it is no longer possible to achieve a sustained
reduction in un-n through stronger economic growth
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Full employment involves the full use of resources but economists generally
interpret this as full employment of labour
Full employment means that the economy is at the natural rate of un-n, the
level remaining after elimination of cyclical un-n
The govt can reduce un-n to the natural rate through macroeconomic policies
to reduce cyclical or microeconomic reform to reduce the natural rate in
general
Full employment has the benefits of
o Maximising the economy’s ability to produce
o Increasing living standards
o Minimizing adverse socio-economic problems due to un-n
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PRICE STABILITY
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Price stability- a goal of government economic policy seeking to restrain the
growth rate of inflation to a sustainable level which will not distort economic
activity
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Price stability in Aus refers to the inflation target of an average of 2-3% over
the course of the business cycle
Inflation may cause
o Reduction in the value of income and wealth
o Reduction in intnl competitiveness
o Depreciation of the $A
o Create uncertainty and distort economic decisions
o Distort pattern of resource allocation via speculation in unproductive
activities and discouraging savings and investment
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EXTERNAL STABILITY
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External stability- an aim of govt policy that seeks to promote sustainability on
the external accounts so that Australia can service its foreign liabilities in the
medium to long run and avoid currency volatility
Debt servicing ratio- the proportion of export revenue that is used to make
repayments on foreign debt, and is a common measure of the sustainability of
debt
There are three elements to external stability
o Achieving a sustainable position on the current account, to keep any
deficit in the balance of payments at a level low enough not to have
adverse effects
o Maintaining intnl confidence in the value of the $A
o Maintaining an acceptable level of foreign debt which is kept at a level
where an economy can afford to make interest payments as measured
by the debt servicing ratio
DISTRIBUTION OF INCOME AND WEALTH
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AN overall objective of government policy is to create a fairer distribution of
income and wealth in the economy
Govts don’t aim to remove all inequality, it is generally accepted that societies
should make provision for the needs of people ho aren’t able to provide for
themselves
Govt policy aims to reduce some of the gap between higher and lower income
earners through redistribution policy
In recent years, govts have tended to give a lower priority to reducing
inequality and focusing on those policies which hep achieve economic growth
i.e. low inflation, sustained growth, increased savings, lower un-n, sustainable
CAD etc
ENVIRONMENTAL MANAGEMENT
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Environmental management is concerned with achieving an ecologically
sustainable level of economic growth
There are significant environmental problems in terms of greenhouse gas,
depletion of natural resources and pollution etc
THE GOALS OF GOVERNMENT POLICY IN 2006
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The main aims of economic policy haven’t changed much over the past
decade. They include
o Maintaining a sustainable level of economic growth in the short to
medium term
o Keeping inflation low within the sustainable target range
o Increasing the sustainable rate of economic growth in the longer term
o Achieving a sustained reduction in un-n
o Increasing the level of national savings
o Boosting Australia’s productivity growth
o Improving Australia’s intnl competitiveness
o Maintaining intnl confidence in the economy
MAINTAINING A SUSTAINABLE LEVEL OF ECONOMIC GROWTH IN THE
SHORT TO MEDIUM TERM
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Due to structural problems, there is a limit on the level of growth that
Australia can sustain in the short to medium term due to increased CAD,
inflation or un-n due to slower economic growth
The sustainable level of economic growth is considered to be 3-4%
KEEPING INFLATION LOW, WITHIN THE RANGE OF 2-3%
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The govt and the RBA are formally committed to keeping inflation within the
target range of 2-3% over the course of the business cycle
Low inflation will improve intnl competitiveness, lower interest rates, foster
investment and encourage higher savings
INCREASING THE SUSTAINABLE RATE OF ECONOMIC GROWTH IN THE
LONG TERM
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Australia can achieve a higher rate of economic growth by removing
constraints on economic growth such as slow productivity growth and low
domestic savings level
In coming years sustaining productivity will become more important with an
ageing population, which affects the participation rate and economic growth.
Australia’s long term growth rate is expected to fall from 3.5% to 3.25% each
year from 2008-09 onwards
ACHIEVING A SUSTAINED REDUCTION IN UN-N
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Un-n and underemployment is a structural problem which the govt has
committed to create job growth through lifting sustainable rate of economic
growth and flexibility
INCREASING THE LEVEL OF NATIONAL SAVINGS
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Low levels of structural savings is a contributor to the CAD
The govt has ventured to reduce this by increasing public (budget surplus) and
private (compulsory super) savings
BOOSTING AUSTRALIA’S PRODUCTIVITY GROWTH
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Productivity growth is essential for improved longer term economic growth
Australia’s productivity growth has slowed considerably but labour market
policies and other structural changes are aimed at increasing labour market
flexibility from increased productivity
IMPROVING AUS’S INTNL COMPETITIVENESS
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A crucial part of improving trade performance is to increase competitiveness
in world markets through reducing costs, improving quality of products and
access to these markets
MAINTAINING INTNL CONFIDENCE IN THE ECONOMY
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It is important for the economy to maintain confidence of intnl financial
markets
In making key economic policy decisions, Aus govts must account for the
reaction of intnl financial markets to new or changing policies. This is because
they can react negatively causing a depreciation in the $A
CONFLICTS IN GOVT POLICY OBJECTIVES
ACHIEVING A SIMULTANEOUS REDUCTION IN UN-N AND INFLATION
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The govt faces a trade off b/w lower un-n and inflation in the short to medium
term i.e. demand up, employment up (un-n down), inflation up OR demand
down, employment down (un-n up) and inflation down
This inverse relationship is shown by the Phillips curve
THE PHILLIPS CURVE
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Stagflation- occurs when the rate of inflation and the rate of un-n rise
simultaneously
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NZ economist A.W Phillips developed the Phillips curve in the 1950’s
The Phillips curve shows the inverse relationship between un-n inflation
The % level of un-n is on horizontal axis, the rate of inflation on the vertical
The Phillips curve is labelled PP
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The Phillips curve shows the following
o Beyond a given level of un-n prices fall  as curve cuts x axis
o Un-n is never zero (there is natural rate)  exponential graph (as
approaching y axis)
o Each point on the PP represents a combination of inflation and un-n
o The PP slopes downward from left to right  inverse relationship
The PP shows that the objectives of full employment ad price stability cannot
be achieved simultaneously
The inverse relationship broke down in the 1970’s and 1980’s when
stagflation occurred. It was concluded that in these times the PP had shifted to
the right, so any trade off occurred at a higher level
The Friedman-Phelps expectations formulated a theory which explained the
shifts in the PP, differentiating between short- run and long-run PP
In reference to the short term
o Changes in inflationary expectations shift the short run PP. Inflation
expectations increase  PP to the right and vice versa
o There is a short run trade off between inflation and un-n
In reference to the long-term
o PP is a vertical line  Cuts the horizontal axis at the natural rate of unn
o In the long run there is no trade off if un-n is attempted to be
lowered than the natural rate inflation rises
ACHIEVING ECONOMIC GROWTH AND EXTERNAL BALANCE
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The govt also faces the challenge of a conflict b/w economic growth and
external balance
Strong economic growth results in a deterioration in the CAD via higher
imports
This is known as the BP constraint i.e. the limitation on the rate of growth
because of the impact of such growth on the CAD
OTHER CONFLICTS IN OBJECTIVES
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The pursuit of economic growth can come at the cost of environmental
damage and increased inequality
o Environmental- extensive mining products for increased economic
growth affects the natural environment and may affect other industries
o Inequality- policies which encourage faster growth which have
negative social effects-companies raise prices, micro reform cause
structural un-n- worsens inequality
Environmental preservation and equality are long-term policy challenges
There are also conflicts in short and long term goals because many long-term
goals are achieved with structural change, which have negative short-term
impacts. Thus, govts may focus on short term goals for political motivation
rather than long-term benefits
ECONOMIC POLICIES AVAILABLE TO THE GOVT
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The federal govt may use
o Macroeconomic policies- impact on the level of economic activity, by
influencing the level of demand
o Microeconomic policies- aim to improve the productivity and
efficiency of firms, industries and markets in the economy, which
influence supply
The govt uses a combination of these two types of policy to achieve its
economic policy objectives effectively and correct short and long term
problems
MACROECONOMIC POLICY
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Macroeconomic policy- policies that affect the economy as a whole with the
aim of minimising fluctuations in the business cycle. Also referred to as
demand management or counter cyclical policies
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The main role of macroeconomic policy is to manage the business cycle,
smoothing out the boom-bust fluctuations
The govt uses macroeconomic policies to achieve low inflation, low un-n,
economic growth and external balance
Macroeconomic policies are counter-cyclical as they stabilise economic
growth by smoothing out peaks and troughs of the business cycle
Macroeconomic policy is often used to stimulate or contract the economy in
the short term, but is ineffective in correcting long term problems such as lack
of intnl competitiveness, high foreign debt and low levels of national savings
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MICROECONOMIC POLICY
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Microeconomic policy- policies that are aimed at individual industries,
seeking to improve the efficiency and productivity of producers, also referred
to as supply-side policies
Over recent years there has been a shift towards the use of microeconomic
policies
Microeconomic reform is important to remove the barriers to higher economic
growth i.e. CAD and inflation
FISCAL POLICY
THE MEANING OF FISCAL POLICY
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Fiscal policy- involves the use of the Cwlth govts budget in order to achieve
the govts economic objectives
Budget- an estimate of cwlth govt revenue and expenditure over the next 12
months
By varying the amount of GR and GE, the govt can influence
o The level of economic activity
o Reallocate resources
o Change the pattern of production in the economy
The budget includes all forms of revenue including both direct (income and
company) tax, indirect taxes (customs, excise, GST) and revenue from GBE’s
Expenditure of the cwlth govt involve social welfare, health, eduction, defence
and public administration
BUDGET OUTCOMES
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Budget/fiscal outcome- gives an indication of the overall impact of fiscal
policy on the state of the economy
Underlying Cash outcome- the underlying cash surplus or deficit which
excludes one off factors from the budget outcome e.g. sale of assets
The fiscal outcome- the most accurate long term indicator of fiscal policy
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The types of budget outcome are
o Fiscal surplus- GR> GE
o Fiscal deficit- GE > GR
o Fiscal balance- GE = GR
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The underlying cash outcome is the best indicator of the impact on economic
growth caused by fiscal policy
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The government’s main fiscal policy aim is to achieve fiscal balance on
average over the course of the economic cycle
CHANGES IN BUDGET OUTCOMES
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The realised budget outcome can differ from the estimate because of
o Cyclical changes/ non-discretionary changes changes due to a boom
or recession which affect level of surplus or deficit or completely shift
from one fiscal outcome to another influence the cyclical component
of the budget
o Discretionary changes deliberate changes to fiscal policy
influence the structural component of the budget e.g. increase
expenditure to increase demand
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Un-n benefits and Australia’s progressive income tax system are known as
automatic stabilisers, as they behave counter-cyclically, to smooth out effects
of booms and recessions e.g. in recessions un-n benefits increase and thus
GE up while GR is lower from lower income, thus there will be an injection of
funds to increase activity
THE IMPACT OF CHANGES IN BUDGET OUTCOMES
IMPACT ON ECONOMIC ACTIVITY
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The impact of fiscal policy can be expansionary, Contractionary or neutral
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Expansionary occurs when the govt plans to increase the level of economic
activity within the economy by creating a smaller surplus or a large deficit
which stimulates aggregate demand and the level of economic activity
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Contractionary occurs when the govt is planning on decreasing the level of
economic activity within an economy by creating a smaller deficit or a larger
surplus which reduced aggregate demand and the level of economic activity
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Neutral occurs when the govt plans on maintaining the gap between revenue
and expenditure at around the same level as the previous year with no effect
on the level of economic activity
IMPACT ON RESOURCE USE
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Fiscal policy can influence the use of resources in an economy either directly
or indirectly
o Directly affects resource use through govt spending in an area of the
economy e.g. national highways in various Aus states to speed the
movement of people, goods and resources
o Indirectly indirectly affects resource use via making it more or less
attractive for resources to be used in a particular way e.g. taxes
Govts use direct measures if they expect that markets wont provide resources
quickly enough without govt intervention e.g. emergency situations
Govts use specific spending and tax to result in changes in resource use for
govt objectives e.g. taxes on cigarettes, discourages consumption, lowers costs
to health care system
IMPACT ON INCOME DISTRIBUTION
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Changes in fiscal policy affect the distribution of income in the economy.
Higher incomes pay higher taxation, allowing usage of this money for social
welfare, community services and other types of social expenditure, assisting
people on lower incomes
Changes in income tax rates affect income distribution significantly
o Reductions in income tax rates across the board benefit high income
earners more than low income earners
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o Any attempts to increase GST is regressive and impacts on low income
earners badly
Changes in Govt spending on programs also affect income distribution.
Reductions in spending on community services and other welfare programs
will increase income inequality
IMPACT ON SAVINGS AND THE CAD
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The budget outcome has a significant relationship with the CAD and foreign
debt levels
A budget deficit decreases national savings and increases the size of the public
sector debt, which causes negative savings
When the size of the budget deficit increases, it may crowd out the private
sectors attempts to seek investment within Aus. Thus they must borrow money
from overseas, increasing the size of foreign debt. This will increase the CAD
via interest payments
Fiscal policy has been aimed at a balance over the economic cycle (on
average) to increase the level of national savings and lead to a lower CAD
METHODS OF FINANCING A DEFICIT
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The govt can finance a deficit by
o Borrowing from the domestic private sector
o Borrowing from overseas
o Borrowing from the RBA (printing money)
o Selling assets
In recent times, if a deficit is run, the govt seeks to borrow from the domestic
private sector
FINANCING A DEFICIT (METHODS)
BORROWING FROM THE DOMESTIC SECTOR
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When the govt borrows from the domestic private sector sells treasury
bonds under a tender system sells value of bonds corresponding to deficit
prospective purchasers tender to buy a certain quantity of bonds at a particular
rate of interest starts with lowest and then highest
This offers the advantages of
o The govt can ensure the deficit is always fully financed
o The market will set the interest rate on the newly issued bonds
However, this method of financing can crowd out the private sector in the
finance market as r’s will be forced up, and thus forced to borrow from
overseas
This crowding out will barely occur in the recession as investment and
spending would be low
BORROWING FROM OVERSEAS
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Since the 1980’s the govt hasn’t tended to borrow from overseas to reduce its
share of foreign debt
BORROWING FROM RBA
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If the govts borrowed from the RBA it would print more money, adding to the
money supply and increasing inflation
This hasn’t occurred since 1982
SELLING ASSETS
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Selling assets doesn’t reduce the fiscal deficit or the underlying cash outcome,
as they don’t reflect one-off transactions
However, in cash terms, a govt can create a headline budget surplus by selling
assets
USING BUDGET SURPLUSES
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The budget surplus cam be used by
o Deposit with the RBA reduce money supply, putting pressure on
interest rates public sector debt unchanged
o Uses the money to pay off some of public sector debt reduces the
size of public sector debt, and injects finds back into the economy
increased investment may offset the Contractionary effect of the fiscal
surplus
o Future fund established in 2005-06 accumulates sufficient assets
and continued with budget surplus to offset super liability to cwlth
public servants
PUBLIC SECTOR BORROWING AND DEBT
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Public sector cash outcome- the overall impact of the public sector on the
economy
Public sector cash deficit/ surplus- shows the borrowing needs brought about
by deficits experienced by govts (all levels) and govt authorities
Public sector debt- also known as the national debt, consisting of the
accumulated debt of the govt sector, which is owed both domestically and
overseas
Foreign debt- amount owed by both private and public sector to overseas
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Public sector debt has been reduced via privatisation and budget balance
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THE 2006-07 BUDGET
MAIN FEATURES
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Fiscal surplus --> 10.8 bn
Budget slightly expansionary
Income tax cuts over 4 years--> worth $36.7 bn
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Abolition of tax on super payments to retirees
Spending increased in
o Health
o Family benefits
o Infrastructure
Elimination of net govt debt
THE POLICY MIX IN 06-07
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Fiscal policy has played a less active role in economic outcomes--> minor
support role of reducing foreign debt--> monetary policy manages the
business cycle
Fiscal stance--> mildly expansionary--> commodities boom will add $ 50 bn
to economy and with tax cuts there will be an injected $6.6 bn and spending
also up--> economic growth will double
The underlying cash surplus--> shrinks 0.4 %--> 1.1% of GDP
Channelling so much revenue into spending and tax cuts have resulted in an
expansionary stance
Income tax cuts reflect a policy of returning surpluses when debt is low so as
not to increase the surplus
Spending on microeconomic reform
o Increased investment in national infrastructure
o Increased investment in road and rail
o Tax incentives for private infrastructure investment
o Incentives to increase private savings by reducing super taxes
o Investment in medical research
GOALS OF FISCAL POLICY IN 06-07
SUPPORT ECONOMIC GROWTH THROUGH SLIGHTLY EXPANSIONARY
STANCE
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Short term--> provide mild fiscal stimulus and sustain economic growth
Personal income tax cuts will offset the slowdown in housing and increased oil
prices to stimulate the economy
Policy is designed to not be too expansionary to result in increased r’s
INCREASED WORKFORCE PARTICIPATION
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Aimed to be caused by
o Raising income level; at which the 30% MRT comes in --> incentives
for low income earners to work
o Changes to superannuation--> encourage retirees to participate yet
retain benefits
BOOSTING THE LEVEL OF NATIONAL SAVINGS
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The govts medium aim is to help address the savins shortfall by
o Reducing public call on private savings--> reducing debt and add to
future fund
o Lift national savings--> reducing tax on super
INCREASED SPENDING ON PRIORITY AREAS
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Increased spending in areas such as
o Road and rail infrastructure--> major highways and freight routes
o Childcare and family benefits ‘
o Health and medical research
o National security an defence
o Enviro objectives--> Murray darling
THE 2006-07 BUDGET OUTCOME
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The budget outcome will be a $ 10.8 bn surplus
o Cyclical factors e.g. TOT and commodity prices and from lower un-n
o Structural changes -> govt policy decisions--> income tax cuts etc
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The cyclical factors will add to GR while changes structurally will reduce GR-> mildly expansionary
IMPACTS OF FISCAL POLICY IN 06-07
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Fiscal policy will stimulate economic activity--> economic growth up to
3.25%
Uncertainty due to monetary and fiscal policy moving in opposite directions-> may cause r’s t be put up with inflation already at upper end
Expansionary budget--> offset housing investment weakness and household
consumption--> investment will be down 1% while consumption up 3% but
restrained by oil prices and higher debt servicing costs
Economic growth expected to be fuelled by exports and business investment
as the TOT boom flatten out--> export growth retained by good weather
(rural) and increased quantities from investment
Un-n expected to be steady
Wages growth at 4%
Inflation at 2.75%
Budget doesn’t address CAD--> widens to 6.25% via net income deficit
Increases inequality due to more benefits to higher income earners via the
lower MRT and super--> tax system less progressive
Expenditure on enviro protection will be up for the Australian govt water fund
and for the Murray darling
RESPONSE
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Generally well received but criticism in areas of
o Impact on r’s
o Impact on income distribution
o Opportunities for micro reform missed--> e.g. reducing complexity of
tax system--> mainly focus on infrastructure and skills shortages
MONETARY POLICY
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Monetary policy- a macroeconomic policy, which involves action by the RBA,
on behalf of the govt, to influence the cost and availability of money and
credit in the economy. It can be used to smooth out fluctuations in the business
cycle and influences the level of economic activity, employment and prices
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Monetary policy in Aus is conducted by the RBA without direct control of the
govt
The main instrument of the monetary policy is DMO, which influences the
level of r’s
In the short term, tightening monetary policy through increased r’s will slow
down economic activity reduces consumer spending and borrowing more
expensive for business Lower AD = lower economic growth
To boost AD and economic growth the RBA would need to loosen monetary
policy by lowering r’s increased consumption and investment
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THE OBJECTIVES OF MONETARY POLICY
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Money base- currency, plus all funds deposited with the RBA by banks
M3- currency plus all bank deposits
Broad money- M3 plus all deposits with NBFI’s
Credit aggregate- all lending by financial intermediaries in the private sector
in Aus
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The reserve bank act 1959 states that the RBA should aim for
o Stability of the currency
o Maintenance of full employment in Australia
o Promoting the economic prosperity and welfare of the people in Aus
The long term goals of monetary policy may not be able to be achieved in the
short term
There are conflicts between policy objectives so they cannot be achieved
simultaneously
Monetary policy is targeting inflation
o “ In pursuing the goal of medium term price stability, the RBA has
adopted the objective of keeping the underlying inflation rate between
2 and 3 %, on average, over the cycle”
o This occurred since the recession in the 1990’s after falling out of
favour in the 1980’s as a policy to reduce the CAD via reducing
economic activity
However, the RBA hasn’t forgotten about the other two goals if inflation is
low, the cash rate may be lowered to increase economic growth and reduce unn
The RBA considers several indicators in decisions about the movement of r’s
o Inflation rate
o Inflationary expectations
o Wages growth
o The rate of un-n
o The rate of economic growth
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o The exchange rate
o The CAD
o Monetary growth
 Money base
 M3
 Broad money
 The credit aggregate
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The board of the RBA considers how these variables contribute to inflation in
general
Whole strong economic growth and reductions in un-n are positive they can
increase inflation if the economy is approaching the supply capacity
THE IMPLEMENTATION OF MONETARY POLICY
HOW IS MONETARY POLICY CONDUCTED?
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Domestic Market Operations- Reserve bank purchase or sale of second hand
govt securities in the STMM with a view to influence the cash rate (of interest)
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Monetary policy is conducted by DMO
Banks, when not using their exchange settlement funds, lend or invest the
money in the STMM and obtain the cash rate of interest
NBFI’s also do this
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CASE 1: TIGHTENING MONETARY POLICY (R’S UP)
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If the RBA wants to tighten monetary policy, its sells second hand govt
securities in the STMM
When the banks pay for these securities by using money from their Exchange
Settlement Accounts, the supply of money in the STMM is reduced
This causes the cash rate to rise which flows on to all other interest rates
(medium and long term) = lower economic activity
CASE 2: LOOSENING MONETARY POLICY (R’S DOWN)
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If the RBA wants to loosen monetary policy, its buys back second hand govt
securities in the STMM
The supply of money in the STMM is in excess
This causes the cash rate to fall which flows on to all other interest rates
(medium and long term) = higher economic activity
THE IMPACT OF CHANGES IN INTEREST RATES
POLICY
STANCE
Tightening
Loosening
DMO
RBA sells govt
securities
RBA buys govt
OVERNIGHT
CASH MKT
Shortage of
borrowable funds
Excess of borrowable
CASH
RATE
Rises
MARKET
R’S
Rise
Falls
Fall
securities
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funds
Main affect of a change in interest rates is on the demand for credit
The process through which monetary policy is known as the transmission
mechanism
It involves
o Lowering interest rates making borrowing cheaper for consumers and
business. A fall in the level of interest rates will encourage borrowing-> AD is increased and so is ec. Growth
o Reduced interest rates means that existing borrowers need less money
to service these loans which may result in additional spending
o A fall in the level of interest rates also discourages financial inflows
which will cause a depreciation--> Exports more intnl comp--> export
growth= economic growth= higher inflation
o The increase in AD will lead to higher output and employment or will
spill over into inflation if the economy is close to full capacity
o The rise in aggregate spending that results from lower r’s will lead to
increased demand, accommodated by the RBA increasing the supply of
money
Monetary policy is tightened or loosened depending on whether the govt
wishes t dampen or boost the level of economic activity
Tightening of monetary policy dampens C and I which will lower economic
activity and inflation but un-n will rise
Loosening monetary policy boosts C and I which will increase economic
activity and inflation but lowering un-n
A change in monetary policy can be made immediately but there is a time lag
which can make decisions inappropriate--> The RBA must make decisions
based on economic conditions 12-18 months ahead when setting r’s
THE CURRENT STANCE OF MONETARY POLICY
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There are five factors that help to explain the stance of monetary policy
o The low inflation objective
o Inflationary expectations
o Wages growth
o Economic growth and low un-n
o External factors
THE LOW INFLATION OBJECTIVE
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Both the govt and the RBA are committee to maintaining the inflation target
mainly by implementing monetary policy
The RBA argues that higher ec. Growth will be achieved by tightening
monetary policy when inflationary pressures rise
INFLATIONARY EXPECTATIONS
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One key element in the govts strategy of achieving low inflation is reinforcing
expectations of low inflation--> businesses will plan lower price rises and
unions for lower wage increases
The RBA will tighten monetary policy to reduce inflationary expectations
WAGE GROWTH
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Future movements in r’s are dependant upon inflation--> a major component
of which is wages growth
Wages growth must remain below 4.5% to consistent with the inflation target
The RBA will threaten higher r’s to restrict wage demands
OBJECTIVES OF EC. GROWTH AND LOW UN-N
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Inflation target is locked in--> RBA can reduce r’s in order to lower un-n-->
this has occurred in recent years
The level of growth and un-n are indicators of the supply constraint--> if the
economy is operating close to capacity then economic growth will spill over
into higher prices
If the RBA feels that un-n is approaching the natural; rate it will tighten
monetary policy to prevent excessive spending which will result in higher
inflation
EXTERNAL FACTORS
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Aus needs to maintain an interest rate differential to attract foreign capital
inflations due to the low domestic savings and the CAD
The RBA may tighten monetary policy to prevent a depreciation which can
cause further increases in inflation (imported)--> sacrifices of domestic policy
objectives
ECONOMY SLIPS ON BANANA SKIN (ARTICLE ON INFLATION)
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Soaring petrol prices have helped propel inflation to an 11 year high
The annual inflation rate has jumped to 4%, the highest since 1995
Prices rose 1.6% in the June qtr alone
The damage caused to farms in N QLD by cyclone Larry sent banana prices
up 250% in the June qtr prices for other foods rise
Fuel rose 11.2% in the qtr and almost 25% for the year
The figures show that price pressures are building in the economy
Inflation is a full percentage point above the target range
The banks’ weighted median inflation rate has risen to 3%
Economists said that an interest rate rise is inevitable to check inflation
Bond futures traded on financial markets have priced in a 100% chance that
the cash rate will rise to 6%
There is an 80% chance of another rate rise before the end of the year
Some analysis’s also believe that there will be a 50 basis point increase for the
first time n 6 years
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Interest rates caused the All ords to drop 52.3 points and the $A to increase by
almost half a US cent
Other pressures upon inflation include
o Child care- up 12.4% this yr
o Food- up 8.3 % this yr
o Transport- 7.7% this yr
o Education- 5.8% this yr
o Health- 4.6% this yr
The treasurer Peter Costello factors are just temporary un-n is low and
beyond the cycling factors, inflation is moderate
Wayne Swan serious inflation challenge Costello had the opportunity to
put in place policies to counteract inflationary pressure failure to address
skill crisis and infrastructure bottlenecks have maintained capacity constraint
Michael Costa (NSW treasurer) spending and tax cuts have put inflationary
pressures up what average earners picked up in the budget will pale
compared to the effect of higher interest rates
STRUCTURAL CHANGE AND MICROECONOMIC POLICIES
STRUCTURAL CHANGE AND MICROECONOMIC REFORM
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Structural change- refers to the process by which the pattern of production in
an economy is altered over time, an certain products, processes of production
and even industries disappear, while others emerge
Microeconomic policy- action taken by the govt to improve resource
allocation amongst firms and industries. Microeconomic reforms raise
productivity, increase efficiency, improve flexibility and encourage Australian
firms and industries to take on worlds best practices
Productivity- output per unit of input over time
The past century has seen the relative decline of agricultural and
manufacturing industries, and the rise of services and new technology sectors
Structural change may be caused by
o A change in the pattern of consumer demand- new products emerge
while others obsolete
o Technological change- change the way in which G/S are produced and
delivered to consumers
Structural change involves the creation of new sectors in the economy, while
other sectors decline
Structural adjustment needs to occur in the economy but was impeded in the
past by protection of inefficient industries and protection of inefficient
workers by labour market policies which maintain wage levels in declining
industries
The govt has realised that many of Australia’s economic problems were
caused by structural problems e.g. CAD and structural un-n
Since the 1980’s the federal govt has relied more heavily on microeconomic
reforms to achieve structural change
Microeconomic reform is central to the long term aim of increasing the level
of sustainable growth and reducing CAD and inflation problems
The federal govt has found that macroeconomic policy is only effective in
manipulating short term movements in economic growth a mix of
microeconomic and macro policy is effective together
Macroeconomic policy affects demand, microeconomic affects supply in the
product and factor markets
Microeconomic reform aims to achieve
o Allocative efficiency- a more efficient allocation of resources
o Technical efficiency- businesses in a competitive situation will be
encouraged maximise efficiency and minimise costs. They will be
inclined to adopt latest tech and use the least combo of resources.
Minimising the quantity of resources needed to produce a certain level
of output also frees up resources to be used in new areas of production
o Dynamic efficiency- producers are able to respond quickly to the
changing pattern of demand in both the domestic and word economy.
Producers who are dynamically efficient are able to quickly take up
tech developments
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Increasing the degree of competition is an aim of microeconomic reform,
because more competitive markets tend to embrace structural change more
quickly
Productivity can come in the form of
o Labour productivity- output/ labour inputs/time
o Capital productivity- output/ capital inputs/time
o Multifactor productivity- output/all inputs/time
Productivity was at its highest ion the 1960’s and the early 1970’s. Declined in
the 1980’s to below the OECD average and recovered in the 1990’s. Between
1989 and 1998 the average was 1.5%, outperforming OECD
Microeconomic freeform dominated policy making during the 1990’s the
coalition believes that further micro reform is essential to sustain a higher rate
of economic growth
There are 6 priorities to the govts micro reform strategy
o Deregulation
o Labour market reform
o National competition policy
o Industry assistance reform
o Reform of public enterprises
o Tax reform
MICROECONOMIC REFORM AND INDIVIDUAL SECTORS
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Workable competition- the government’s objective to achieve the minimum
level of competition within an industry that is compatible with the market
structure and specific conditions of the industry i.e. a situation where all
markets are contestable
Monopolisation- occurs when a firm uses its dominant market position to
eliminate existing competition or to prevent new firms entering the market
Price discrimination- occurs when a firm sells the same type of good or
service in different markets at different prices
Exclusive dealing- occurs when a firm sets conditions for supply which
exclude retailers from dealing with other competitors
Collusion- occurs when firms agree on a pricing or market sharing
arrangement hat reduces effective competition between them, and tends to
inhibit entry of new firms into the market
Microeconomic has an aim of promoting structural change by efficiency in
commodity and factor markets
The objective of promoting competition is based on the assumption that it will
provide a more efficient allocation of resources, lower production costs,
product innovation and lower prices
The govt aims for workable competition so that markets are contestable and
restrictive trade practices minimised
The trade practices act 1974 outlaws monopolisation, price discrimination,
exclusive dealing and collusion these practices hinder structural change
less efficient and less competitive industries
The types of reform associated with microeconomic reform in Aus are
o Deregulation
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Labour market and IR reforms
Reductions in the level of protection and industry assistance
Reforms to GBE’s (PTE’s)
Tax reform
DEREGULATION
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Deregulation- the removal of govt controls over an industry and exposing
firms to greater influence from domestic ad global market forces
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Deregulation has occurred since the 1980’s with an aim to improve efficiency
of industry with the result being extensive structural change
FINANCIAL SECTOR
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The $A was floated in 1983
Banking industry deregulated foreign banks allowed increased
competition and number of financial products and services
RBA controls over banks alleviated
Controls over interest rates removed
Further deregulated after Wallis report in 1997 recommended changes to
allow all financial institutions to compete with banks in providing a full range
of banking services
The more competitive financial sector are spread across the entire economy
businesses and consumers pay lower prices for access to finance
AGRICULTURAL INDUSTRIES
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Past two decades moved from monopolies which bought all output and was
only seller
Embargoes were lifted (sugar, vine fruits, tobacco etc)
Domestic wheat market deregulated and AWE privatised
NSW egg industry deregulated
Dairy industry major structural change almost half of all dairy farmers
will leave market = larger and more efficient farms
TRANSPORT INDUSTRIES
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Reforms to transport important due to transport of gods
Aviation
o Domestic aviation industry deregulated in 1990’s
o Ansett bankrupt (after being 2nd largest)
o Virgin Blue is only major competitor to Qantas
o Qantas has 65% market share
o Govt has privatised many major airports
Rail
o National rail corp. established to undertake interstate freight
privatised in 2001 boost competition
o Competition in the rail industry should reduce transport costs
TELECOM INDUSTRY
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Aus has one of the most deregulated telecom industries
50 carriers reduce telecom costs esp. for long distance
Telstra still virtual monopoly for residential telephone connections and local
calls prices up in recent years
LABOUR MARKET AND INDUSTRIAL REFORM
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Reform since 1985 [productivity based bargaining system two tier
Enterprise bargaining 1990’s aims to promote labour productivity to
linking wage increases to productivity
Industrial relations reform act 1993 wage decentralisation through
enterprise bargaining streams
Workplace relations act 1996 encouraged greater flexibility by more
enterprise bargaining. Involved
o Introduced AWA’s administered by employment advocate
o Award system only for safety net wage increase
o 20 minimum allowable matters in awards
o Removed compulsory unionism
o Restricted unions in negotiating certified agreements
o Relaxed unfair dismissal rules
o Reduced regulatory power of AIRC and of unions to oversee AWA’s
Working Nation program of the Keating govt job compact with subsidies
for firms which hired the long term un-n
Howard promoted increased competition in the job placement market work
for the dole, youth allowance, apprenticeships/traineeships, employment
national (1998)
Other reforms in 1998
o Establishment of centrelink in 1998 efficiency, equity and targeting
of social security
o Work for the dole job search allowance only when participation in
community projects
o Improvements in OH & S coverage
Further labour mkt and IR reforms were announced by the Howard govt in
2005 workplace relations amendment (work choices) act 2005 (cwlth) 
December
Key features of this were
o A single national IR system
o Simplification of awards
o Smaller increases to minimum wage
o Major shifts towards individual contracts
o No disadvantage tests for agreements abolished allows employers to
trade off redundancy pay, overtime and conditions
o Reduced role for IRC ‘unfair dismissal laws abolished for 2/3 of
employees
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These changes are intended to deregulate the labour mkt and simplify rules
relating to pay and conditions
The govt argues that allowing a freer hand for employers in wage
determination and conditions will increase job creation, increased investment,
productivity growth and higher wages
The critics argue that it gives employers too much power to reduce conditions
and wages and that there is double standards by controlling employees but
allowing greater power for employers
NATIONAL COMPETITION POLICY REFORMS
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National competition policy- an agreement between Australia’s
commonwealth and state govts signed in 1995 to encourage microeconomic
reform throughout the economy
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Outline in the Hilmer report 1993
There are six major components to the reforms
o Establishment of the ACCC as a competition watchdog and to ensure
that businesses don’t engage in anti-competitive behaviour
o State govt instrumentalities- state govts have agreed to implement
competition reforms in the electricity, gas water ad road transport
industries e.g. power distribution and generation separated
o Uniform national competition rules- competition principles across a
number of industries throughout Aus are now the same
o Access rights for essential infrastructure- businesses are guaranteed
access to electricity, gas and water, at a fair price, even if they are
owned or operated by rivals
o GBE reforms- GBE’s have to compete on an equal footing with private
sector enterprises
o Reform of the professions- lawyers, doctors etc are required to
abandon restrictive work practices
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These reforms are having a major impact Industry commission report
(1999): reforms boost economic activity, advantages to businesses through
lower costs for electricity, water and transport and new markets to provide G/S
to the public sector
REDUCTION IN LEVELS OF PROTECTION AND INDUSTRY ASSISTANCE
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1973 25% across the board tariff cut by Whitlam govt- failed
1980’s plans to reduce levels of protection in order to force Aus industry to
allocation to more intnl competitive industries
Industry statement 1991 reductions in industry assistance
Rapid decline of tariffs in 90’s Howard pursues slower schedule
Average level of tariffs reduced t 5% in 1996
Quotas on PMV and TCF abolished
Tariffs on PMV cut to 10% in 2005 5% in 2010
Tariffs on TCF reduced currently at 15%
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Aus is low tariff country  APEC commitments: tariffs abolished Aus will
only have a general level of 5% at this time
REFORMS OF GBE’S
CORPORATISATION
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Corporatisation- occurs when the govt encourages PTE’s to operate
independently from the govt as if they are private businesses in order to
improve efficiency and profitability
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Corporatisation will involve
o Rates of return similar to private sector
o Decision making free from govt interference
o Management appointed on liability
o GBE’s shouldn’t have an artificial advantage over competitors
PRIVATISATION
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Privatisation- occurs when the govt sells PTE’s to the private sector
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Examples of privatisation include: Qantas, cwlth bank, GIO, major airports,
Telstra (Partial)
The advantages of privatisation
o Enterprises forced to become more efficient and competitive more
rational management and pricing
o Govt assets sales have increased amt of fiscal surpluses reduces
public sector debt and reduces the size of the interest bill debt, freeing
up resources for more socially desirable projects
The disadvantages of privatisation
o Selling off public assets is simply a revenue raising exercise may be
sold at below market value
o GBEs should not have to be profit maximising e.g. gas etc should serve
community
o Govts should justify the sale of public assets with Allocative efficiency
rather than to overcome short term budget difficulties
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TAXATION REFORM
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The major micro reform of the Howard govt was the tax reform package in
July 2000, designed to reduce the extent to which the tax system distorted
allocation of resources and imposed costs on Aus businesses
REASONS FOR THE REFORM OF AUS’S TAX SYSTEM
1. It relied too heavily on direct taxes reduced personal incentive for personal
effort and work
2. Discouraged savings taxed incomes heavily relative to consumption
3. Businesses tax system too complex and high cost of compliance
4. Distorted allocation of resources discriminated unfairly b/w forms of
investment and industries
5. Disadvantaged Aus exporters
MAIN FEATURES
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Introduction of the GST with minor basic food exemptions
Abolition of the sales tax and phasing out of 9 state taxes
Revenue from GST allocated to states replaced grants
Income tax scales altered and MRT were reduced
Streamlining of family allowance payments, improved coordination b/w tax
and social security payments
6. Compensation measures e.g. increase of 4% in welfare
7. Simplification of the business tax system lower company tax of 30% and
reforms to reduce compliance costs for small businesses and abolition of
several tax deductions
8. Halving of capital gains tax for individuals
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The federal govt has claimed that the tax reform package would bring
substantial economic benefits,
o Reduction in average business costs by 3%
o $4.5 bn reduced costs for exporters
o Boost economic growth by 2% over the medium to long term
OVERALL IMPACTS OF MICRO REFORM
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Microeconomic reform was seen as the only solution for Australia’s external
imbalance problems and relatively high inflation and un-n levels
NEGATIVES
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The costs of economic reform are evident-, manufacturing businesses closed
down and un-n increased
Some workers structurally un-n due to greater competition
Improvements in efficiency may lead to labour shedding as works with
redundant or low skills are no longer needed due to productive labour and
capital
The costs of retraining and relocation must be paid for by govts from the
expected reform dividends
o Higher expenditure on benefits and; labour mkt programs
o Shifts from state to federal costs due to un-n of those in PTE
Unequal distribution in terms of higher income earners gaining the benefits
while lower income earners bear costs e.g. IR and tax reform
Productivity stats are claimed to be inaccurate stemming from unpaid longer
hours
POSITIVES
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The broad benefits of MER are
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o Raise national productivity by improving Allocative, labour and capital
efficiency
o Lower inflation and expectations via competitive markets
o Reduce CAD by increased exports
o Higher level of sustainable economic growth
o Reduce un-n through job creation in expanding industries
o Overcome structural problems e.g. low savings
o Leads o higher living standards through increasing real incomes
Microeconomic reform has added an extra 0.8% to annual productivity growth
New info and communication technologies has boosted productivity by 0.3%
of GDP
Structural change has boosted productivity by increasing incentives to become
more productive, opening the economy to trade investment and tech from
overseas and greater flexibility to improve production process and business
management
Structural change and micro reform have resulted in extensive changes in the
operation of industries in recent decades. There has been greatest productivity
in those areas exposed to state instrumentalities of national competition policy
reforms e.g. water, gas. This is because of the great impact of MER and
structural change and new tech
IMPORTANT STATS
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Structural changes have resulted in GDP 2.5% higher than it would’ve been
Productivity improvements during the 1990’s have lead to higher National
income, equating to an extra $7000 per household per year
Unilateral tariff reductions have brought 86% of tariff rates within the 0-5%
range
Microeconomic reform has led to a more internationally integrated economy
the trade intensity of the economy increased from 27% in 1980’s to 44% in the
early 2000’s
Over the past 5 years Australia’s intnl competitiveness for countries with a
population of greater than 20 million has remained at 3rd out of 30, increasing
to 2nd in 2003
MFP growth averaged 1.8% a year between 1993-99, an increase upon the
previous average of 0.6
The rate of growth in labour productivity was 3.2% per year in the second half
of the 1990’s
GDP per hour worked for Aus was 2.3% (1990-2001), from 1.5% between
1973-90
IMPROVING AUSTRALIA’S TRADE PERFORMANCE I.E. TRADE POLICY
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In the past the federal govt used protectionist policies such as tariffs, quotas,
subsidies, embargoes, voluntary export restraints, local content rules, export
incentives
The arguments for protection included: infant industry argument, protect
domestic employment, prevent dumping, defence and self sufficiency etc
This attitude has changed
o Microeconomic reform and structural change
o Trade strategy has switched from protection towards improving intnl
competitiveness and access to world markets
PROTECTION
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The main form of trade policy was protection of domestic import competing
industries, to improve the BP, employment and economic growth
In 1970’s protection policies were criticised by the productivity commission
due to
o Encouraged inefficiency
o Increased prices
o Misallocated resources
o Reduced intnl comp
o Damaged the trading performance in the long run
Cuts began with Whitlam 25% across the board failed
1988 Hawke comprehensive plan to reduce protection aimed to force
Aus to become more intnl competitive, encouraged resources to move from
less to more efficient industries
1991 industry statement accelerated changes announced tariffs down to
5% by 1996 but for PMV, 15% and TCF, 25% by 2000, and frozen till 2005
Howard govt has pursued slower pace currently 15% for TCF and 10% for
PMV’s
Aus are regarded as a low tariff country. Current tariff reductions will see
tariffs phased to 5% by 2010 not zero under APEC commitments
Protection isn’t a major tool for increasing trade performance
TRADE NEGOTIATIONS
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Govts try to open up access to overseas markets through trade agreements
Australia’s involvement in negotiations involves
o Bilateral
o Regional
o WTO
BILATERAL TRADE NEGOTIATIONS
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Bilateral agreements involve two nations
Easiest to negotiate
E.g. CERTA 1983 with NZ
Bilateral trade deals are main focus of trade policy
REGIONAL TRADE LIBERALISATION
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APEC forum of 1990’s has been the focus of Australia’s policies. Govt
continues to giving high priority and supporting the free trade aim, which
APEC Is unlikely to achieve
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Regional trade negotiations have shifted to ASEAN and AFTA (add free trade
area to ASEAN), which covers NIC’s in S-E Asia and is a counterweight to
developed APEC. AFTA covers six ASEAN economies with a further four
from 2010. 2005 negotiations to join AFTA with CERTA which will benefit
the complementary trade nations with an extra $19bn for Aus b/w 2007 and
2017
USING THE WTO PROCESS
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The WTO was established in 1995, has 148 countries and has a role to
o Implement and enforce global trade agreements
o Settle trade disputes b/w economies
Australia’s trade policy involves active use of the WTO to force compliance
with WTO agreements and reducing trade barriers
Australia is encouraging trade liberalisation I world mkt, particularly
commodities. Aus has also supported the Doha round
Trade agreements rent the major policy to improve trade performance, but are
essential to maximise access to potential export markets
The main focus of the WTO is the Doha Round of Trad negotiations, which
was launched in 2001. The main items included
o Abolition of US $700 bn worth of tariffs and subsidies
High levels of protection by developed economies have reduced the prices for
commodities and thus reduced the revenue fro developing economies and
tariffs have made it harder for developing countries to sell their products to
developed economies
Aus is hoping that reduced levels of agricultural protection will allow Aus to
access commodity mkt but would put pressure on manufacturing
Review of anti-dumping rules is likely to be controversial
Reductions in agricultural protection overall are likely to be controversial
because many countries have a vested interest in looking after their own
farmers
Allowing environmental standards to be imposed on trade will be a Problem
for developing countries as the Euro countries will restrict trader
Allowing developing countries greater flexibility in implementing their WTO
obligations
Giving developing countries cheaper access to pharmaceuticals
The lack of commitment to multilateral trade sank the Doha round in July
2006
Many of the participating countries were to blame
o India wanted fewer subsidised and tariffs but wouldn’t reduce barriers
to ag and manufactured goods
o EU wouldn’t cut agricultural tariffs
o America “ a bad deal was worse than no deal at all”
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Countries are now turning to regional agreements. There has been large
involvement in terms of America (14), EU (seeking bilateral deals with failure
of Doha), ASEAN countries have bilateral agreements with themselves and
China and in some cases India, Japan and S Korea.
Bilateral agreements tend to be bad for poor countries, because they have to
negotiate on their own, rather than multilateral extended to all members. More
bilateral agreements will make multilateral agreements harder to achieve
INDUSTRY ASSISTANCE PROGRAMS
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The Mortimer report (1997) reviewed govt programs to assist industry=
federal govt should be more active in attracting foreign investment for new
industries through tax breaks and subsidies
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There is argument that Australia should be more active, industry is encouraged
to be more outward looking e.g. export development grant program to engage
in export promotion and find other export mkt
Others argue against using active industry policy, believing that it will disport
the allocation of resources
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By adopting the recommendations of the Mortimer report, the federal govt has
become more active but without the use of old protectionist measures. Industry
policy isn’t a major macro policy to solve economic problems
This adoption came via the Howard govts investment for growth statement in
1997
o A commitment to economic growth of 4%
o Increased investment expenditure of $1.3 bn
o Australia is a free trade zone for electronic commerce
o Tax incentives offered to attract foreign investment in high growth
industries
o Taxation inventive given to multinational companies to establish plants
to assemble components into final consumer goods for export
o Retaining a 125% tax concession for R & D
o Tax breaks to car manufacturers who invest in local production
EXCHANGE RATE POLICY
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IN the past, many countries used fixed exchange rates
Exchange rate policy is not actively used by Australia to improve Australia’s
trade performance due to a floating exchange rate
The federal govt can influence the exchange rate by
o Dirtying the float
o Monetary policy
However, other factors beside domestic interest rates affect exchange rates and
due to the magnitude of speculation there is little effectiveness by dirtying the
float
As a general rule, the fed govt and the RBA don’t have a preferred exchange
rate and rarely attempt to influence the value of the exchange rate
PRICES AND INCOMES AND LABOUR MARKET POLICIES
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During the 1980’s, prices and incomes policy was an active macroeconomic
policy this is no longer the case due to the move of enterprise bargaining as
the govt cannot regulate the rate at which wages increase
Govts intervened in the labour markets in the past due to
o To affect the distribution of income and wealth
o Promote macroeconomic stability
o Improve the productivity and intnl competitiveness of Australian
producers
In the past, the federal govt influenced wage outcomes directly or through
independent industrial courts and tribunals
PRICES AND INCOMES POLICY
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Prices and incomes policy- involves govt policy action to influence the terms
of pay and the conditions under which Australians work as well as the prices
of G/S
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Prices and incomes policy sought to influence the rate of growth of prices
The 1980’s brought the prices and incomes accord an agreement between
the federal govt and the ACTU on the guidelines for wage determination,
reviewed by the AIRC
With the accord wage relatives were frozen between different occupational
groups, inflation was restrained and un-n fell
The accord was criticised for failing to improve productivity due to the
inflexibility of the IR system
The accord was abandoned with the election of the Howard govt in 1996
o The coalition govt doesn’t use an active incomes or wages policy
o Believes the market place should determine wage outcomes without
influence by third parties or the AIRC
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POSSIBLE PRICES POLICIES
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Prices policy- govt controls and guidelines concerning the size of price
adjustments in the economy
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The govt influences prices through the ACCC which
o Conducts inquiries into pricing structures
o Recommends changes to regulatory policies for specific industries ‘
o Initiates legal actions when there is a breach
o Negative publicity to businesses when it finds excessive overcharging
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The ACCC has adopted a hands off attitude towards industry regulation by
removing infantries from its prices monitoring schedule
The ACCC conducts pricing inquiries into industries where anti-competitive
conduct is suspected
The ACCC enforces the trade practices act 1974


POSSIBLE INCOMES POLICIES
CENTRALISED SYSTEM

Centralised system- wage rises and other labour market outcomes are
determined wither by the govt or a govt appointed body such as the IRC

A centralised system is used when the incomes policy seeks to restrain wage
increases
The arguments in favour of a centralised system
o AIRC protects low income workers
o AIRC needs to restrain excessive wage increase of higher workers to
minimise cost push inflation and un-n
Wage adjustments are made on the criteria of
o Needs- based principle- wage indexation for workers
o Capacity to pay principles- of firm or economy
o Sustaining wage growth at the level of major trading partners
o Productivity increases
The advantages of a centralised system are
o Helps achieve key economic objectives such as lower un-n
o Act as an extra policy tool
The disadvantages of a centralised system are
o Lack of flexibility
o Lack of incentive for productivity
o Can slow down structural change
o A high level of inflation can be locked in




DECENTRALISED SYSTEM

Decentralised system- a system under which wage rises are determined by
negotiation between employees and employers. Market forces of supply and
demand, as well as the firm’s capacity to pay would determine any wage
increases.

Under a decentralised system, there would be greater wage flexibility, and
wage levels could change between diff firms and industries
Australia has moved to a more decentralised system progressively since the
1990’s
The advantages of a system of this type are
o More efficient allocation of resources and structural change
o Incentives for productivity
o Reducing inflationary pressures
o Helps economy adjust in times of changes
The disadvantages are
o Greater inequality



THE DEGREE OF GOVT REGULATION




The govt has a role in establishing the framework for the IR system
The govt may decide to
o Use a deregulated workplace relations system i.e. only employs
minimum standards
o Use regulated workplace relations system
Australia uses a decentralised system of wage determination but is still highly
regulated by intnl standards due to the comprehensive award pay and working
conditions, and the role for IRC and state tribunals
Because of enterprise bargaining, the power of unions, the power of the AIRC
to intervene in industrial disputes has been reduced, but the power of the
management in the workplace has grown considerably
THE SHIFT FROM INCOMES TO LABOUR MKT POLICIES


1.
2.
3.
4.




The centralised system of wage determination, which controlled prices and
incomes, become less relevant by the 1990’s. This was due to the
incompatibility with structural change and ineffectiveness in promoting
productivity
The following process has occurred since the 1990s
Introduction of enterprise bargaining in 1991 as complementary to award
wage increases
Industrial relations system changes saw workers shifted on to collective
agreements since enforcement of the industrial relations reform act 1993
began (1994)
Further decentralised system under the workplace relations act 1996
Substantial deregulation under work choices which aims to shift workers onto
individual contracts
The workplace relation’s act retained the three-tier wage determination system
from previous legislation but abandoned the accord. The AIRC continued to
grant wage increases via the awards. The Howard govt also promoted further
flexibility by making enterprise more attractive and introducing AWA’s
Incomes policy is now no longer an active instrument of macroeconomic
policy and wage growth is now determined by indvidual enterprise
agreements.
Incomes policy is now also an issue of microeconomic reform and no longer a
tool of macroeconomic management because the govt cannot control
movement in wages growth in any given year
Monetary policy has taken over this role in a minimalist fashion, it is more
targeted to inflation as a whole but can use rate rises as a threat to ensure that
unions restrain their wage demands
INDUSTRIAL RELATIONS IN THE 1990’S


The two pieces of legislation were the industrial relations reform act 1993 and
the workplace relations act 1996
These pieces of legislation continued the move to enterprise bargaining
INDUSTRIAL RELATIONS REFORM ACT 1993


Encouraged enterprise bargaining but recognised that unions were part of this
process
Gave AIRC power to influence this process via the three streams of wage
determination
o Industrial awards- for those workers unable to negotiate an enterprise
agreement
o Certified agreement- enterprise bargaining with unions
o Enterprise flexibility agreements- enterprise bargaining without unions
THE WORKPLACE RELATIONS ACT 1996



Retained similar 3 streams of wage determination
Aimed to increase flexibility in the system by making non-union contracts
more attractive (individual employment contracts introduced for the first time)
The three streams were
o Industrial awards (the safety net)
o Certified agreements (collective enterprise bargaining)
o AWA’s (individual employment contracts)
INDUSTRIAL AWARDS (25%)



This stream provides a safety net of minimum wages and working conditions
for those unable to negotiate an enterprise agreement
Awards were simplified in 1998 to include only 20 key principles
The AIRC, under this act could only
o Adjust safety net rates of pay for workers not on enterprise agreements
at the safety net wage case hearing
o Arbitrate on the 20 allowable matters
CERTIFIED AGREEMENTS (COLLECTIVE ENTERPRISE BARGAINING)
(72%)




Originally introduced in 1993
Involves management and workers collectively (through unions) negotiating
enterprise agreements to improve productivity
The AIRC examines the enterprise deal and certifies the agreement and
enforces it (community standards test)
The Howard govt has sought to reduce the power of unions by
o Abolishing compulsory unionism
o Restricting the right of workers to only strike during bargaining
o Encouraging competition between unions by allowing 50 employees to
form their own non-union enterprise bargaining unit
AWA’S (3%)


AWA’s aim to increase labour mkt flexibility by adjusting work and [ay
conditions to circumstances of employers and employees
AWA’s may be negotiated individually or collectively but must be signed
individually



The AWA must be lodged with the OEA which applies the no disadvantage
test
If uncertain the AIRC will offer advice and conciliate to ensure it meets
requirements
AWA’s have replaced EFA’s as they didn’t attract workplaces because they
could be overturned by the AIRC and had a strict no-disadvantage test
WORK CHOICES


Work choices legislation Workplace relations amendment (work choices)
act 2005 (Cth)
The federal govt has taken over most IR responsibilities and has changed wage
setting rules to ensure higher take up of individual contracts
ROLE OF LABOUR MKT REFORMS


The IR changes are an example of microeconomic reform
It will have an effect upon
o Productivity and thus economic growth and living standards
o Wage rates and labour costs have an impact upon inflation
o Unemployment rate
o Distribution of income
o Work force skills via minimum wages (low = low skills and vice
versa). Skills shortages can constrain investment
KEY FEATURES OF THE CHANGES

The key features of the changes include
o Single IR system where 85% of workers will be federal jurisdiction
o Simplified awards
o Smaller increases in minimum wages
o Shift towards individual contracts
o Abolition of the no-disadvantage test
o Reduced role for the AIRC
o Unfair dismissal laws abolished for 2/3 of employees
INDUSTRIAL AWARDS HAVE BEEN SIMPLIFIED


Traditionally
o Awards have set minimum wages and conditions
o Large no of awards
o Changes made by awards
o Agreements must pass the no disadvantage test
Under work choices
o Reduction in the number of awards, approximately 4000 to 100 via the
award rationalisation taskforce
o Adjustments to award wages made by the Australian Fair Pay
Commission, with minimum wage rises expected to occur more slowly
o Uniform minimum standards for annual leave, personal leave, unpaid
parental leave and ordinary hours of work
o Award conditions a be eliminated from workplace agreements e.g.
penalty rates
COLLECTIVE BARGAINING NO LONGER SUBJECT TO THE NO
DISADVANTAGE TEST


The govt has scaled back the role of the AIRC in enterprise agreements and
abolished the no disadvantage test
Agreements only have to pay the minimum award wages and can apply for 5
years and lodged with the OEA
INDIVIDUAL CONTRACTS AS PART OF THE IR SYSTEM


There is likely to be widespread shifting to AWA’s as they are more attractive
for employers
Unfair dismissal laws have been changed to apply for only workplaces with
greater than 100 employees. For all other workers, only unlawful dismissal
can be a consideration
THE IR DEBATE



IR changes are intended to deregulate the labour mkt, which will allow
employers a freer hand in determining wages and conditions. This is in order
to increase productivity, encourage job creation, encourage investment and
result in higher wages
Critics argue an imbalance of power and that the IR system is more complex
than previously
Media has shown cases of sackings and wage cuts
CHANGING WORK PRACTICES

The shift towards a decentralised wage determination system has brought
around changes in working hours
o Employees are working longer but less often
o Employers are having greater control over the work patterns of
employees e.g. in overtime
o Employees are now often working longer without penalty rates
o Employees are often working longer hours such as on the weekends
without being paid extra
o Reduced break times

Work arrangements and pay structures also have changed due to enterprise
bargaining
o Performance based pay
o More flexible job descriptions allowing multi-skilling
o Changed entitlements to recreational leave
o Cashing out sick leave
o Giving employees greater flexibility to take unpaid time off
o Employee share ownership schemes (shares issued to employees) to
give them a stake and thus responsibility in the company
DISPUTE RESOLUTION







A measure of the effectiveness of the industrial relations system is the level
and intensity of industrial disputes e.g. strikes
Disputes can turn bitter and violent, creating deep divisions in the community
but also have economic costs such as lower production and less reliable supply
The AIRC has played an important role in resolving industrial disputes
through conciliation and arbitration (in rare circumstances e.g. when it may
have drastic effect upon the economy)
The AIRC also plays an important role in unfair dismissal, involving a
conciliation conference or a formal arbitration which makes a binding decision
The federal court of Australia plays a role in dispute resolution as AIRC
decisions aren’t court arbitrations and must be given legal effect. The federal
court achieves this by interpreting and enforcing decisions of the AIRC. They
can also impose injunctions in matters of industrial actions
The employment advocate doesn’t have formal powers to resolve disputes and
thus refers these disputes to the AIRC or the federal court. However, the
employment advocate seeks to resolve the dispute directly or can help the
employee take court action
Industrial disputes have been infrequent in recent years, with low strike rates
since the introduction of enterprise bargaining. However, this can also be
attributed to tight legal controls on the right to strike, as it must occur only in
the bargaining period and relate to limited issues.
EVALUATING THE INDUSTRIAL RELATIONS SYSTEM


Under enterprise bargaining, Australia has sustained moderate wage increases,
low inflation, strong productivity growth
IR reform has contributed to Australia’s economic performance in the areas of
o Wages growth- the enterprise bargaining system allows flexibility of
wage increases to be able to be concentrated in certain areas without
increases across the board. Recently, wages growth hasn’t increased
inflationary pressures but has been more difficult to contain with lower
un-n
o Work practices- The IR system has helped to bring about changes in
work practices contributing to stronger productivity growth
o Industrial disputes- have stayed at low levels since enterprise
bargaining
o Productivity- enterprise bargaining is likely to result in wage increases
being linked to productivity. During the 1990’s, Aus achieved its most
sustained productivity growth averaging 3% per year
o Unemployment- Australia has been successful in combining low
unemployment with rising wages and productivity. However,
enterprise bargaining has resulted in high underemployment
o Intnl competitiveness- The decentralised wage determination system
has contributed to higher productivity growth, the cost of labour has
become more competitive as a result
o Income inequality- the deregulated industrial relations system is
increasing the gap between income levels due to the relative bargaining
powers of higher vs. lower income earners




There is debate over the extent to which non-market (govt intervention) and
market forces should be used to determine wage outcomes
The 2006 changes to industrial relations are radical changes and are set to
continue the debate further
The govts argument include
o Higher wages
o Higher employment
o Lower industrial disputes
o Simplicity and flexibility
The arguments against include
o Lower award rises
o More power to employers
o Reduction in benefits and penalty rates
o 2/3 reduction in unfair dismissal
EMPLOYMENT EDUCATION AND TRAINING PROGRAMS

The govt can contribute to structural change and achieving its economic
objectives through education and labour mkt programs
EDUCATION AND TRAINING

Vocational and industry training in Australia involves
o Modern Australian Apprenticeship and Traineeship System (MAATS)
o Entry level training programs- develop vocational skills and improve
access to training via wage subsidies and incentives for employers and
stronger links between schools, TAFE and employers

Spending on labour mkt programs were reduced with the election of the
Howard govt
The 2001 budget saw a considerable expansion n spending on active labour
mkt programs thought the Australians Working Together package attempted
to reduce un-n by improving job search assistance and increasing financial
incentives to return to work, job search training places were expanded and
training credits are provided to mature age and indigenous job seekers to boost
their skills to gain employment

LABOUR MKT PROGRAMS

Since 1996 the Howard govt has restructured labour mkt assistance via
centrelink which delivers income support payments, childcare assistance,
student and other welfare assistance, integrated with the aim of moving people
into jobs







Centrelink emphasises the importance of moving people off welfare and into
work quickly
Employment services (matching people to jobs and giving them training) has
had the following changes
o 1998- govt created the job network. The govt pays charitable and
private sector orgs for training and placing the unemployed into work
o Commonwealth Employment service became employment national- 1
public org which closed down in 2003 due to ineffectiveness and
uncompetitive with private sector in finding work and retraining un-n
The govt argues that the job network has improved the efficiency with which
individuals receive assistance to undertake job searches via incentives. An
OECD report found that this network has had little effect on reducing un-n but
is quite cost-effective
Aus spends a relatively small proportion of its labour mkt sending on active
programs compared with other industrialised nations
The Govts mutual obligation strategy has meant implementation of changes to
the welfare system. This involves the imposition of requirements upon welfare
recipients in return for welfare reports e.g. work for the dole, in order to
reduce incentives for people to choose to stay on welfare rather than find work
The work for the dole scheme introduced in 1996 involves returning the
financial help received from the community and improving skills and job
prospects. Refusal to participate leads to a reduction in welfare benefits
The welfare to work measures introduced in the 2005 budget aims to move
welfare recipients into the workforce via increased incentives to work and
threatening people with the loss of benefits if they don’t actively seek work.
This is important to reduce long-term unemployment and the cost to the
economy. Changes include
o Single parents with school aged children need to work at least 15 hrs
per week to receive the single parent payment
o Those able to work for 15 hrs will be required to do so in order to
receive the disability support pension
o Wage subsidies for employers who hire the very long term
unemployment (2 years or more)
o Welfare payments phase out at a slower rate than before to promote
more paid work
o Increased spending of $2 bn on govt services
EFFECTIVENESS AND LIMITATIONS OF ECONOMIC POLICIES
AN OVERVIEW OF THE EFFECTIVENESS OF ECO MGMT

Since the early 1990’d
o Macroeconomic policy- balance between sustainable growth rate of 34% and inflation rate of 2-3% while maintaining a sustainable CAD
o Microeconomic policies- aimed to improve productivity and intnl
competitiveness so that a higher level of economic growth can be
achieved over the long term

The success of economic management can be seen with improvement in
Australia’s prosperity compared to other economies 8th in GDP per capita in
2004 after being 18th in the 1980’s
Another indicator of success is that the govt has not been forced to sacrifice on
economic goal in attempt to achieve another since the 1990’s the govt has
been able to strike a balance between economic growth, inflation and un-n and
to a lesser extent, external balance
Structural problems such as Aus’s high CAD and foreign debt are still major
due to reliance on commodity exports and borrowing from overseas. Aus also
faces the problems of an ageing population and enviro threats
Australia has been lucky over recent years with the commodities boom and the
strength of the American economy and low levels of global interest rates
Australia has sustained a higher level of economic growth since the 1990’s (15
yrs). In the decade to 05-06, economic growth averaged 3.6%, higher than
most advanced economies
Australia’s annual inflation rate of just above 2% ha been outstanding since
the early 1990’s. Using monetary policy, lowering protection, increasing
competition, cheaper imports, moderating wage outcomes and higher
productivity have all contributed
Australia’s progress in reducing un-n ha been slower with a large problem of
underemployment due to the casualisation of the labour mkt. This lower
reduction in un-n has been attributed to
o Rigidity in the labour mkt deregulation
o Failure to provide training and education by govts
Australia has only made limited structural improvements in overcoming
external problems CAD and FL.
o The net income deficit remains a problem due to servicing costs of
FL very high levels for any industrialised economy
o Have the potential to restrain economic growth and result in shifts of
investor confidence
Benefits of structural change have favoured the higher income earners Aus
has a more unequal distribution of income and wealth compared to other
advanced economies. Strong economic growth benefits have flowed to owners
of shares and property (usually high income) while the negative effects of
structural change have impacted on lower income earners
Sustained economic growth has continued to affect the environment Aus
has problems of reduced quality of the water supply, rising salinity and level
of greenhouse gas emissions (didn’t sign Kyoto)









LIMITATIONS ON POLICY IMPLEMENTATION
TIME LAGS


Significant time delays can exist in implementing changes to economic policy
and in waiting for these changes to have an impact
Policies can take time to achieve their aims due to differing time lags in
impacts
POLICY
Fiscal
Monetary
IMPLEMENTATION
TIME LAG
 Medium term (annual
budget in may)
> May require budget
committees and govt scrutiny
before approval

Short term (monthly
RBA meeting)
IMPACT TIME LAG

Short term (a few months)
> Quick affect on economic
activity via increasing or
decreasing spending etc

Medium term (6-18
months)
> Takes time for cash rate to affect
r’s and then upon economic
activity. The RBA must consider
economic activity at the impact
time to make appropriate deacons
Microeconomic
reform

Long term (a few
years)
> Planning and detail
> Committees e.g. Wallis
report
> Time to secure support
from state govt e.g. national
competition reforms

Long term (up to 20 years)
> Structural change is long term as
it involves changes to the
allocation of resources
POLITICAL CONSIDERATIONS




The govt must consider the reactions of the public, supporters and their own
party
Generally, the govt will not introduce any unpopular policy in its final year
before elections unless they believe the economy critically needs it. Instead
they may implement irresponsible polices
The first year generally involves less popular long term policies
The senate may also restrict economic policy as most changes must be passed
by parliament with new legislation etc

Special interest groups may also start media campaigns to advertise their view
e.g. unions
GLOBAL FACTORS







Govts must place a high priority on maintaining intnl investor confidence and
that of global financial mkts
Forex mkts support changes to a more open foreign investment policy and
minimal govt intervention
Critics argue that global financial mkts restrain alternative economic policy by
reducing confidence but supporters argue that it pressures govts to adopt better
policies
Global financial flows can influence the conduct of monetary policy. If other
nations r’s go up, so must Australia’s to maintain inflows of funds to prevent a
depreciation
The intnl business cycle can restrict economic growth of a single country if
others are in downturns. Exports will fall while imports will rise and this will
blowouts the CAD, and the govt may have to restrain economic growth
Intnl orgs such as the WTO can influence individual policies via enforcement
powers and sanctions e.g. forced Aus to change export assistance programs
and lift strict quarantine
G8 can significantly influence the policies of small countries. The G8 operates
as an unofficial co-ordinator of macro policy settings due o globalisation
EVALUATING THE EFFECTIVENESS OF SPECIFIC POLICIES
MONETARY POLICY





Monetary policy has worked well since the early 1990’s in managing
economic growth and controlling inflation. However, there is a risk that
Australia is relying on monetary policy to achieve too many objectives
including economic growth, low inflation and low unemployment. This may
create policy problems if economic circumstances become more difficult
Tight monetary policy not only slows down economic growth but it also
discourages investment and increases the value of the $A, which can increase
the CAD
The other limitation of monetary policy is that it impacts on the demand side
and cannot fix structural problems such as improving intnl competitiveness or
improving savings rates
Monetary policy is designed o control inflation conditions in Aus, it cannot
affect changes in the global economy which affect Aus
Monetary policy is the tool of last resort if wages are growing in excess of 4%
FISCAL POLICY

Since the Howard govt has come into office, fiscal policy has gone though 3
phases
o Achieving fiscal balance in order to raise the level of national savings
and reduce the CAD doesn’t appear to have led to better outcomes in
this areas, but without it may have been worse
o More expansionary because of tax cuts that were needed to offset GST
impacts, and spending increase used to boost a slowing economy in
2001
o Mildly expansionary, with significant spending increases and tax cuts
by the govt, most funded by the tax windfall from the commodities
boom in 2005
o Fiscal policy is now expected to play a much smaller role in the policy
mix



Fiscal policy is criticised for widening the income inequality in Australia and
failing to give enough encouragement for increasing savings (the heart of the
CAD)
Fiscal policy is the most effective policy to stimulate the economy but is least
effective in slowing it down
The Howard govt has been criticised for abandoning the promise of fiscal
surpluses during periods of weaker economic growth, meaning that if a
recession occurs, Australia will be faced with substantial deficits as there is no
surplus to act as a buffer against difficult times
INCOMES POLICY


Incomes policy is no longer a significant part of economic policy with the
move to a more deregulated labour mkt. Now, the wage outcomes of wage
determination are outside the control of the govt, and cannot be used to
achieve specific inflation or other objectives
Macro policy has had a limited impact on Australia’s structural problems
CAD remains relatively high, FL are growing, savings are amongst lowest of
any industrialised country and there is underemployment (500 000)
MICROECONOMIC REFORMS


Australia’s microeconomic reforms since the 1980’s have been successful in
allowing the economy o grow at a faster rate over a longer period of time,
reducing un-n and improving living standards. The Australian economy has
improved its level of intnl competitiveness and inflationary pressures have
been contained.
According to a report in 2005 by access economics, microeconomic reforms
between 1983 and 2004 had
o Raised economic growth by 0.5 per annum
o Increased GDP by 10.8%
o Boosted annual average income of $4200 pp
o Reduced un-n by 2.3%

Not all economists are connived about the success of microeconomic reforms.
Professor John Quiggin argued that microeconomic reforms have never
delivered the benefits advocated and that economic growth in recent decades


has only been slightly above its average and that it has done nothing to
improve external imbalance
Some economists have criticised the govt for lack of ongoing microeconomic
reform and have noted the weakness of economic performance since 2000
o Economic growth has slowed to 3.2% on average between 2000 and
2004 (1.1% lower than previous period)
o Annual productivity since 2000 has fallen back to its long term average
of around 2.4%
o Australia’s ranking of competitiveness has slipped from 4th to 9th in
2005
o Australia’s external imbalances have continued to grow
The success r failure of the policy mix will be measured by our capacity to
sustain economic growth in the economy, employment and living standards
while achieving a sustainable position on external accounts and without
adversely affecting the environment