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Topic 4
Chapter 13: The objectives of economic policy
THE GOALS OF GOVT POLICY IN 2009
1. *Maintaining a sustainable (non-specific) rate of eco growth in the short to medium term
a. Bc of its structural problems, there is a limit on the level of growth that Aus can sustain in
the short to medium term
b. A high rate of growth would cause a blowout in the CAD and higher inflationary pressures
2. *Sustaining a low (non-specific) rate of unemployment
a. Unemployment (and underemployment) is recognised as 1 of Aus’s major structural
problems
b. 2009-10 Budget has addressed unemployment…
3. *Keeping inflation low, within the range of 2-3%
a. RBA’s monetary policy addresses inflation…
4. Boosting Aus’s productivity growth
a. Productivity: output per unit of production per unit of time
b. Govt has committed to lifting productivity growth as a central long term priority through
micro reforms E.g. increased investment in education and infrastructure, alongside reforms
to business regulations
5. Increasing the sustainable rate of growth in the longer term
a. By implementing structural changes that aim to remove some of the constraints on eco
growth such as low productivity and low workforce participation rates in some parts of the
population
b. Sustaining productivity growth will become more important as population ageing reduces
labour force participation rate
6. Boosting workforce participation rate
a. Will become more important in coming yrs as Aus’s eco growth rate is constrained by an
ageing population, which reduces the proportion of ppl contributing to national production
b. Addressed through changes to welfare, family payments and super policies
7. Improving Aus’s international competitiveness
a. To improve Aus’s trade performance
b. Addressed through measures to reduce costs, improve the quality of our exports and
improve our access to overseas markets
8. Maintaining international confidence in the economy
a. Important given Aus’s small size relative to world eco, and our reliance on overseas savings
to fund investment in Aus
b. Especially true at times of eco uncertainty
c. Addressed through govt’s efforts to remain wary of how financial markets are likely to react
to particular policies
9. Promoting environmental sustainability
a. Growing awareness that long-term prosperity depends on addressing environmental
challenges, in particular prob of water shortages and long term threat of climate change
b. Addressed through policies to minimise pollution and waste, preserve natural habitats,
manage water resources, improve land-use practices and promote the use of renewable
energy
*Major goals
CONFLICTS IN GOVT POLICY OBJECTIVES
1. *Achieving a simultaneous reduction in unemployment and inflation
a. The Phillips curve shows this inverse relationship bw inflation and unemployment,
highlighting the trade off that govts face when making policy decisions
b. Since 1993, Aus has had a low inflation target of 2-3%, which effectively gives low inflation
priority over lower unemployment
2. *Achieving eco growth and external balance
a. Strong eco growth often results in a deterioration in the current account on the balance of
payments
b. This is bc higher eco growth is often associated with increased consumption and investment
 volume of imports rises + c&f surplus rises  CAD rises
3. Achieving eco growth at the cost of environmental damage and greater income inequality E.g.
a. A govt that approves extensive mining projects without regard to their environmental
effects may promote faster eco growth, but this could occur at heavy cost to natural
environment and could damage other industries e.g. tourism
b. Privatised companies sharply raising prices or micro reform resulting in an increase in
structural unemployment
4. Short-term and longer-term objectives
a. E.g. structural change involves short-term costs (such as increased structural unemployment
and additional costs to govt) and long-term benefits (such as higher rate of sustainable eco
growth)
b. Govts often focus more on short-term objectives bc of political considerations such as the
desire to be re-elected, rather than long-term objectives where benefits will be experienced
for some time
*Major conflicts
Chapter 14: Fiscal Policy
INTRODUCTION
When govts make smaller changes to fiscal policy throughout the course of the year, the full costings of
these decisions are set out afterwards, either in the next Budget or in the Mid-year Economic and Fiscal
Outlook statement (released around late Nov. or early Dec. each yr) – Keating govt introduced it during the
1980s
BUDGET OUTCOMES
The fiscal/budget outcome gives an indication of the overall impact of fiscal policy on the state of the
economy. There are 3 possible budget outcomes:
1. Balanced budget: a zero balance that occurs when planned govt revenue=planned govt expenditure
2. Budget surplus: a positive balance that occurs when PGR > PGE
3. Budget deficit: a negative balance occurs when PGR < PGE
NB. Govts usually aim to achieve surplus/deficit to either promote eco growth/contraction
The Cwth Govt’s Budget includes 2 measures of the budget outcome, which are the result of different
accounting methods:
1. The fiscal outcome
2. The underlying cash outcome
Each yr, the levels of govt spending and revenue collection, and thus the Budget outcome, change. This
reflects the impact of 2 key factors:
1. Discretionary changes in fiscal policy
 Involve deliberate changes to fiscal policy such as reduced spending/changing taxation rates
 Influence the structural component of the Budget outcome
 E.g. if the govt deliberately increased expenditure in order to stimulate demand
2. Non-discretionary changes in fiscal policy
 Caused by changes in the level of economic activity (i.e. business cycle)
 Influence the cyclical component of the Budget outcome
 E.g. when an economy is in recession, the Budget deficit will increase whereas during a period
of strong eco growth, the deficit will contract or the Budget will shift into surplus (b/c govt will
earn more revenue in the form of tax from businesses that are earning more – govt not
actually changing rates)
 Includes automatic stabilizers
o Play a counter cyclical role e.g. when growth is high, demand is automatically slowed
through higher tax revenues and reduced govt expenditure
o Nevertheless, on their own they can only counteract the severity of the business cycle –
govts still ultimately rely on discretionary policy measures
o 2 main types:
 Unemployment benefits E.g. eco recessionlevel of eco activity fallsrise in
unemploymentgreater govt expenditure on unemployment benefits
 Progressive income tax system (ppl on higher incomes pay proportionately more
tax than those on lower incomes) E.g. eco boomemployment opps
riseincomes riseworkers’ incomes fall into higher income tax brackets and ppl
who were previously unemployed start paying taxincrease in govt revenue
Impact on eco activity
General
The most sig short-term impact of fiscal policy is how it affects economic activity. The impact of fiscal
policy on eco growth can be gauged by looking at the fiscal policy stance. 3 stances are possible:
1. Expansionary
 Where govt plans to increase level of eco activity by stimulating AD – increase in AD leads to
multiplied increase in Y
 Can occur through either a reduction in tax revenue &/or increase in govt expenditure,
creating either a smaller surplus or a larger deficit than previous yr
 Leads to a reduction in unemployment, but if economy grows too quickly, inflation may rise
2. Contractionary
 Where govt plans to decrease level of eco activity by dampening AD – decrease in AD leads to
a multiplied decrease in Y
 Can occur through either an increase in taxation revenue and/or decrease in govt xture,
creating either a smaller deficit or a larger surplus than previous yr
 Reduces inflation, but risks increasing unemployment if demand is reduced too much
3. Neutral
 Govt does not change the budget outcome from the previous year’s level
 Budget should, in general, have no overall effect on the level of aggregate demand and eco
activity
Recent trends
 For many yrs, fiscal policy’s most important impact was its influence on the level of eco growth
o Keynesian economic theory, which dominated policy making bw the 1940s and 1970s,
argued that an expansionary budget involving increased spending or tax cuts would
accelerate eco growth, while a contractionary budget would decelerate eco growth
 Recent evidence suggests that the relationship bw fiscal policy and eco growth is more complex. E.g.
The experience of the late 1990s suggests that tighter fiscal policy can sometimes actually increase the
level of eco growth in the medium term, if it helps to:
o Achieve lower interest rates
o Improve business confidence
o Make domestic funds more easily available for investment
 opposite of crowding out effect
 Changes in fiscal policy may also affect monetary policy decisions E.g. some argued that the large
income tax reductions that came into effect bw 2006 and 2008 contributed to the RBA’s decisions to
raise interest rates, bc they increased household consumption and added to inflationary pressures at a
time when inflation was already rising
Impact on resource use
General
1. Direct
a. Govt directs funds towards a particular area of the economy E.g. healthcare
b. If govt expects that markets will not provide the resources quickly enough without govt
intervention
2. Indirect
a. Govt makes it more or less attractive for resources to be used in a particular way through
tax and spending decisions E.g. taxes on petrol
b. More likely
Recent trends
Unemployment and workforce participation
 Prior to Dec 2008, Aus’s official unemployment rate had fallen to well below 5%, its lowest level in 33
yrs
 Specific Budget measures have been introduced in recent yrs to address some of Aus’s longer term
labour market challenges – in particular, the challenge of increasing the participation rate E.g.
o 2005-06 Budget introduced ‘Welfare to Work’
o 2008-09 Budget raised the Child Care Tax Rebate from 30% to 50%
o 2009-10 Budget increased the age requirement for the aged pension
Impact on income distribution
General
From yr to yr, changes in fiscal policy play the most important role of any govt policy in influencing the
distribution of income in the economy E.g.
 Changes to taxation arrangements
o A reduction in tax rates at the upper end of the income scale would make the tax system
less progressive and may create a less equal distribution of income
o An increase in the rate of the GST (a regressive tax system) would make the income tax
system less progressive since lower-income earners would be paying a relatively higher
proportion of their incomes in tax, increasing income inequality
 Changes to some govt spending measures
o Increase in pensions to aged, carers etc. will positively affect income distribution
Recent trends
 Main impact of recent fiscal policy changes has been felt through changes to income tax rates
o Successive budgets have substantially increased the income thresholds at which each
income tax bracket cuts in, as well as making smaller reductions in the actual rates of tax
o The 2008-09 budget continued this trend by outlining a long-term plan for reducing tax
rates over a 4 yr period
 Other changes:
o Increased targeting of middle-class welfare in 2009-10 budget e.g. private health insurance
rebates
Impact on savings and the CAD
General
 Public sector deficit = negative savings/dissavings  will reduce the level of national savings (public +
private savings) 
o Crowding out effect
o Higher foreign debt greater CAD
Recent trends
 During the late 1980s and the 1990s, one of the main goals of fiscal policy was to help to increase
national savings and reduce the CAD
 However, there is little evidence to suggest that Aus’s increased public savings have helped to reduce
the CAD in the past decade – CAD remained at higher levels than during the 1990s
 2002: Howard govt abandoned external stability as an official objective of macro policy
o Instead, it ensured that the Cwth did not directly add to Aus’s savings imbalance by running
a budget deficit
o This yr, eco growth and low unemployment were given a higher priority – means that Aus
govt is currently a net borrower
METHODS OF FINANCING A DEFICIT
In recent times, when it has run a deficit the Aus govt has relied exclusively on borrowing from the
domestic private sector, although it has suggested that it might also consider borrowing money from
overseas.
Methods available to govt:
1. *Borrowing from the domestic private sector
a. Under this system, the govt sets the value of bonds to be sold (determined by the size of the
deficit to be financed), and the prospective purchasers tender to buy a certain quantity at a
particular rate of interest
b. The govt then accepts the tenders, starting with those offering to buy at the lowest rate of
interest, through to the highest, until all bonds are sold
c. Adv: Govt can always be certain that:
i. It will fully finance its deficit
ii. The market will set the interest rate on newly issued bonds
d. Disadv: crowding out effect
i. Describes how a budget deficit will soak up funds in Aus’s domestic savings pool,
putting upward pressure on interest rates and leading to a reduction in private
sector spending and investment (i.e. offsets expansionary effect of budget deficit)
ii. The public sector will often ‘crowd out’ the private sector of the domestic market
since lenders prefer to lend to the govt
iii. This reduces private access to domestic savingsprivate sector may be forced to
borrow overseas
iv. The strength of effect depends on eco conditions – if govt increases fiscal deficit
during economic recession, it is less likely to crowd out private sector, since I and S
would be low at this time
2. *Borrowing from overseas
a. To minimise the crowding out effect, whilst still stimulating growth, the govt can borrow
from overseas (e.g. China and middle-eastern countries)
b. The last time the govt borrowed from overseas was during the late 1980s
3. Borrowing from RBA (monetary financing/monetising the deficit)
a. This amounts to the govt printing money in order to finance its expenditures
b. Since 1982, with the deregulation of the financial sector, the govt has not borrowed from
the RBA in order to finance its deficit
c. This is bc it increases the money supply and thus adds to inflation + it means that there is no
longer a direct connection bw fiscal and monetary policies
4. Selling assets
a. Selling assets, such as Cwth land or the Cwth’s share in businesses, namely Telstra or Aus
Post, does not reduce the level of the fiscal deficit or the underlying cash outcome, bc they
are adjusted to reflect one-off transactions
b. However, in cash terms from yr to yr a govt can create a headline budget surplus by selling
assets
*2 main sources of finance for 2009-10 Budget
Using budget surpluses
The govt can use the surplus in 3 ways:
1. Depositing it with the RBA
2. Using it to pay off public sector debt
3. Placing the money in a specially established, govt-owned investment fund
For several yrs the govt used surplus funds to pay off public sector debt. This reduces the size of the debt,
and frees up funds on financial markets for other purposes. However, the increase in funds available for
private sector investment may offset the contractionary effect of the fiscal surplus.
The establishment of dedicated investment funds (E.g. Building Australia Fund, Education Investment
Fund, Health and Hospitals Fund in 2008) shows how Aus has shifted away from the traditional approach
of simply putting surplus funds in the RBA, earning low rates of interest.
Public sector borrowing and debt
Although the budget outcome is an effective measure of the underlying stance of fiscal policy, it does not
represent the full impact of the public sector on the economy.
The public sector underlying cash outcome, on the other hand, does. It shows the borrowing needs or
surplus funds from all levels of govt, as well as govt authorities and PTEs. E.g. A rising deficit or falling
surplus (as a percentage of GDP) would mean greater public sector stimulus to the economy.
From the late 1990s until recently, the public sector cash outcome was in surplus.
Over a period of time, running a public sector deficit results in an accumulation of public sector debt
(otherwise known as national debt). It consists of the accumulated debt of the govt sector, which is owed
both domestically and overseas.
Public sector debt has been reduced significantly over the past decade (from a peak of 34% of GDP in
1994-1995 to 0% in 2008-09), primarily as a result of lower budget deficits and the privatisation of govt
business by Cwth and State govts.
NB. Public sector = Cwth govt + state govt + govt instrumentalities (also known as PTEs)
Net foreign debt = total amount owed to overseas lenders by public + private sectors
Net public sector debt = national debt = total amount owed to domestic and overseas lenders by public
sector
THE CURRENT STANCE OF FISCAL POLICY
History **only read
 1st term of Howard govt saw substantial reductions in spending on govt programs E.g. abolition of many
labour market programs, tighter eligibility test for unemployment benefits
 2nd term of Howard govt saw a rebound in spending, shift in the tax mix from direct (income) tax to
indirect tax (GST)
 3rd and 4th terms of Howard govt saw a return to modest budget surpluses (resources boom increased
govt revenue), sig personal income tax cuts, increased spending on priority areas E.g. defence
 1st budget of Rudd govt saw a continued budget surplus (3 new futures funds), slowdown in growth
of spending (despite income tax cuts)
 2nd budget of Rudd govt saw a massive deficit in response to GFC
Chapter 15: Monetary policy
THE OBJECTIVES OF MONETARY POLICY
Inflation targeting
The decision to follow the example of several other countries including Canada and NZ in targeting
inflation only reflects numerous important aspects of monetary policy:
 Well suited to fighting inflation
 Unsuccessful in achieving simultaneous goals in the past (e.g. 1980s: CAD targeting)
 RBA independently conducts monetary policy – minimises damaging political influence (e.g. keeping
interest rates low to please voters)
 Possible to achieve low inflation without incurring cost of rising unemployment
+ it’s been part of a worldwide trend!
NB. Target is flexible – inflation can emerge due to shocks and events outside of the RBA’s control but
inflation should remain within target over course of business cycle.
Some of the indicators considered by the RBA Board:
 The (underlying) inflation rate
 Inflationary expectations
 Wages growth
 The rate of unemployment




The rate of eco growth
Interest rates
The exchange rate
The balance of payments
THE IMPLEMENTATION OF MONETARY POLICY
Monetary policy involves influencing the cost and availability of money in the economy. There are 2
possible instruments for conducting monetary policy:
1. The RBA may control the growth in the money supply in the economy through its control over the
money base = monetary targeting
2. The RBA may influence the general level of interest rates in the economy by setting the short run
cash rate = rate-setting monetary policy (i.e. Does not directly control/regulate the market interest
rates charged by banks to their customers)
Monetary targeting was used in Aus from mid 1970s to early 1980s. However, it did not prove to be
successful – monetary targets were regularly missed and money supply figures were distorted by the
movement of funds from banks to other financial institutions that were not subject to RBA regulation and
controls. Now, monetary policy in Aus (as in most other modern market economies) is implemented
through an interest rate instrument.
How DMO work
Banks must hold a certain proportion of their funds with the RBA in Exchange Settlement accounts in order
to settle payments with other banks and the RBA.
E.g. funds flow from ANZ Bank’s ES account to Westpac Bank’s ES account when a customer of the ANZ
bank uses a cheque to buy a g/s from a business that has a bank account at Westpac bank
At the end of each trading day, settlements b/w banks cancel out, having no net impact on the supply of
money. Some banks, however, will need to borrow in order to settle their daily transactions, while others
will have surplus funds that they can lend to earn interest.
The RBA influences the cash rate by affecting the supply of funds in the OMM through DMO.
E.g. when the RBA buys second-hand Cwth govt securities from a bank, it pays for them by depositing
money in the seller’s ES account, adding to total ES balances and creating a surplus of funds in the OMM.
This puts downward pressure on the cash rate.
Conversely, when the RBA sells securities to a bank, it withdraws money from the seller’s ES account,
subtracting from total ES balances and putting upward pressure on the cash rate.
In recent yrs, with declining govt debt levels reducing the supply of CGS, the RBA has shifted from using
outright purchases and sales of CGS, instead using repurchase agreements to conduct DMO. However,
repos won’t be needed anymore considering the size of the 2009-10 Budget deficit.
THE IMPACT OF CHANGES IN INTEREST RATES
Monetary Domestic Overnight
Cash
Market interest
policy
market
money
rate
rates (change to
stance
operations market
maintain
margins)
Tightening RBA sells
Shortage of Rises
Rise
govt
borrowable
securities funds
Loosening
RBA buys
govt
securities
Excess of
borrowable
funds
Falls
Fall
Consumption and
investment spending
Economic
activity
Consumers and
businesses have to pay
more on existing debts;
new borrowers find it
harder to borrow funds
decrease
C&B have to pay less
on existing debts; new
borrowers find it easier
to borrow funds 
increase
Decrease
Increase
The market interest rates are affected:
1. Predominately by the cash rate since 90% of a bank’s funds come from the short term money
market e.g. increase in cash rate  more expensive for financial institutions to obtain funds in
OMM  increases overall cost structure of borrowings, eventually flowing through to longer term
rates, as banks try to maintain their profit margins
2. Availability of funds from overseas lenders (particularly America) = 10%
e.g. banks put up rates in response to decrease in availability and therefore, increase in cost
Chapter 16: Structural change and microeconomic policies
STRUCTURAL CHANGE AND MICRO REFORM
Structural change:
 Is important for individual economies because of the importance of remaining competitive in a fastchanging global economy. If an economy is slow to change, it may find that:
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o Overseas demand for its exports falls bc it is no longer producing the most advanced
products/bc other countries are now selling the same items more cheaply
o Domestic demand for imports increases (for the same reasons as above)
o Overall, it is likely to experience lower productivity growth, lower eco growth, higher
inflation, lower competitiveness, higher external liabilities, slower growth in real incomes
and lower living standards
Causes of structural change:
1. Market forces:
a. Technological change: can affect consumer tastes and preferences by introducing new
products; leads to more efficient production processes, changing the way g&s are produced
and delivered to consumers
b. Changes in human behaviour: as a result of income changes, changes in the distribution of
income, changing lifestyles, demographic changes – eg. In the age composition of the pop
c. Increasing global specialisation: and changes in the types of goods traded and the levels and
nature of foreign competition
d. Resources discovery and depletion: eg. New mineral deposits, salinity problems
2. Govt policies:
a. Trade and investment liberalisation: reduction in barriers to trade and deregulation of
capital markets
b. Reform policies in the govt sector: such as privatisation of public utilities and infrastructure,
policies to promote competition for former monopolies, outsourcing of some public service
activities
c. Labour market reform: such as how wages are determined (enterprise bargaining etc.)
d. Business regulations: in areas such as restrictive trade practices, corporation law and price
monitoring
e. Taxation reforms: broadening of income tax system, the GST and reforms to business
taxation
NB. Globalisation is a sig factor in the acceleration of this change
Market forces are more active in driving structural change than govt forces
Constraints on the speed of structural adjustment:
1. The speed with which factors of production can move from one area to another E.g. workers must
retrain, existing capital equipment must be adjusted/replaced, entrepreneurs must find ways to
convince consumers to buy new products
2. Govt policies E.g. protectionist policies may shield certain inefficient industries, labour market
policies that do not allow for variations in wage levels provide no incentive for workers in declining
industries to retrain etc.
Recent decades have seen a shift in the govt’s focus from macroeconomic management to microeconomic
reform. This reflects:
 The govt’s argument that many of Australia's economic problems (e.g. Aus’s regular trade deficits and
labour market problems) are caused by structural factors that cannot be addressed through
macroeconomic policies, which simply aim to manage the level of economic activity
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 The move from demand-side to supply-side policy measures – by improving competitiveness,
productivity, and efficiency of Australian industries, micro reform aims to reduce business costs,
shown through a right-ward shift in the AS curve
Increasing supply as a result of micro reform
MICRO REFORM AND INDIVIDUAL SECTORS
Why workable competition?
 The govt considers competition desirable bc it will lead to a more efficient use of resources, lower
production costs, product innovation, and lower prices for consumers.
 This is bc those remaining firms can then operate on a larger scale and achieve the lowest possible long
run average costs of production
 However, micro policies need to adapt to the specific features of individual industries if they are to be
effective in promoting structural change.
 Therefore, the goal of promoting competition needs to be balanced against the need for economies of
scale in that industry = workable competition
Business practices that are outlawed by the trade practices act include:
 Monopolisation: which occurs when a firm uses its dominant market position to eliminate competition,
such as through temporary price cutting
 Price discrimination: which occurs when a firm sells the same type of good or service in different
markets at different prices (for reasons not related to different costs such as for transport)
 Exclusive dealing: which occurs when a firm sets conditions for supply that exclude retailers from
dealing with other competitors
 Collusion and market sharing: occurs when firms get together to fix prices or agree on a market sharing
arrangement that reduces effective competition bw firms
Examples of micro reform (for more details, see micro essay)
1. Deregulation
a. E.g. Agricultural industries
b. Continuing regulation
2. Reforms to PTEs
3. National Competition Policy reforms
4. Future reforms
5. Improving Aus’s trade performance (Since 1980s, there has been a shift away from direct policies to
improve Aus's trade performance)
a. Direct
i. Protection
ii. Trade negotiations
iii. Trade promotion and export assistance programs
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b. Indirect
i. General assistance programs
ii. Exchange rate policy
Future reforms
In 2006, State and Federal Governments agreed to launch a new wave of microeconomic policies, now
called the COAG Reform Agenda, which aim to:
 Remove impediments to raising productivity through regulatory reforms and competition reforms
to Cwth-State arrangements
o 2008: ‘seamless national economy’ = focus of reforms bc overlapping and inconsistent
regulations impede productivity growth and the competiveness of the economy
o E.g. OH&S, national occupational trade licensing, business reporting requirements and the
national regulation of consumer credit
 Increase workforce participation and mobility
 Improve service delivery by govts
 Contribute to the broader goals of social inclusion, closing the gap on Indigenous disadvantage,
environmental sustainability.
The reforms will be monitored and assessed by the new COAG Reform Council (CRC). According to research
undertaken by the Productivity Commission:
 The competition and regulatory reforms could improve GDP by up to 2% in the long run
 Reforms to increase workforce participation and productivity could improve GDP by 6% and 3%
respectively within 25 years
Trade Performance
Trade Negotiations – direct
Governments try to open up access to overseas markets through trade agreements. There are 3
dimensions of Australia's involvement in trade negotiations:
1. Bilateral trade negotiations
 Easiest to negotiate
 E.g. 1983 CERTA with NZ
 Implemented through the Market Development Task Force.
 Currently the focus of Aus trade policy, with separate negotiations occurring between Australia and
China, Malaysia, Japan, etc.
2. Regional trade liberalisation
 2008: ASEAN-Australia-NZ (AANZFTA) finalised – will cover cover 16% of Australia's trade in goods
and service and is expected to boost the Aus economy by $US 19 billion over the decade after its
implementation
 1990s: Aus's regional trade negotiations focused on APEC – even though Aus is still striving for free
trade by 2020, this is now considered unachievable, as the forum's target has made little progress
in recent years.
3. Multilateral trade agreements e.g. WTO
 Aus actively uses the WTO to maximise its trade interests:
o To pressure other countries to comply with the WTO agreement e.g. Aus has lodged several
complaints with the Disputes Settlement Body of the WTO
o To continue reducing trade barriers, esp in agriculture
However, trade agreements are not the major policy to improve Australia's trade performance since
Australia's major trade problem is more a lack of globally competitive exports.
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Trade promotion and export assistance programs – direct
 While protection and direct assistance for producers has been substantially reduced during recent
years, some export assistance programs still exist.
 Austrade provides financial assistance, information on potential export markets and marketing
advice.
o Main program: Export Market Development Grants (EMDG) scheme, which reimburses
exporters for some of their costs in promoting their exports in new markets. This is
effective, providing around $200 million in grants to over 3,000 Australian businesses to
help them find export markets and enhance export promotion.
 Australia's membership of the WTO can impose constraints on the policies we use to assist our own
industries.
o E.g. Australia has been criticised for using quarantine arguments to protect local agricultural
and food processing industries, which are necessary to prevent the entry of exotic diseases
into Australia.
General industry assistance programs – indirect
have an indirect effect on our trading performance if they lead to the emergence of successful and
competitive exporters.
While Australia generally does not adopt strategic industry policies, the govt has implemented special
assistance packages for some industry sectors E.g. motor vehicle industry
 The Automotive Competitiveness and Investment Scheme (ACIS) is a 10 year, $4.2 billion program that
will assist the automotive industry until 2015 as tariffs on imports are reduced
 It aims to encourage new investment and innovation through import duty credits (that make imported
inputs cheaper) and tax breaks for research and development (e.g. environmentally friendly cars)
Exchange rate policy - indirect
In the past, governments have used exchange rates as an indirect instrument of trade policy. E.g. lower
exchange rate value to improve competitiveness of their products (on domestic and world markets)
While the Australian government may occasionally try to stabilise the dollar when it is volatile, it does not
target any particular exchange rate. The ability of the government to affect our trading performance
through exchange rate policy is limited since the dollar is floating and its value is determined in the foreign
exchange market.
EVALUATION OF RECENT MICRO REFORMS
 Now that sufficient time has passed for many of the micro reforms of 1980s and 90s to produce
measurable outcomes, it is possible to review progress
 Economists generally feel that micro policy has been successful in delivering increased productivity,
sustained higher rates of eco growth, low inflation and improved international competitiveness
 However, in many areas Aus has simply been catching up with rest of the world
 Despite effectiveness of many structural change policies, they have negatively effected some parts of
community e.g. rural and regional areas
 The OECD’s most recent review of Aus economy in 2003 noted that further reforms to labour, product
and financial markets and to social policies are still needed
 In an environment where eco reform is increasingly unpopular and inequality is rising, it may prove
difficult for Aus to sustain further micro reform despite effectiveness in achieving past goals
EFFECTS OF MICRO REFORM (for more details, see micro essay)
Benefits
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1.
2.
3.
4.
5.
Productivity growth
Inflation
Economic Growth
Job opportunities
Trading performance
Costs
1. Structural unemployment
Chapter 17: PRICES AND INCOMES AND LABOUR MARKET POLICIES
INTRODUCTION
Govts intervene in labour markets to achieve:
 Macro objectives such as low inflation and unemployment (since wages growth is a major influence on
inflation)
 Micro objectives such as productivity growth and improved competitiveness for Aus businesses, and
resolving disputes that arise in the workplace
 Objectives relating to the distribution of income and wealth, such as ensuring that fair minimum
standards apply to all employees (since wages are the main source of income for most households)
Historically, wage determination in Aus has not been left to the free operation fo the forces of s&d in the
labour market. Rather, the govt has played an important role in influencing wage outcomes either directly
or through independent industrial courts and tribunals.
PRICES AND INCOMES POLICY
Prices and incomes policy: is a macroeconomic policy that seeks to control the growth rate of prices and/or
wages and expand employment by imposing restraints on wages growth
The Hawke and Keating Govts of the 1990s were the last to use it in what was known as the Prices and
Incomes Accord.
Reasons for p&i policies (SSIIC)
1. Reducing inflation and unemployment
a. A freely functioning labour market may allow a wages breakout, where large wage rises in 1
part of the economy trigger a rush of similar wage claims and an inflationary spiral (as in
1980s)  possibly leading to higher unemployment
2. *International competitiveness
a. Given that labour costs constitute around 60% of business costs, the competitiveness of the
labour market makes an important contribution to Aus’s ability to compete on global
markets
3. Reduced strike levels
a. Without an effective mechanism to resolve disputes bw employers and employees, there
may be a higher risk of frequent industrial action e.g. strikes
b. Strikes impose a sig cost on the economy and can damage Aus’s international reputation
(wharfies of 1980s)
4. Fairer distribution of income
a. Without govt controls, wage earners with greater bargaining power are able to negotiate
large wage increases than those with limited bargaining power  worsens income
inequality over time
b. Businesses that operate in uncompetitive markets may increase prices and generate
excessive inflation  hurts low-income earners the most
5. Achieving specific policy objectives
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a. E.g. the Keating govt used it to introduce compulsory superannuation as part of its objective
of raising national savings
*major argument in Aus in the 1980s
Possible prices policies
A prices policy: involves govt controls and guidelines concerning the size of price adjustments in the
economy. Its main role is to control inflation.
But, it has never been of great importance to Aus economy bc Cwth govt does not have constitutional
power to control prices. Nevertheless, it is able to influence prices through actions of the Aus Competition
and Consumer Commission (ACCC), which:





Conducts inquiries into pricing structures
Recommends changes to regulatory policies for specific industries
Initiates legal action when a company breaches trade practices laws
Gives negative publicity to businesses where it finds there is excessive overcharging or ‘price gouging’
Can prohibit businesses from taking over or merging with rivals if that is likely to give them the ability
to raise prices to consumers
The ACCC’s main focus is to ensure that genuinely competitive forces are operating in each industry sector.
It has adopted a ‘hands-off’ attitude towards industry regulation by progressively removing industries from
its prices monitoring schedule. It is more likely to conduct investigations into pricing strategies in industries
where some form of anti-competitive conduct is suspected
These actions are part of the ACCC’s function as a competition watchdog that enforces the Trade Practices
Act 1974. They are not seen as part of a co-ordinated prices policy designed to restrain inflation.
Possible incomes policies
The Cwth govt in Aus does not have the constitutional power to set income levels. It can, however, est the
framework for determining the wage levels of employees. There are two options available:
Centralised wage determination
A system in which a govt or industrial tribunal determines wages and working conditions for all employees,
regardless of which firm they work for.
Those in favour of this system argue that a centralised decision is needed to protect the interests of those
on low wages while restraining inappropriate and excessive wage increases, so as to minimise cost-push
inflation and possibly increase employment.
Under this system, there are 5 possible criteria that could be used for wage adjustments, such as:
(PerCENT)
1. Needs-based principle:
a. Wage adjustments are made according to needs  main goal is to provide an adequate
income that satisfies the basic needs of the average employee
b. Could rely on automatic wage indexation/partial wage indexation – whereby nominal wages
are adjusted according to changes in the CPI in order to maintain the purchasing power of
workers’ incomes
2. Capacity to pay principle:
a. Can relate to either the capacity of the firm to pay for a wage rise, or to the capacity of the
economy to afford an across-the-board wage rise
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b. This requires an increase in productivity or an increase in profit levels – to avoid passing on
the cost of higher wages in the form of higher prices to consumers
3. Employment outcomes:
a. Some economists argue that businesses will employ more workers if the level of minimum
wages is set at a lower rate
b. Necessary to balance the goal of moving individuals into paid work with the goal of ensuring
that everyone who works a full time job is able to enjoy at least a basic standard of living
4. Sustaining wage growth at the level of major trading partners
a. To avoid an erosion of Aus’s international competitiveness
5. Productivity increases:
a. Wages increases would be based on overall productivity growth in the Aus economy
Advantages:
 May help to achieve key eco outcomes e.g. lower inflation, reduced unemployment, and a fair
distribution of income and lower strike levels
 Gives the govt an additional policy tool with which to achieve its eco objs E.g. govt may offer a trade-off
bw a tax-cut and lower wage increases
Disadvantages:
 Lower productivity growth – due to lack of incentives i.e. workers are guaranteed a uniform wage
increase, regardless of whether/not they improve work practices
 Higher inflation – if the rate of inflation is high at the time when centralised wage fixation is introduced,
it is more likely to lock in that higher inflation rate if wages are indexed to inflation rates under the
incomes policy
Decentralised wage determination
A system in which wages and working conditions are determined through negotiations bw individual firms
and their employees (or unions)
The role of central govt tribunals/agencies is reduced. Instead, market forces of s&d + individual firm’s
capacity to pay determine the size of wage increases. This ensures greater wage flexibility + wage levels
can change bw diff firms and industries.
Since early 1990s when Aus shifted to this type of system, the system has become more decentralised.
Adv:
 *More efficient allocation of resources + structural change: it encourages labour resources to move to
firms and industries that are more efficient and which have the capacity to pay more
 Employees have incentive to work more productively reduces inflationary pressures improves
international competitiveness
 Wage flexibility labour market can adjust when the economy is affected by shocks, helping to keep
unemployment at a lower rate e.g. wages fall rather than employment rate
*Main adv
Disadv: greater inequality
 Workers doing the same job in different industries or firms may be covered by very different pay and
working conditions
 Wage increases tend to reflect the bargaining power of employees (influenced by the employees’ skills
or the extent of union membership) rather than productivity improvements
The degree of govt regulation (as opposed to the degree of centralisation)
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Regulation: the collection of govt rules and institutions that influence the operation of markets and
participants in markets
The govt plays a role in est the framework for the industrial relations system. The govt may choose to:
1. Only impose minimum standards for all employees, covering issues such as OH&S and protection
from discrimination, but not to regulate wage outcomes/other working conditions = deregulated
2. Control the process of enterprise bargaining and the content of agreements through industrial
relations laws = regulated
Although the Aus industrial relations system has been decentralised since 1994, most labour market
economists argue that it is still subject to a sig amount of regulation – although the nature of that
regulation has changed over time – from favouring employees in the early 1990s to favouring employers
since 2006. Many also argue that wage determination needs to remain regulated to ensure fair outcomes.
THE SHIFT FROM INCOMES TO LABOUR MARKET POLICIES
Labour market policies: microeconomic policies that are aimed at influencing the operation and outcomes
in the labour market, including industrial relations policies that regulate the process of wage determination
as well as training, education and job-placement programs to assist the unemployed
From a highly centralised system under which most employees had their wage determined by the govt’s
prices and incomes policy in the 1980s, the 1990s saw a shift to a decentralised system where wages are
mostly determined through workplace bargaining.
The industrial relations system has gone through several transitions since the 1990s:
 The introduction of enterprise bargaining as an add-on to centralised wage increases in 1991
 Changes to the industrial relations system in 1994 that resulted in most workers shifting on to
collective enterprise agreements
 The 1996 Workplace Relations Act, which further decentralised the industrial relations system and
created a new formal stream of individual contracts
 The WorkChoices legislation in 2006, which re-wrote the Workplace Relations Act, dismantling much of
the award system with the aim of shifting workers onto individual contracts
 Changes in 2007 which re-instated a safety net test for workplace agreements
 Changes in 2008 that restricted the use of individual contracts within the formal industrial relations
system
 Fair Work Australia established in 2009
Aus formally abandoned an incomes policy in 1996 after the election of the Howard govt, but by this time
it had a very limited role in macro policy. Thus, the govt currently uses monetary policy as its major macro
policy tool to prevent excessive wage rises.
 RBA perceives annual wages growth (reflected in Wage Price Index) in excess of 4.5% as a threat to its
target of keeping inflation in the 2-3% target range.
 Therefore, the RBA has warned, if wage growth rises above 4.5% its policy response is likely to include
raising interest rates as a means to slow down eco growth and contain inflationary pressures.
THE CURRENT INDUSTRIAL RELATIONS FRAMEWORK
The Rudd Govt’s ‘Fair Work Act’ will have 9 main elements: (CAANN UU FicS it?)
1. National system: labor will retain and improve workcoice’s uniform national IR system
2. AWAs: No new AWAs may be entered into, although existing AWAs will be permitted to run their
course and some workers may be employed under ‘individual transitional employment agreements’
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3.
4.
5.
6.
7.
8.
9.
until the end of 2009. Until then, all new ITEAs and collective agreements will be subject to a nodisadvantage test.
CAs: the main form of bargaining will be through collective enterprise agreements.
Safety net: Labor’s safety net will have 2 parts: National employment standards + awards
NES: all employees will be protected by 10 legislative NES covering e.g. standard work hrs, parental
leave, annual leave
Awards: the award system will be modernised and simplified. It will apply only to employees
earning less than $100,000/yr. Awards may contain only a further 10 minimum employment
standards e.g. flexibility clause
Unfair dismissal: labor will restore the unfair dismissal laws with streamlined procedures and
special arrangements for businesses with fewer than 15 employees.
Union power: Labor will retain many of Workchoice’s measures to limit union power e.g. ban on
secondary boycotts
Fair Work Australia: will be the new ‘one-stop shop’ for IR issues; it will work in concert with Fair
Work Ombudsman (which will ensure compliance with FWA).
CHANGING WORK PRACTICES
In practical terms, the impacts of the shift towards bargaining have been felt more strongly in changing
work hrs. E.g.
- Employees working longer shifts but having more days off
- Employers having greater say in organising work patterns of employees
Other changes brought about through enterprise agreements relate to work arrangements and pay
structures E.g.
- performance-based pay
- more flexible job descriptions
- ‘cashing out’ sick leave
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