Economic ReformPolicy Mix Essay Research Paper QuestionWhat

Economic Reform-Policy Mix Essay, Research Paper

Question:

What role do governments have in modern mixed economies such as Australia. Using appropriate indicators (macro economic aggregates) outline the present state of the economy. In what ways is the Commonwealth government using fiscal and monetary policies to influence the Australian economy. What are the main features of the government’s micro economic policy. Why is the government concerned about microeconomic reform.

Synopsis:

The role of government in Australia today has less influence on the market than they did a decade ago. It function now is to provide a stable internal and external balance under which the market can function. This is achieved through the use of fiscal, monetary and microeconomic reform.

Australia currently operates under a mixed economic system. This means that the government has partial control over the economy and has the ability to influence the markets. Recent moves by the government that shows the government’s role in the economy to be shrinking includes the privatisation of government business enterprises (GBE) and deregulation of the financial market. The main roles that the Australian government plays today are to ensure:

1) The efficient and even distribution of income (though CSSB, tax)

2) Provide a limited range of goods and services (Aust post)

3) General economic management through macro and micro economic policies.

In 96/97 the CAD fell to $20.9bn from the $27bn blowout during 95/96. This was largely due to a fall in domestic spending which lead to a slight rise in national savings. Inflation remained low and fell between the RBA’s 2-3% target. This gave way to the RBA’s 3 consecutive drops in interest rates to stimulate the economy. Economic growth has stabilised between 3-4%. Although this is a reasonable figure, a higher growth rate is required if unemployment is to fall from the 8.6% is has averaged for the past year. Overall economic performance has been reasonable but current figures show the problems with our external balance and unemployment will not be solved any time soon.

Fiscal policy is the government’s use of the Budget to achieve its economic management goals. This is done through revenue collection and government spending. In recent years there has been a shift away from the Keynesian view that fiscal policy is used to stabilise short-term fluctuations in demand. This refers to a contractionary stance during a boom period to dampen economy and an expansionary stance during a bust period to stimulate the economy. Current fiscal policies are aimed at the medium and long-term goals of resource allocation, income distribution and external balance. This is because fiscal policy is relatively inflexible and is adjusted on an annual basis.

One of the government’s objectives in using fiscal policy is to reduce the Public Sector Borrowing Requirement (PSBR). To do this the government has had a $3.9bn cut in discretionary spending during the 96/97 budget. This cut may be the first of several in a bid to achieve a budget surplus. One reason behind this goal is to maintain external stability. For the past decade (except for the late 80’s boom) the public debt has been on a continual rise. This was largely due to a succession of budget deficits. The result of this was a large increase in net income as a component of the current account, which in turn became a burden on the next budget. A surplus budget can be used to pay of the public debt thereby easing interest obligations.

At the same time a reduction in the deficit will increase national savings. By reducing the deficit, the government does not need as much national savings in order to finance the budget. This will leave a larger pool of savings to fund investment. Although a contractionary fiscal stance will increase public saving, they may decrease private savings. Cuts in government spending to programs aimed at increasing private savings (such as Austudy) have meant that the private sector must cover the costs, forgoing saving opportunities. This will mean a lower level of private savings but not enough to offset the increase in public saving. On the whole national saving increases.

Due to the multiplier effect, a reduction in government spending will impact the level of economic activity. The recent cut in government spending has dampened aggregate demand. This in turn produced low levels of inflation and economic growth.

By reducing the amount of government participation in the market, it hopes to achieve the ‘crowding in’ effect. This means that the private sector will invest in functions that the government once provided (CES facilities).

Monetary policy is the raising or lowering of interest rates to dampen or stimulate the economy. It is concerned with internal balance (ie. economic activity, employment and price stability). Unlike fiscal policy, monetary policies influence the economy indirectly through changes in financial conditions. This follows the belief that the level of financial activity plays a major role in determining the level of economic activity. The main indicator of monetary policy stance is the level of short-term interest rates.

The government is currently using monetary policy to boost the level of economic activity. By easing interest rates the private sect