Discuss the effectiveness of macroeconomic policies in achieving the

Australian government's economic objectives of economic growth and price

stability

By Jobin John

Macroeconomic policies such as fiscal and monetary are used by the Australian government to
influence the level of aggregate demand in the economy. They are used in the short term in
order to smooth out fluctuations in the business cycle. Monetary policy controls the supply of
cash in the domestic market through open market operations coordinated by the Reserve Bank
of Australia through the manipulation of the cash rate (1.75%). Fiscal policy involves the
manipulation of the Budget to vary the amount of expenditure (G) and revenue (T).
Macroeconomic policies have been effective in achieving their economic objectives including
economic growth (3-4% pa) and price stability (2-3% across the cycle)

The government uses fiscal policy to achieve its economic objectives through discretionary and
non-discretionary outcomes to combat the cyclical and structural components of the Budget.
The 2016/17 budget focuses on effectively improving EG and job creation, adopting an
expansionary stance with a projected 37.1b deficit expected to improve to 6 b by the end of
2020 with all increases in spending being offset by reductions in payments elsewhere reflecting
the Governments strong commitment to fiscal restraint and budget repair. As it transitions
from the mining boom and expands into the services industry for sustainable medium to long
term growth. Subsequently reducing company tax to 27.5% for all small companies with an
annual turnover of $10 million from July 1, 2016 up to 25% in 2026, providing 5.3 billion in
tax cuts for small to medium business. Additionally business receive $1000 upfront for hiring
interns as a new $840 million scheme aimed at reducing youth unemployment with a further
$200 being paid to the intern on top of their income support. These changes are forecasted to
fund up 120,000 internships in a ambitious new attempt to get vulnerable young people into
jobs -Treasurer Scott Morrison. As a result Australias transition into the services sector
through improved support for business is expected increase employment and injections into the
economy, effectively increasing economic growth.
Price stability is the maintenance of inflation between 2-3% to maintain inflationary pressures.
Fiscal policy is not implemented with the objective of maintaining price stability but affecting
it indirectly. Controlling inflation can be achieved by adopting a contractionary stance which
theoretically stifles EG and sustains price stability. For example, in response to post GFC
recovery that caused demand pull inflationary pressures, the 2011-12 annual budgets adopted a
contractionary stance which resulted in the fiscal deficit falling 1.9% of GDP. Consequently,
inflation dropped from an average of 3.1% in 2010-11 to 2.1% in 2011-12, despite sustained
interest rates, highlighting the effectiveness of fiscal policy. The RBA has estimated that EG
higher than 4.5% will boost demand-pull inflation levels as consumers bid up prices in their
demand for goods and services. Inflation is therefore a speed limit on economic growth
highlighting the inherent conflict between price stability and EG.

Monetary policy is an indirect tool that affects economic growth through the manipulation of
the cash rate. This is achieved through the tightening, loosening and neutral stance which
occurs in the open market. Loosening of monetary policy involves decreasing the cash rate and
injecting more funds into banks to stimulate growth in the economy. This is evident in the Cash
Market graph below, where S goes to S2 increasing supply and r goes to r2 decreasing the cash
rate, this occurs when the RBA wants to stimulate growth such as during the Global financial
crisis when the RBA decreased the cash rate from 7.25% in September 2008, to a drastically
lower 3% in April 2009. This led to an increase in the supply of cash, enabling banks to lower
interest rates while still earning profits. This encouraged entrepreneurs to borrow money,
effectively increasing spending and GDP from $853 billion dollars in 2008 to $1055 billion
dollars in 2009. Though economic growth reached its lowest in the last ten years at 1.4% this
steadily grew to 2.4% in 2010, effectively increasing economic growth, coupled with a rise in
investors and tourist numbers in October 2008 due to the depreciated value of the Australian
dollar at 0.68 US increased injections into the economy. Furthermore retail sales in September
2008 where at $18,202 million and went to $19,531 million in April 2009 due to rising
consumer confidence and increasing tourism. Consequently the RBAs manipulation of the cash
rate plays a significant role in the medium to long term on economic growth.

Following on, Monetary policy is the main instrument used to affect price stability, which has
been effective in sustaining EG at a level that has not created excessive inflationary pressures.
By targeting a transparent and credible 2-3% inflation threshold over the business cycle, MP
has effectively anchored inflationary expectations thus dampening fears of a wage price spiral.
In fact, since 1993 Australia has not experienced such a self-perpetuating cycle, and inflation
has averaged 2.7% compared to 7.7% from 1966-1992. This stable rate has also alleviated the
risk of a recession-which high inflation is a precursor to- evidenced by Australias 21 years of
consecutive EG at an average of 3.9%p.a. Thus monetary policy has been instrumental in
maintaining a sustainable EG and inflation.

Though Macroeconomic are effective in their own respects they are severely restricted due to
time lags. Monetary policy is subject to approximately 6-12 months of time lag hence having to
forecast future economic conditions 18 months into the future. Whereas Fiscal policy requires a
long period to implement however, its effects are felt almost instantly, as it contributes directly
to aggregate demand.