Australian macroeconomic policy in recent years

Year 11 Economics Research Task

Fiscal policy: 2007- 2013

The government during the period from 2007- 2013 developed a strong Fiscal policy stance. In the years Prior to the Global Financial Crisis (GFC), the government decided to take a countercyclical approach to the economy through Fiscal policy as they had seen the unstable increase in levels of spending and the levels of saving. This is shown in diagram 1, government spending was at low point in the previous decade of 31.5 %. In the year of 2008, Australia entered the GFC a severe time of recession in the global economy this marked a period of expansionary policy. This is also shown through diagram 1, which shows the spike in government expenditure to 34.1 % in 2009- 2010. The government started to run budget deficits; this is when expenditure exceeds their intake. In 2010 Australia changed their stance and entered a period of contractionary Fiscal stance to attempt to bring the budget back from deficit to a budget surplus. This change was also brought on by the upcoming federal election, as the labour party had problems with their economic policies in the past. Despite the period of contractionary policy the fiscal stance of the Australian government made little difference on the end result.

During the government’s budgets for 2007 to 2013 there was a recorded $42 billion of expenditure mainly targeted at developing infrastructure, housing, education and infrastructure for the community? The government decided to focus on Infrastructure as the benefits it provides to the economy. The government has also chosen to increase expenditure for both education and disability care sectors.

Diagram 1:

Monetary Policy: 2007 – 2013

Prior to the GFC in 2008, the RBA increased interest rates to up to a level of 7.5% so that they could slow down the economic activity. This was the RBA’s reaction to increasing rates of inflation; they therefore increased interest rates to counteract this. The Inflation rate had risen to around 5% during 2007 which is well above the set level of inflation (2-3%). The GFC occurred in around 2008 and hit the economy this lead to the RBA lowering interest rates to around 3%. This resulted in a steep fall in levels of inflation rates to around 1.2%, in 2009. The RBA’s decreased interest rates by over 4%, from 2007 to 2008 (as seen in Diagram 2) the RBA sought to stimulate the Australian economy during the time of recession and attempting to limit the decline of the Australian economy

In 2009, the economy started to increase, as factors such as inflation started to grow again to around 3.5%, this lead to an increase in interest rates from around 3% to 4.75% by 2011. However, interest rates have fallen again, as the world attempts to recover from the effects of the GFC. This has seen the RBA reduce the interest rate from 4.75 % in 2011 to 2.75% in 2013. This interest rate is even smaller then the interest rate during the GFC of 3% this though has happened gradually opposed to the 4% drop in one year, which took place between 2007 and 2008. (See Diagram 2)

Currently, in 2013, the inflation rate is around 2% this rate is at the RBA’s proffered inflation rate level, which is its number one goal. The RBA has decided not to change the current interest rate of 2.75% in order to stop fluctuations of inflation.

Diagram 2:

Part 2: Policies in managing Aus. economy

The government uses Fiscal and Monetary policy in conjunction with the Australian economy, from 2007 to 2013. The government in comparison to other governments such as America and Europe have been successful in reducing the effects of the GFC on the Australian economy. This is due to the governments work with the RBA using an expansionary stance with Fiscal and Monetary Policies; this helped minimize the damage we saw other countries go through with the GFC along with capitalizing on the mining boom.

The United States government’s economic polies in Comparison to Australia were not used effectively; during the time of the GFC (2007 – 2013) this comparison reinforces the strong state that the Australian government put Australia in during the GFC

Diagram 3: Aus post GFC unemployment rate Diagram 4: America post GFC unemployment

One other sign of the success of the Australian government was Australia’s ability to manage the unemployment levels through Fiscal and Monetary Policy to below 6% over the 2007-2013 period, as shown in diagram 4. The U.S however had unemployment rates, from 2007 – 2013, at around 4.6% to 10%, as shown in diagram 5. This again shows the success of the Australian governments during the GFC and after the GFC and the use of Fiscal and Monetary policies in the economy, as they have kept unemployment rates relatively low in comparison to the U.S.

The ability of the Australian government in their use of expansionary policy and the time taken to react to the GFC, resulted in a series of deficits, while attempting to manage and maintaining relatively low government debt is impressive. As seen in diagram 3, Australia’s government debt remained quite low despite the government’s expansionary stances, which results in increasing debt. The previous of John Howard must also be given credit as they had run successive budget surpluses to, in order to have a large amount of saved funds giving the Rudd government the ability to react aggressively to events such as the GFC. Also allowing us to put out a substantial economic stimulus.
Diagram 5: x

There is still though a major challenge for the Australian government to continue their trend of running expansionary fiscal and monetary policy. As it is estimated that Australia will be required to spend from $320 billion up to $770 billion over the next decade so that Australia is able to continue in economic growth and to maintain inflation levels that are between 2-3%.

Based upon the evidence shown in the above paragraph Australia have used the Fiscal and monetary policies well to make sure that the inflation rate is around 2-3%, there is a relatively low amount of government debt and low levels of unemployment in the economy from 2007 to 2013

Bibliography:

1) http://parliamentflagpost.blogspot.com.au/2011/04/australias-current-debt-position.html
2) http://www.rebuildingthenation.com.au/finance/financing-infrastructure/
3) http://www.rba.gov.au/publications/smp/index.html

4) http://hsc.csu.edu.au/economics/policies_mgt/2592/Topic4Tutorial1.html
5) http://www.business.uwa.edu.au/__data/assets/pdf_file/0018/2254050/12-28-Australia-and-the-GFC,-Saved-by-Astute-Fiscal-Policy.pdf
6) http://www.budget.gov.au/2008-09/content/uefo/html/appendix_a.htm
7) http://archive.treasury.gov.au/documents/1033/HTML/docshell.asp?URL=TW_2005-04.htm
8) http://www.kewpid.net/notes/macro_reform.pdf
9) http://www.rba.gov.au/chart-pack/

Bibliography: 1) http://parliamentflagpost.blogspot.com.au/2011/04/australias-current-debt-position.html 2) http://www.rebuildingthenation.com.au/finance/financing-infrastructure/ 3) http://www.rba.gov.au/publications/smp/index.html 4) http://hsc.csu.edu.au/economics/policies_mgt/2592/Topic4Tutorial1.html 5) http://www.business.uwa.edu.au/__data/assets/pdf_file/0018/2254050/12-28-Australia-and-the-GFC,-Saved-by-Astute-Fiscal-Policy.pdf 6) http://www.budget.gov.au/2008-09/content/uefo/html/appendix_a.htm 7) http://archive.treasury.gov.au/documents/1033/HTML/docshell.asp?URL=TW_2005-04.htm 8) http://www.kewpid.net/notes/macro_reform.pdf 9) http://www.rba.gov.au/chart-pack/