Macroeconomic Policy, Inflation, Unemployment and Growth

1 Macroeconomic Policy, Inflation, Unemployment and Growth Introduction Australia has advanced a number of regulatory reforms aimed at improving its global economic rating. Key policies are directed towards matters of international trade, liberalization, export/import, and trade regulations. These policies have enabled Australia stay in its economic blue print despite the global economic crunch. These policies that govern operations globally, together with the formulation of sound fiscal and monetary policies have boosted the growth of Australian economy. For example, formulated polices aimed at liberalizing trade by doing away with barriers and creating cordial interstate agreements have seen an increase in trade gains.

Australia faces acute challenges as far as its working population is concerned; a good number of its populace is aging.

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2 Therefore, to foster a sensible economic wellbeing, the government of Australia needs to formulate policies that will enhance macroeconomic stability. These policies cut across the economic sphere i.e. they address matters of inflation, economic growth, trade, and unemployment. To address the issue of an aging population, the Australian government needs to advance attractive labour policies (Otto, 2007).

It is evident that the macroeconomic uncertainty that is slowly affecting the global economy is finally getting its place in the Australia public and private sectors, where senior management executives are in a mad rush to formulate measures that will enable their companies cope with the unstable world economy. Australia has made major strides towards the restoration of a stable macro economy. For macroeconomic stability to be realized, all policy makers and persons responsible for daily operation of companies should be ready to embrace the formulated policies by taking their implementation seriously. Australia as a country has made remarkable progress in both the formulation and implementation of policies. These policies seek to enhance the country’s macroeconomic stability and propel economic growth. But the million dollar question is whether these gains are sustainable. The sustainability of Australian economic growth is largely dependent on other economic determinants i.e. inflation and the factors that have continually enhanced growth in the past (Edgmand et. al, 2007). This essay looks at the macroeconomic aspects currently playing out in the Australian economy. The essay examines matters of macroeconomic stability, inflation, unemployment, and growth policies that are in operation and how they have transformed the economic outlook of this economy.

Economic Growth and inflation policies in Australia Despite the recent global economic crisis, the performance of Australian economy has been outstanding. Sound fiscal policies and monetary policies adopted in both the long and

3 medium policy frameworks are accredited for the magnificent performance. The formulation and subsequent adoption of these policies of monetary and fiscal policies has improved Australia macroeconomic stability stance. According to Taylor and Moosa (2008), fiscal and monetary policies are often incorporated in short term frameworks to combat inflation. Monetary policies are often instruments of the central bank that help mob excess cash in circulation to help contain inflation. On the other hand, fiscal policies are instruments employed by the government of the time to target inflation. These policy instruments are both used to bring down inflation to manageable levels, often low levels. Inflation is the state where a lot of money is chasing very few goods. Inflation often leads to rapid increase in prices of commodities.

A graph of Australia Economy

Source: dfat.gov.au The central bank of Australia, commonly known as Reserve Bank of Australia (RBA) is tasked with the responsibility of overseeing the monetary condition of Australia. The reserve bank through monetary arm plays a major role in containing inflation. Often, the allowed level of

4 inflation is 3%. To realize this objective, the Reserve Bank of Australia does a comparison of inflation rates i.e. looking at the current prospects and the rates in paper. This explicit approach of comparing inflation rates can be dated back to early 1990s (Reserve Bank of Australia, 2009).

Just like in other parts of the world, Australian fiscal policy is directed towards the balancing of deficits resulting from the national budget over a market cycle. Fiscal policy helps inject macroeconomic stability in an economy. From the aforementioned, it is apparent that fiscal policy is aimed at boosting the confidence of investors and consumers in an economy. Australia has accrued a number of advantages from sound fiscal policies. For example, through sound formulated fiscal policies, Australia was able to balance its 1997-1998 budget deficit. In addition, fiscal policies adopted in late 1990s helped Australia spur its surplus to greater amounts. The recent formulated policies are aimed at not only addressing budgetary policies, but also the finances of the Australian government (Reserve Bank of Australia, 2009).

To complement the policies aimed at spurring economic growth, the government has formulated regulatory frameworks that seek to nurture and enhance governance. Through these frameworks, the Australian government is looking to advocated sound and credible macroeconomic frameworks. These governance reforms, famously knows as structural reforms, have brought with them exchange rate flexibility and an improved monetary policy (McTaggart et al., 2010). In addition, the reforms have also enhanced the credibility of the Reserve Bank of Australia in its quest to keep inflation at manageable levels.

The economic growth of Australia has been very impressive over the last decade. This positive gesture was made possible by the constant appreciation of the country’s dollar. In addition, the cutthroat competition between some of the banking institutions has reduced market interest rates. The reduced rate has eased access to credit facilities which is otherwise injected

5 into the economy as investments (Jackson et al., 2008). This rapid economic growth experienced in Australia seeks to rapidly reduce the current unemployment rates. This will easily be done courtesy of the ever increasing investments brought about by macroeconomic stability.

A graph Showing Australia GDP Growth Source: economicoutlook.net

Unemployment Polices Adopted in Australia The global economic crunch impacts were not only limited to the United States of America, the effects of the crisis are well and alive at Australia. The financial crunch saw millions of jobs lost. This was largely because a good number of firms were looking to cut their costs (Stonecash et al., 2009). Due to the financial crisis, unemployment has continued to torment humanity. Being an impending disaster, the Australian government has formulated top notch policies aimed at reducing unemployment rates within its borders. The government of Australia has been forced to re-examine past employment policies with an aim of aligning them with the present demands. The Australian government’s revision of past employment polices is driven by its need to advance the economy towards full employment. To prove its seriousness on

6 the issue, the Australian government has set up a program called, ‘The Skills for the Future Inquiry and Review of South Australian Employment Program’ to help it address the sensitive issue of unemployment. This strategy is aimed at improving the skills of citizens. In addition, it looks to help citizens gain quality and highly paying jobs. According to Hatch (2010), Australia has done remarkably well in formulating sound policies to address unemployment within its borders than its counterparts in Asia. However, despites these major strides, Australia faces a grave challenge as far as an ageing population is concerned. An aging population is a drag to economic growth. This is because it increases the dependency ratio of a state. This implies that the small number of individuals who are working bear the burden of nursing and meeting other necessities of an ageing population. However, this impending economic catastrophe is being addressed by the advancement of feasible measures to increase productivity.

A graph showing Australia’s Inflation and Unemployment from 1995 Source: debtdeflation.com

7 Trade Policies Applied in Australia Trade is defined as the exchange of goods and services between two interested parties.

Trade has played a cardinal role in Australian economy. The economic prosperity currently enjoyed by Australia is derived from feasible trade and investment policies. According to Levitt and Dubner (2006), over 3 million jobs currently enjoyed by the Australian populace are in one way or another derived from import and export trade. Most of Australian exports come from mining. This implies that mining is the backbone of the economy as it not only creates avenues for employments, but is also responsible for Australian foreign receipts.

A Chart illustrating Australia’s export Source: dfat.gov.au

The rationale behind Australian trade policy is the elimination of barriers. Trade barriers minimize the movement of goods and services between states (Gittins, 2007). Therefore, their dismantling enhances economic growth and subsequent macroeconomic stability of a state. That is possible as exchange between economies is eased. The policy makers of Australia are in agreement with WTO on matters of trade liberalization. Being aware of the benefits to be

8 accrued from a liberalized market, Australia has been urging the World Trade Organization to engage in negotiations that are aiming to liberalize the world economy further. Furthermore, Australia has engaged other economies on matters related to the international prices of agricultural products. By forming a group called Cairns, Australia has been able to push for liberation of agricultural produce market. In addition, the group has been able to push for export subsidies for countries engaged in agriculture. The move is aimed at increasing agricultural produce and subsequently government revenues.

Australia, being a strong supporter of economic blocks, is a member of Asia Pacific Economic Cooperation (APEC) (Reserve Bank of Australia, 2009). APEC is a group that seeks to nurture cooperation to spur economic growth of Asia Pacific. This block is looking to dismantle trade barriers and enhance free trade in the larger Asia Pacific. As an integral call, the Asia Pacific leaders have joined efforts to enhance security in the larger Asia Pacific.

Macroeconomic stability and economic growth is never feasible without a secure place of doing business, thus the move to contain insecurity in the wider Asia region is an enough catalyst of economic prosperity. From the aforementioned, it is apparent that APEC has a larger call of containing terrorism in the wider Asia region.

Australia has not limited its trade engagements to Asia. In a move to enhance its international presence, Australia is constantly engaging key international players in its negotiations. Negotiated Trade Agreements between Australia and its international partners open up markets for Australian goods and services. In addition, it provides a hospitable environment for investments (Reserve Bank of Australia, 2009). For example, its agreement with New Zealand has widened trade and enhanced investment between the countries. These agreements have also been signed with western nations i.e. the United States of America.

9 Australia’s Balance of Payment Source: agsm.edu.au

Conclusion and Recommendations From the above discussion, it is apparent that Australia has done remarkably well to achieve macroeconomic stability despite the global financial crunch. Sound policies can be accredited for the impressive economic performance. The macroeconomic stability of Australian economy has reduced unemployment rates remarkably. Also, sound monetary and fiscal policies have thrived well to contain and keep inflation at relatively very low rates. The aforementioned economic prosperities have enhanced the living standards of Australian citizens.

10 Despite the above advantages accrued courtesy of good macroeconomic performance, Australia faces a major challenge in the pricing of goods and services. The high prices of goods and services have crippled its terms of trade. Another major challenge facing Australian government is related to labour supply. A good number of Australian citizens are aging faster, this dwindles their production ability.

To fully address these challenges, the government of Australia needs to improve the skills of its workforce through enhanced trainings and improvement of learning facilities; this will ensure that its workforce is fully baked and able to handle skill related tasks. On matters of efficiency, the government needs to devise ways of enhancing sectoral cooperation. Finally, the ongoing fiscal measures aimed at enhancing infrastructural development ought to be enhanced as they widen up employment avenues as well as spur economic growth. Similarly, monetary policies need to be keenly monitored to ensure that not only inflation is kept in check, but also that macroeconomic stability is enhanced.

11 Reference List Edgmand, MR, Moomaw, RL & Olsen, KW, 2007, Economics and contemporary issues, 7th edn, Thomson, South-Western Gittins, R 2007, Gittonomics, Allen & Unwin, Crow’s Nest Hatch, JV 2010, Reading between the lines, Pearson, Frenchs Forest, NSW Jackson, J, McIver, R & McConnell, C 2008, Economic principles, 2nd edn, McGraw-Hill, Sydney Levitt, SD & Dubner, SJ 2006, Freakonomics, Penguin, New York, NY Levitt, SD & Dubner, SJ 2009, Super freakonomics, Penguin, New York, NY McTaggart, D, Findlay, C, & Parkin, M 2010, Economics, 6th edn, Pearson, Sydney Otto, G 2007, `Central Bank operating procedures: How the RBA achieves its target for the cash rate’, Australian Economic Review, vol. 40 no. 2, pp. 216-224.

Reserve Bank of Australia, 2011, Monetary policy, viewed November 7, 2012, http://www.rba.gov.au/monetary-policy/index.html Stonecash, R, Gans, J, King, S & Mankiw, NG 2009, Principles of economics, 4th edn, Thomson Taylor, JB & Moosa, I 2008, Economics, 4th edn, John Wiley, Brisbane