FISCAL POLICY

Impact

1. Economic activity (Stabilization)

2. Resource use (Allocation)
3. Impact on income distribution (Redistribution of Income)
4. Impact on savings and the current account deficit

Strengths of fiscal policy

1. Selective
2. Direct
3. Automatic stabiliser
4. Controls spending up

Weakness of fiscal policy

1. Time lag
- Recognition:
- Decision:
- Implementation:
- Outside:
- Effect:
2. Inflexibility
-
3. Political problems
- 3 years electoral cycle, government reluctant to take difficult political decisions in
election years- may offer tax cuts
- Pressure from lobby groups – Greens, Welfare Groups
4. Crowding out
-
5. Unforeseen circumstances
- Exogenous factors: drought, war, tsunami, swine flu, GFC

MONETARY POLICY

Factors RBA changes cash rate

1. Trends in AD (C,Ip)
2. Leading indicators or credit, consumer and business
3. Prices, including CPI, wage rates, import prices and houses prices
4. External indicator : ER BOGS
5. Fiscal policy
6. Overseas problems – China
7. Economic objectives

Strength of monetary policy

1. Shorter inside lag

- RB Board meets each month (except Jan) and can implement a policy change.
2. Very flexible
- RBA makes decision that does not require specific authorisation by Parliament.
 3. Greater political neutrality
- RBA members are not chosen by the public.
4. Very effective during boom
- After GFC, 2011, inflation rate 3.3% annually, at the same time cash rate was at 4.75%
5. Most effective under floating exchange rates system (Cash rate effect AUD)
- 2011, exchange rate 1.04 USD to 1 AUD, cash rate was at 4.75%
6. Transparency
- RBA publishes a statement explaining each monetary policy decision of each Board
Meeting.
7. No crowding out effect
- No side effects from monetary policy.

Weaknesses of monetary policy

1. Longer outside lag

- 2017-2018, cash rate was consistent at 1.5% while CPI was at 2.1%
- 2018-2019, cash rate dropped to 1.0% while CPI decreased to 1.6%
2. Less effective during recession or trough
- 2012 to 013, the cash rate decreases from 4.25% to 3.0% wile Australia’s real GDP
dropped from 4.6% to 2.2%
3. Blunt policy instrument
- 2017-2018, cash rate was consistent at 1.5% while CPI was at 2.1%
- 2018-2019, cash rate dropped to 1.0% while CPI decreased to 1.6%
4. Not the only factor effecting exchange rate
- Other factors:
a. Interest rates differentials
b. Commodity prices
c. Purchasing power parity
d. Government credit ratings
e. Sentiment and speculation
5. Ineffective against cost-push inflation
- 2017-2018, cash rate was consistent at 1.5% while CPI was at 2.1%
- 2018-2019, cash rate dropped to 1.0% while CPI decreased to 1.6%
- Takes time to increase

STRUCTURAL CHANGE

Structural change trend

1. Agriculture 10 6 7
2. Mining 5 1 8
3. Manufacturing 14 15 8
4. Services 21 21 8

Causes for structural change

1. Change in the pattern of consumer demand

- EG:
2. Technological change
- Service industry, communication have rapidly change due to technological advances
such as internet and broadcasting.
 3. Government policy measures
- Microeconomic reform, National Competition Policy, Labour Market Reform
4. Economic growth rate
- EG:
5. International competition level
- National Competition policy
6. International competitiveness

Effect of structural change

1. Macroeconomic effects (SOL EG IR)

- EG: 2018 to early 2019, AUS EG grew from 2.4% to 2.6%. // AUD focus on efficient
allocation of resource (mining sector output has increased by 5% since 1960 to 2000
- SOL: 2018 to early 2019, AUS EG grew from 2.4% to 2.6%.
- IR: Since GFC, the inflation rate have been fluctuating but is now steady at 2% since
2017.
2. Microeconomic effects
- Job opp: Sydney, population grown by 2 million since 1960s.
- Tourism: create jobs/transportation
3. Dutch disease/two speed economy
- 1960 to 2000, employment level in agriculture decreased from 10% to 4% while services
industry increase from 63% to 84%
- 2002-2012, mining boom, AUD app
4. Resource curse
- 1960 to 2000, employment level in agriculture decreased from 10% to 4% while service
industry from 63% to 84%.
- Mining sector concentrate in Queensland, Western Australia, followed by Northern
Territory and Southern Australia.
- Output: Mining: Agriculture:

Government role/policy change

1. Encourage competition
- Microeconomic Reform (national competition policy, labour market reform)
2. Avoid propping up
- India, the government has programs to access credit for farmers through interest rates
subsidies. Hence, AUS cannot compete, leading to the contribution of output of
agriculture by 10% from 1960 to 2000s.
3. Promote further structural change
-

In June 2018, household consumption was at 2.9%, however it decreased to 1.8% in March 2019,
based on (Monthly Bulletin of Economic Trends: Economic Activity in the Major States, 2019)

Unemployment rate has risen steadily over the past year as can be seen in the Figure 1 with an
increased to 5.24% in Jun 2019, from 5.19% in May 2019. (CEICDATA, 2019) Moving on, consumer
price index has decrease from 112.6 (Jan 2018) to 114.8% (March 2019)

Moreover, GDP has decreased from 2.4% (Dec 2018) to 1.8% (Mac 2019) as shown in Figure 3.
Additionally, retail sales growth has dropped from 2.8% (May 2019) to 2.4% (Jun 2019).
‘The government is investing in economic and community infrastructure, including $100 billion in
transport infrastructure projects over the next decade.’ (Commonwealth of Australia 2019, 2019)

Hence, economic growth and employment growth will slow down. Figure 1 shows that
unemployment rate is at a high rate of 5.24% (Jun 2019) and Figure 3 shows real at lowest 1.8% (Jan
2019).

For instance, in February 2008, unemployment reached the lowest level at 3.98%. (Australian Bureau
of Statistics, 2016) Meanwhile, inflation rate peak up to 4.44% in the same year. (in2013dollar, n.d.)