Macro-Economic Policies used by the Australian Government and Reserve Bank

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Macro-Economic Policies used by the Australian Government and Reserve Bank

Australia has been very successful in her economic growth compared to other advanced economies since the 2008 financial crisis. The government in conjunction with the Reserve Bank of Australia has made sound monetary and fiscal policies that are responsible for the positive economies. According to “Australian Government”, Australian economic boom has been contributed by the recent rise in global demand particularly China’s economic emergence as well as changing from controlling inflation to avoid recession (Web). This article describes and evaluates the main Macro Economic Policies used by the Australian Government and Reserve Bank over the last two years.

Australian government has successfully utilized fiscal policy to alleviate the macroeconomic effects which includes substantial increase in surplus while reducing the government’s debt ratio.

In the last two years, the government’s goal has achieved economic growth, internal and external balance within an economy thereby maintaining economic growth and low inflation as well as ensuring low foreign debt and liabilities. Although economic growth has not been constant for the last two years due to international business cycles, the government has reduced the fluctuations via influencing demand. In as much as the economy has had several ups and downs, her improved international demands and rich natural resources such as iron ore and coal. According to “International Monetary Fund,” Reserve Bank of Australia has strengthened financial system in such a way that the macroeconomic policy is devised to curb recession instead of controlling inflation (Web).

Macroeconomic aggregates which include rate of inflation, GDP growth and unemployment rate can possibly reflect the performance of a country’s economy. Initially, the signs of recession were responded to by the RBA through cutting the interest rates down to 3.0% while Commonwealth government assured retail bank deposits and further gave out A $67 billion as discretionary fiscal stimulus. Indeed the effects of recession largely affected the government’s and RBA’s decision in the last two years. According to Akpansung, even as other countries such as U.S are struggling to recover from recession, the Australian government has boosted the economy by encouraging export to Asia (125-128). The government’s move to incorporate interest rate is aimed at promoting non-mining and housing investments which play integral role in spurring economic growth.

Reserve Bank of Australia further made some great efforts in controlling money supply through the open market operations which involves purchasing or selling of financial instruments (Web). This has stabilized the Australian economy for the last two years because of their eventual effect on consumption and investment. According to Soliman RBA’s monetary policy for the last two years has been directed to achieve 2-3% inflation rate on the average over the cycle and this has really stimulated economic activities without interfering with economic decisions in the economy (98-100). It is apparent that both the government and the RBA have instituted strong fiscal and monetary policies that have successfully countered the economic recession.

Theoretically, reduction of interest rate would enhance aggregate demand by influencing the aggregate components such as stimulation of investments projects as borrowing would be less expensive. The attraction or creation of a good investment environment has been one of the core activities that the government has dealt with in the previous years as this will deal with unemployment issues. Soliman explains that low interest rate has enabled Australia to increase her export while reducing their imports thus enhancing net export (101-102). The monetary policy decision process in Australia which includes the RBA board has been frequently meeting to discuss new developments in both Australia and international economies as well as local and international markets. This has always encouraged quality recommendations for the monetary policy decisions in the country. It has also ensured controlled cash rates and interest rate structure which has prevailed in the financial system.

According to Bahn, Llandis and Ghialy, the independency of the Reserve Bank Board has been commendable for the last two years because there has been minimal political influence especially regarding interest rate issues (380-383). This conforms to the international standard and avoids political manipulation thus letting monetary policy concentrated towards long term goal achievements. Reserve Bank of Australia has generally lowered the restrictive monetary policy stance which is considered accommodative such as the compatibility of cash rate with inflation which has recently gone up to the midpoint of the 2-3% target (Web). RBA’s inflation policy has really been successful and greatly conforms to the wages increase driven by increased productivity in the past two years. RBA’s credibility and quick response to changing economic changes such as stall of global recovery and perhaps disruption of international markets may prompt RBA to cut her policy and provide liquidity support for financial systems.

To some extent, Australia’s economic growth has been irregular because of the mining related sectors which have greatly expanded while other sectors growing slowly when compared with the trend growth. Regarding the household sector, the household consumption grew with the increase in income thus prompting the RBA to take appropriate measure to curb inflation. Internationally, Australia’s labor market has performed well and the unemployment rate has generally decreased in the last two years due to robust job opportunities in the mining sector. The government introduced tax incentive in the mining sector thus enhancing investment and trade in the mining industry such as the mineral resource rent tax. Thirlwell explains that mining and construction sector has performed extremely well and boosted economic growth (Web). Terms of trade have done averagely very well hence maintaining Australian dollar at a higher position. The current account deficit has remained commonly narrow due to improved terms of trade and effective exchange rate.

It is undeniable that the Australian government and the RBA have had a solid bipartisan backing for both monetary and fiscal policies which are intended to propagate economic growth. In the last two years, the government effort has had a positive effect on various areas of the economy despite challenges and disruptions in the international economies. According to Thirlwell, Australia’s desire to reduce public debt ratio over the business made very progressive impact in the last two years (Web). It is evident therefore that the Australian government has successfully utilized fiscal policy to alleviate the macroeconomic effects which includes substantial increase in surplus while reducing the government’s debt ratio.

Works Cited

“Australian Government”. Skills for all Australians-The Australian economy of the future, 2013. 31Oct. 2013. <http://www.dpmc.gov.au/publications/skills_for_all_australians/chapter2_the_australian_economy_of_the_future.html>.

“International Monetary Fund”. Australia: 2012 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Australia, 1-42.

Akpansung, Aniekan O. “A Review of Empirical Literature on Balance of Payments as a Monetary Phenomenon.” Journal of Emerging Trends in Economics and Management Sciences 4.2 (2013): 124-32. ProQuest. Web. 1 Nov. 2013.

Bahn, Susanne, Llandis Barrati-Pugh, and Ghialy Yap. “The Employment of Skilled Migrants on Temporary 457 Visas In Australia: Emerging Issues.” Labour & Industry 22.4 (2012): 379-98. Proquest. Web. 1 Nov. 2013.

Reserve Bank of Australia. About Monetary Policy, 2013. Web. 1 Oct. 2013. <http://www.rba.gov.au/monetary-policy/about.html>.

Soliman, Carlo. “Anti-Fraud Measures and Financial Market Regulation: An Overview of the Australian Position.” Journal of American Academy of Business, Cambridge 19.1 (2013): 98-104. ProQuest. Web. 1 Nov. 2013.Thirlwell, M. “Can Australia Keep Beating the Economic Odds? “ Pacific Standard, 11 Mar. 2013. Web. 31 Oct. 2013. <http://www.psmag.com/magazines/march-april-2013/australia-economy-recession-53744/>.