AOS 5 Flashcards
Aggregate Supply Policies
AS policies are any government initiative the is designed to reduce the costs of production and/or improve supply side conditions for businesses so that the productive capacity and living standards of Australia are improved.
All AS policies operate on the supply side of the economy and will result in a shift of the aggregate supply curve.
AS policies can target specific areas of the economy such as improving equity, the environment or welfare reforms.
Aggregate Supply Policies
Effective AS policies will see the PPF expand, allowing for the production of more goods and services. They also help to increase the level of economic output of an economy and lower inflation, helping to achieve sustainable growth.
Microeconomic Reform
Corporatisation of GBEs
Privatisation of GBE
Decentralisation of the labour market
Contracting out government services
Introduced competitive neutrality
Regulatory and pricing reforms in the electricity market
These reforms exposed Australian businesses to greater competition, increasing productivity, reducing costs and put downward pressure on prices, which helped to ensure economic growth.
Aggregate Supply Policies
Often, AD policies such as monetary policy are not enough to deal with economic issues on their own, or are ill-equipped to do so, therefore AS policies are used to address these issues including:
• AS policies to fight stagflation
• AS policies to alleviate capacity constraints
• AS policies to address short term supply shocks
• AS policies to increase international competitiveness
AS policies to fight stagflation
Stagflation is where an economy experiences high inflation, but low levels of economic growth.
• AD policies are inadequate to deal with this on their own. They may lift growth, but they would also increase demand inflation. Or they could control inflation with a contractionary stance, but this would hinder growth.
• AS policies can be used to help create conditions of economic growth with low inflationary pressure.
AS policies to alleviate capacity constraints
Capacity constraints refers to an economy nearing productive capacity and not being able to keep up with the growth in demand.
Congested roads, busy ports and electricity constraints are issued that Australia faced about 10 years ago.
Government was able to introduce supply side policies to ease these constraints somewhat by spending on roads, rails, ports and other infrastructure
Government looks to boost productivity, participation and population.
AS policies to address short term supply shocks
Short term supply shocks can arise from global economic conditions such as increased oil prices or other events such as floods, cyclones or drought. Events such as this have the potential to worsen supply side conditions by increasing costs and restricting supply.
The government can negate some of this impact with AS policies designed to provide assistance and improve supply side conditions. They might consider short term tax relief, subsidies grants.
This assistance can help reduce production costs and keep prices down while improving employment and production prospects.
AS policies to improve international competitiveness
International competitiveness refers to our ability to compete against other businesses in a global marketplace.
• Improvements in international competitiveness mean that Australian businesses are able to produce goods and services lower prices or higher quality compared international competitors.
• An increase in AS shoud increase international competitiveness as average costs are likely to fall over time, resulting in cheaper prices or allowing businesses to improve their quality.
• This helps Australian business take a larger market share and increase incomes
AS and efficiency in resource allocation
• AS policies such as microeconomic reforms (tariff reductions, deregulation of markets, privatisation etc) improve productive capacity by increasing productivity and improving the efficiency of resource allocation.
• Remember there are different types of efficiency and they can all be influenced by AS policies:
• Technical efficiency (productive efficiency)
• Allocative efficiency
• Dynamic efficiency
• Inter-temporal efficiency
Technical efficiency
• Technical efficiency is where productivity is at a maximum and and average costs are at a minimum.
• AS policies help to boost technical efficiency because they will help businesses achieve the lowest possible costs with the optimal mix of resources and technology - increasing productivity.
Allocative efficiency
• Allocative efficiency is a type of efficiency measured by how well the resources are being allocated in an economy. It is where resources are allocated in such a way the living standards and welfare are maximised.
• AS policies help to achieve allocative efficiency as well because they often remove barriers or impediments which might otherwise prevent resources from being allocated to particular parts of the economy. For example, with high tariffs, people are discouraged from buying particular imported goods, but the removal of tariffs will remove the barrier and encourage a market which is free to allocate resource in the way that it sees best.
Dynamic efficiency
• Dynamic efficiency relates to how quickly an economy can reallocate resources to achieve allocative efficiency.
• Business that are dynamically efficient, will quickly adjust to changes brought on by AS policies such a more competition, changes in technology or the implementation of regulations.
Intertemporal efficiency
• Intertemporal efficiency is a measure of how well resources are allocated over time, ensuring balance between current and future use.
• Some AS policies are aimed at improving this balance and the goal is not necessarily about improving productive capacity, growth or low prices but more about a more sustainable approach to using resources or more equity in sharing the income gains from particular activities.
• Intertemporal efficiency might at time contradict the aims of other types of efficiency.
AS policies to achieve goals and living standards
• By increasing AS the economy will experience both economic growth and lower average prices, leading to an increased likelihood of achieving the goals of strong and sustainable growth and price stability.
• Low inflationary growth - downward pressure on prices will lead to economic growth from increased C, I and net exports and will increase real GDP without inflation pressures.
• With higher AD and GDP, we could expect to see more demand for labour, reducing the rate of unemployment that is consistent with the NAIRU.
• Some AS policies may have a negative effect on unemployment in the short term as it may require restructuring, but in the long run, the effect on employment should be positive.
Generally, AS policies will improve living standards in Australia. Incomes should increase and we should have a greater capacity to access goods and services.
• We need to be mindful of how some policies can negatively impact living standards, particularly if they focus too much on the short term and risk our future living standards.
Budgetary policies to influence AS and
economic goals
Budgetary policy can be used to influence AS by boosting productive capacity,
economic growth and living standards. In recent times, it has done this by:
• Spending on training and education
• Making provisions for research and development
• Investing in infrastructure
• Providing subsidies
Training and education
Investment in training and education courses will improve the skills, knowledge and capacity of the labour force.
It increases labour productivity and boosts productive capacity.
Better training helps with dynamic efficiency as labour markets are better able to adapt to technological and structural changes. e.g
Australian Apprenticeships Incentive Scheme
Skills and Training Boost.
$146.3m over 5 years to improve educational outcomes for disadvantaged and vulnerable young Australians.
Job Trainer - $1 b to give hundreds Of thousands Of Australians access to newskills by and upskilling them into sectors With job opportunities, as the econotny recovers from COVID•19.
• A better skilled labour force will result in fewer skills shortages and capacity constraints, increasing the productive capacity of the economy.
• There will be higher productivity growth and reduced average costs of production, leading to price stability.
• Low inflation and increased economic growth also leads to healthy demand for labour, helping us to achieve the goal of full employment.
Research and development grants
● Research and development provides for the innovation required to better meet the needs of consumersandremaincompetitiveinrapidlychanging globalmarkets.
● R&D may include investing time, money and resources to discover better methods of production or improved efficiencies in business operations, including new technologies.
● R&D can be a risk for some business because there is no guarantee of improvements and there is a risk that others could copy or piggyback of their research. So the government can provide grants and tax incentives to encourage R&D.
● Benefits of R&D will spill over to positively impact on third parties – positives externalities.
○ Investing in the COVID-19 Winter Response Plan
○ $2.2b University Research Commercialization Action Plan
○ $1.3b Medical Research Future Fund
○ Research and Development Tax Incentive
Investment in infrastructure
● Infrastructure is the basic physical structures and capital resources required to supporteconomicactivity. Thisincludesroads,rails,ports,hospitalsetc.
● Government spending on infrastructure reduces the cost of production for businesses by reducing bottlenecks and congestion that prevent increases in output, improves our international competitiveness and grows our productive capacity.
• Recent budgets have seen:
• $7.1b to regions of national importance
• $120 billion 10 Year infrastructure investment pipleine
• Road and rail upgrades
• Freight and logistics upgrades
Provision of subsidies
● Historically the government was assisting business and industry with subsidies and tariffs. Though this often resulted in inefficiency and higher prices.
● There has been a move away from providing specific industry to support and more towards the spill-over benefits are more wide reaching.
● Climate change, renewable energy, combating drought, child care subsidies, wage subsidies (such as the incentive to employ older Australians) are areas where subsides have been used more productively.
Tax Reform
Tax incentives can encourage entrepreneurial behavior, innovation and investment to improve productive capacity as well as provide motivation to increase effort and productivity.
Tax concessions (EG: R&D tax concession)
Rebates
Accelerated depreciation allowances (encouragement to invest in productive capital equipment)
Tax cuts
LMITO
Welfare Reform
The welfare system (also called the transfer system) in Australia is designed to help those individuals and families in need of financial support. Income support payments include:
Aged pension (over 65)
Disability support pension (long term disability)
Youth allowance (students or job seekers 16 — 20)
JobSeeker (unemployment benefits over 22)
Family tax benefit (help with the cost of raising children)
Rent assistance
Child care subsidies
Recent changes
Tightening welfare eligibility
Lengthening waiting period for newly arrived migrants to access benefits
Investing more money into childcare
Cashless debit card
Strengthening participation requirements of welfare recipients
Immigration policy
Australia’s immigration policy is a supply-side approach to managing the number and composition of people migrating to Australia from overseas.
Recently, Australia has been trying to attract young, skilled people who are likely to contribute to our labour force and the economy.
2020-21 Migration Planning
160 000 placements for people
Migration streams:
Skilled-main source of people
Family
Special eligibility
Skilled Migration
General skilled – general skilled workers with no employee sponsor
Employer nomination – have an employer sponsoring their position
Business skills migration
Distinguished talent
Recent Migration Information
Expected to have negative migration in Australia this year
Less arrivals from O/S due to border restrictions.
More temporary residents returning home
This will constrict AS
Reasons for demographic changes:
Family size
Acceptance and use of contraceptive
Economic events
Political developments (war, immigration policy)
Changing role of women
Better health care
Problems with an ageing population:
Expensive to provide welfare for aged
Fewer young people working
Labour forces grows slowly (labour shortages)
Slows economic growth
Higher wages (due to labour shortages) lead to inflationary pressures
Fewer tax payers which weakens the government’s financial position
Spending on training and education: Strengths
strengths:
initiative can target particular industries or sectors facing skills shortages and/or in need of skills development.
initiative can target particular industries or sectors facing skills shortages and/or in need of skills development.
added benefit of capturing significant positive externalities (or social benefits) that would otherwise not exist without this government expenditure
Spending on training and education:
Weaknessess
Spending on training and education needs to be funded either by taxes, or if governments run deficits, by borrowing.
Spending on education and training can experience implementation lags.
Research and development grants: Strengths and weaknessess
Strengths
Spending on research and development (R&D) creates economy-wide spillovers (positive externalities) helping to achieve simultaneously the goals of strong and sustainable economic growth and low inflation.
R&D grants can target particular industries or sectors that the government consider provide a particular economic or social benefit to the country.
Weaknesses
requires either a reduction in tax collections (through tax concessions) or increased government spending (through grants). This can lead to pressure on the federal Budget
Investment in infrastructure: Strengths
Investment in infrastructure helps reduce the cost of production for businesses right across the economy, by reducing or removing bottlenecks and congestion and speeding up business operations.
Infrastructure can also provide broader spillover benefits (positive externalities) beyond its direct contribution to improved productivity.
Infrastructure investment can complement the use of other AS policies.
Investment in infrastructure: weaknessess
There are significant impact lags involved in achieving the efficiencies available from infrastructure spending, as infrastructure projects take a long time to plan and build.
precise location and nature of infrastructure investment can be prone to political influence.
Investment in infrastructure is extremely expensive and requires funding, either by increased taxes or borrowing.
Provision of subsidies: Strengths and weaknesses
Strengths
Subsidies can target particular areas or industries that require additional support at specific times.
Because of the ability to target specific industries, subsidies can also be used to assist beneficial industries in their early years of development
Weaknessess
result in short-term benefits to economic growth and employment that might result in longer term costs
Subsidies to certain industries will provide those industries with an advantage relative to other industries. By the government providing subsidies, it could be seen to be ‘backing winners’
Tax reforms strengths and weaknesses
Strengths
target particular areas of the economy and help simultaneously achieve all three domestic macroeconomic goals.
increased worker effort and improvements in productivity as well as providing increases in disposable income for workers without the need for wage rises.
Weaknesses
reduced government revenue from taxation collections.
long implementation lags because any change to tax rates requires the approval of both houses of parliament.
mixed evidence as to the effectiveness of decreases in tax rates on increasing labour supply.
Welfare reforms strengths and weaknessess
Strengths:
designed to tighten eligibility for welfare payments and reduce the number of people dependent on welfare. If it is effective, welfare reform might increase the labour supply and reduce the impost on the budget of providing welfare payments to those capable of contributing to the labour market.
Welfare and taxation reforms can be designed to complement each other to increase the availability and quality of labour.
Weaknesses
Welfare reforms can be politically unpopular and subject to political interference
involved further tightening and reducing eligibility argue that it further disadvantages and targets the most vulnerable without noticeably increasing participation, and thereby reduces overall living standards.
Immigration policies strengths and weaknesses
Strengths
The policy can be targeted to areas and regions of need in the economy where there are skill shortages
Immigrants arrive with skills and experience in the areas of employment required and this reduces the cost to the Australian economy, which does not need to pay for the education and training of the workers.
Weaknessess
Immigration policies can be controversial and are subject to political influence
If immigration policy is not well managed, it can result in social effects that detract from its benefits.
Skilled immigration can be used to fill gaps in skills, rather than the government (and employers) investing in education and retraining of Australian workers.
