Economic Policy Objectives and Conflicts

Question 1

How can we evaluate Australia’s level of economic growth?

Answer 1

Okun’s Law: Australia’s growth needs to be above 3% on average (to keep up with the growth in the labour force and productivity) in order to prevent unemployment rising

Question 2

How can we evaluate Australia’s level of inflation?

Answer 2

The RBA’s target of 2-3% on average over the business cycle

Question 3

How can we evaluate Australia’s level of unemployment?

Answer 3

The Treasury estimates full employment in Australia to be 4.5%

Question 4

How can we evaluate Australia’s level of external stability?

Answer 4

The IMF has warned that a CAD worse than 4% of GDP is unsustainable for the Australian economy

Can also see whether NFD and NFE are improving or worsening over time

Question 5

How can we evaluate Australia’s level of environmental sustainability?

Answer 5

• Australia met its 2020 emissions target - but this was mostly due to disputed deforestation data and grounded flights due to the pandemic
• The new Albanese Government has a target to reduce greenhouse gas emissions by 43% from 2005 levels by 2030, and net zero by 2050. Australia is not on track for this.
• Australia also has the 4th highest extinction rate in the world, and is in the top 10 countries for deforestation

Question 6

How can we evaluate Australia’s level of inequality?

Answer 6

The OECD average for income Gini coefficient is around 0.3 (Aus is close at around 0.31)

The OECD average for wealth Gini coefficient is around 0.75 (Aus has increased to around 0.65)

Question 7

How does achieving economic growth conflict with the objective of price stability?

Answer 7

Improving growth leads to more demand inflation

Question 8

How does achieving low unemployment conflict with the objective of price stability?

Answer 8

Decreasing unemployment leads to higher wages and cost inflation

Question 9

How does achieving economic growth conflict with the objective of a more fair distribution of income and wealth?

Answer 9

1) High growth allows high-skilled workers to negotiate higher wages, and for business owners to increase their profits, widening inequality
2) Reducing inequality reduces the incentive for productivity, slowing growth

Question 10

How does achieving economic growth conflict with the objective of external stability?

Answer 10

Higher growth leads to a worse BOGS, NPI and CA

Question 11

How does achieving environmental sustainability conflict with the objective of economic growth?

Answer 11

Restricting resource use restricts AS and growth in the short-term

Question 12

How does achieving environmental sustainability conflict with the objective of inflation?

Answer 12

Restricting resource use and introducing taxes or regulations increase business costs, leading to cost inflation

Question 13

How does achieving environmental sustainability conflict with the objective of unemployment?

Answer 13

Reducing business practices that damage the environment will cause structural unemployment in those industries, such as coal mining and deforestation

Question 14

How does achieving environmental sustainability conflict with the objective of a more fair distribution of income?

Answer 14

Regulations and market-based policies increase business costs and prices, which affect lower income earners most because they have a high APC

Question 15

How does achieving environmental sustainability conflict with the objective of external stability?

Answer 15

Regulations and market-based policies increase business costs, which worsens international competitiveness and the BOGS

Question 16

To what extent has the trend in Australia’s economic growth been a success?

Answer 16

While the recession was severe, it was less extreme than other countries and the recovery was swift

Question 17

To what extent is the recent trend in Australia’s economic growth due to the Australian Government?

Answer 17

While not the only driver, the macro response in the pandemic was critical in reducing the severity of the downturn and driving a swift recovery

Question 18

To what extent has the trends in Australia’s inflation been a success?

Answer 18

While more extreme deflation in the pandemic was avoided, the RBA consistently failed to meet the target for 7 years, and inflation is now dangerously high

Question 19

To what extent is the recent trend in Australia’s inflation due to the Australian Government?

Answer 19

The low inflation prior to the pandemic was largely due to the RBA’s expansionary policy being counteracted by the government’s contractionary fiscal

In the pandemic, inflation was heavily supported by the gov’s macro response

In 2022, the surge in inflation is largely due to factors outside the control of the gov, but has been worsened by loose macro policy

Question 20

To what extent has the trends in Australia’s unemployment been a success?

Answer 20

Better than most OECD countries in pandemic, and better than 10% forecast by RBA. Now below full employment, which is dangerous for inflation

Question 21

To what extent is the recent trend in Australia’s unemployment due to the Australian Government?

Answer 21

Although unemployment looked lower than it actually was during the pandemic, unprecedented macro stimulus was critical to keeping it low

While not the only reason, loose macro policy is the main reason for the fall in unemp recently and is risking inflation (because it is below the NAIRU)

Question 22

To what extent has the trends in Australia’s distribution of income and wealth been a success?

Answer 22

Income inequality is similar to OECD average, and wealth ineq. is still below OECD average but is widening

Question 23

To what extent is the recent trend in Australia’s distribution of income and wealth due to the Australian Government?

Answer 23

Most factors affecting income inequality have been changes to gov policies, but income inequality has overall remained steady

While not the only reason, expansionary macro policy has been one of the main drivers of house price growth which has widened wealth inequality significantly

Question 24

To what extent has the trends in Australia’s environmental sustainability been a success?

Answer 24

Emissions have fallen from 2005, but that was an unusually high base year. Emissions are still much higher per capita than other OECD countries and only fell because of controversial statistics of deforestation rates and the temporary effect of covid on industrial action

Question 25

To what extent is the recent trend in Australia’s environmental sustainability due to the Australian Government?

Answer 25

The reduction has been almost entirely due to factors other than the Aus Gov

In fact, the biggest action by the Aus Gov has been to remove a carbon tax and replace it with a less effective subsidy scheme (the Climate Solutions Fund)

Question 26

To what extent has the trends in Australia’s external stability been a success?

Answer 26

A dramatic improvement that far exceeds the -4% CA that the IMF estimates would be sustainable for Australia

Question 27

To what extent is the recent trend in Australia’s external stability due to the Australian Government?

Answer 27

While the RBA’s low cash rate has helped depreciate the AUD, the improvement in the CA was largely driven by changes in the mining industry outside the gov’s control

… In fact the gov’s rising debt levels would if anything have worsened the CA and NFL