Economic Policy Objectives and Conflicts Flashcards
How can we evaluate Australia’s level of economic growth?
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
How can we evaluate Australia’s level of inflation?
The RBA’s target of 2-3% on average over the business cycle
How can we evaluate Australia’s level of unemployment?
The Treasury estimates full employment in Australia to be 4.5%
How can we evaluate Australia’s level of external stability?
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
How can we evaluate Australia’s level of environmental sustainability?
- 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
How can we evaluate Australia’s level of inequality?
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)
How does achieving economic growth conflict with the objective of price stability?
Improving growth leads to more demand inflation
How does achieving low unemployment conflict with the objective of price stability?
Decreasing unemployment leads to higher wages and cost inflation
How does achieving economic growth conflict with the objective of a more fair distribution of income and wealth?
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
How does achieving economic growth conflict with the objective of external stability?
Higher growth leads to a worse BOGS, NPI and CA
How does achieving environmental sustainability conflict with the objective of economic growth?
Restricting resource use restricts AS and growth in the short-term
How does achieving environmental sustainability conflict with the objective of inflation?
Restricting resource use and introducing taxes or regulations increase business costs, leading to cost inflation
How does achieving environmental sustainability conflict with the objective of unemployment?
Reducing business practices that damage the environment will cause structural unemployment in those industries, such as coal mining and deforestation
How does achieving environmental sustainability conflict with the objective of a more fair distribution of income?
Regulations and market-based policies increase business costs and prices, which affect lower income earners most because they have a high APC
How does achieving environmental sustainability conflict with the objective of external stability?
Regulations and market-based policies increase business costs, which worsens international competitiveness and the BOGS
To what extent has the trend in Australia’s economic growth been a success?
While the recession was severe, it was less extreme than other countries and the recovery was swift
To what extent is the recent trend in Australia’s economic growth due to the Australian Government?
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
To what extent has the trends in Australia’s inflation been a success?
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
To what extent is the recent trend in Australia’s inflation due to the Australian Government?
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
To what extent has the trends in Australia’s unemployment been a success?
Better than most OECD countries in pandemic, and better than 10% forecast by RBA. Now below full employment, which is dangerous for inflation
To what extent is the recent trend in Australia’s unemployment due to the Australian Government?
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)
To what extent has the trends in Australia’s distribution of income and wealth been a success?
Income inequality is similar to OECD average, and wealth ineq. is still below OECD average but is widening
To what extent is the recent trend in Australia’s distribution of income and wealth due to the Australian Government?
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
To what extent has the trends in Australia’s environmental sustainability been a success?
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
To what extent is the recent trend in Australia’s environmental sustainability due to the Australian Government?
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)
To what extent has the trends in Australia’s external stability been a success?
A dramatic improvement that far exceeds the -4% CA that the IMF estimates would be sustainable for Australia
To what extent is the recent trend in Australia’s external stability due to the Australian Government?
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
