Microeconomic Reform: Concepts

Question 1

List the effects of the Australian Government’s deregulation of the financial market.

Answer 1

• Bank interest margins have halved since the 1980s
• Net foreign debt increased (though has recently fallen again due to the ToT spike closing the S-I gap)
• The 2019 Royal Commission found banks guilty of systemic gross misconduct

Question 2

What are some recent microeconomic reforms by the Australian Government?

Answer 2

• ACCC Effects Test
• Stage 3 tax cuts (starting in 2024)
• Superannuation reforms: APRA ratings and notifying customers of poor performance
• Online news media laws

Question 3

What is the ‘Effects Test’?

Answer 3

The ACCC can now penalise anti-competitive behaviour if it has an ‘anti-competitive effect’, instead of needing to prove that it was a ‘deliberate’ abuse of ‘substantial’ market power

Question 4

How successful has the ACCC’s new Effects Test been?

Answer 4

Since being introduced in 2017, the ACCC has not penalised any firms under this rule, and the only case it took to court was against a state-owned port in Tasmania

Question 5

What is meant by the argument that ‘microeconomic reform is good because it reduces the risk of regulatory capture by rent-seeking firms’?

Answer 5

Regulatory capture is when firms convince the government to introduce rules that protect the interests of those firms.

So reducing government regulation avoids the risk that there will be regulations protecting firms who have successfully lobbied the government

Question 6

What are some new reforms the Productivity Commission recommended the Government should do in its 2023 Productivity Inquiry?

Answer 6

• Recognise more foreign qualifications to increase competition in services
• Make industrial relations more flexible by offering ‘menus’ (options) in awards, and allowing EAs to pass the BOOT even if a small number of staff are worse off

Question 7

How does microeconomic reform affect growth?

Answer 7

Increases efficiency to increase AS and growth

Question 8

How does microeconomic reform affect inflation?

Answer 8

Increases efficiency to reduce cost inflation

Question 9

How does microeconomic reform affect unemployment?

Answer 9

1) Creates short-term structural unemployment, but helps to increase long-term growth and employment.
2) Decentralisation, retraining and job-matching services can also reduce the NAIRU

Question 10

Why would decentralisation of the labour market help to reduce unemployment?

Answer 10

1) There are fewer regulations when hiring staff, so firms are more willing to hire them.
2) Decentralisation also allows firms to negotiate wage rises individually, putting less upward pressure on wages and reducing the country’s NAIRU

Question 11

How does microeconomic reform affect external stability?

Answer 11

1) Improves efficiency to increase international competitiveness and the BOGS.
2) But financial deregulation has led to increased foreign liabilities.

Question 12

How does microeconomic reform affect the distribution of income?

Answer 12

1) Structural unemployment and labour decentralisation reduces incomes for low-skilled workers.
2) At the same time, higher growth and decentralisation increases incomes for high-skilled employees and business owners

Question 13

How has labour productivity changed in Australia?

Answer 13

• In the 1990s, it averaged 2.2% per year
• In the 2010s, it averaged 1.1% per year
• Productivity hasn’t grown since 2019

Question 14

What did the Government’s superannuation reforms involve?

Answer 14

The 2021 Your Future, Your Super reforms involved:
- Preventing firms creating new super accounts for staff (estimated to save $450m in fees per year)
- Creating a ‘performance test’ for underperforming schemes to notify their customers
- Creating the YourSuper comparison tool

Question 15

Why are the Government’s superannuation reforms expected to benefit the economy?

Answer 15

1) Super funds are forced to be more efficient in order to retain customers and increase profits, increasing AS
2) Savings in superannuation funds will be invested more efficiently in the economy, helping to reduce the need for foreign investment
3) Reducing super fees will increase the wealth of low-income people, helping t reduce wealth inequality

Question 16

What did the Government’s media law reforms involve?

Answer 16

2021: News Media Bargaining Code requires digital platforms like Facebook to negotiate with news businesses for use of their content
2022: expanding ‘local content rules’ of 5% to streaming platforms (though still far less than 55% for TV stations)

Question 17

Why are the Government’s media law reforms expected to benefit the economy?

Answer 17

The News Media Bargaining Code incentivises journalists to produce content that people value, because they will be paid for it. This increases allocative efficiency.

Expanding local content rules to online platforms helps to level the playing field for local TV stations, so that firms are now competing to be more efficient and have better quality (rather than online just being cheaper because of having different regulations)

Question 18

How does the ACCC regulate the economy to increase efficiency?

Answer 18

It enforces Australian Consumer Laws consistently across all states to prevent:

• Collusion
• Exclusive dealing
• Misleading advertising
• Monopolies

It also regulates mergers to prevent significant reductions in competition in an industry.

Question 19

How successful has the ACCC been in regulating competition recently?

Answer 19

Outgoing ACCC Chair Rod Sims believes the ACCC merger laws are “not up to task” (such as its inability to prevent the Vodafone-TPG merger)

Since 2017, the ACCC can use the ‘Effect Test’ to prove abuse of market power
… but the ACCC has only charged one firm under this new power yet - and this firm was a port owned by the Tasmanian Government, and the ACCC lost the case.