Economic Growth

The Policy Approach

Having justified intervention by the government, we should now look at exactly what it is they do to try and influence economic growth in this country. (You will learn a lot more about this in Unit 4. For now, it is enough to know the basics about the policy options that are available.)

The government has three broad options available when trying to manipulate the economy:

1. Monetary Policy

Monetary policy is implemented by the Reserve Bank of Australia (the RBA) on behalf of the government. They aim to control the level of inflation by changing interest rates.

Interest rates act as both a supply and demand factor in the economy. The impact on aggregate demand, however, is much stronger. When interest rates increase, we can expect to see a fall in investment spending. At this time the demand curve will shift to the left, and the inflation rate should fall.

This also has consequences for economic growth. If inflation is low, then the RBA can act to decrease interest rates. This will result in a higher rate of growth. On the other hand, if inflation is high, then the RBA will act to increase interest rates. This could make the rate of growth lower.

2. Budgetary (Fiscal) Policy – The Federal Budget

In May each year, the federal treasurer will hand down a plan that outlines how the government will raise revenue for the year (most of it comes from collecting taxes), and how they will spend that money. They can use this process to affect growth in two ways.

Once again, the budget can be used as a demand management tool. If the government chooses to increase spending in the economy, then this can have a direct impact on aggregate demand. An increase in spending could move the demand curve to the right, and therefore economic growth will be higher.

In recent years, the budget has not been used this way in Australia. Instead, the federal government has adopted a policy of “fiscal consolidation”. In effect, they are trying to minimise government intervention in the market, and make it more attractive for individuals to provide goods and services. When we do this, we are doing so because we believe that it will add to our standard of living. Acting in this way means that we will seek to minimise our costs; we will always try to be as efficient as possible. Current economic thinking suggests that this will allow us to grow with fewer negative side effects.

3. Microeconomic Reform

This term covers a lot of changes that could be made to individual sectors of the economy, whereas the first two options tend to affect the entire economy. (As a result, these options are considered macroeconomic in nature.)

For example, until 1990 only two airlines (QANTAS and Ansett) were allowed to carry passengers between cities in Australia. The government acted to deregulate the market; after that year more airlines were allowed to offer this service. This forced the existing carriers to become more efficient, because the level of competition was increased. The end result was that today it is relatively inexpensive to fly from one city to another in Australia, and as a result the airline industry has grown.

There are lots of other examples, but for now you just need to remember this one fact: When the government introduces a microeconomic reform into a sector, they are trying to move the supply curve for that industry to the right. This will have an impact on economic growth.

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