Unit 1
Unit 3
Economic Growth
Policy Options
The Australian government aims to achieve consistent growth without the negative side effects of unstable prices or poor external stability. The policy approach adopted by the government will reflect these goals, even though at times it may appear that they are competing.
It is now widely recognised that if Australia is to survive in a globalised economy our domestic policy options must acknowledge our place in the world. As such, monetary policy is now used predominantly to target the inflation rate. Any impact on growth is also assessed before changes are made, but the long term growth potential of the economy is seen to be maximised when prices are stable. Therefore although we can assess the impact of interest rate changes on the growth of the Australian economy, it would be incorrect to assume that changes were made to the cash rate in the hope of targeting the growth rate.
Fiscal policy has adopted a very external focus since 1996. By aiming to achieve fiscal balance over the course of the business cycle, the government aims to achieve an increase in the money supply, which should assist in fueling growth. However, they also aim to maintain a stable current account deficit, and this can also help to increase our rate of growth. Large Keynesian deficits as were seen at the end of the Keating government’s time in office are no longer used by the federal government as a tool to increase growth. Despite the return to a Labor government in late 2007, there has been no indication that the government will resume the Keynesian approach to fiscal policy.
The microeconomic reform process involves changes to a specific industry or sector of the economy. Many structural changes have been made to the Australian economy in the hope of improving our long term growth prospects. In theory, we have seen that an increase in aggregate supply will lead to an increase in growth, without any pressure on prices. This goes some way to explaining why it is that the Australian government has focused on this process.
The actual processes involved in implementing these policies will be discussed in Unit 4.
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