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.
On the other hand, fiscal policy has adopted a strong focus on economic growth since the election of the Rudd government in November 2007. While the previous government believed that it was important to avoid budget deficits whenever possible, the current government has adopted a Keynesian approach to the implementation of this policy. This means that when the economy is suffering from a lack of aggregate demand, the government will use the budget to try and stimulate activity. For example, large stimulus packages in late 2008 and early 2009 were used to help the Australian economy to avoid the worst of the economic downturn that was being seen in other parts of the world. This policy ultimately proved to be successful, as the Australian economy was one of the few to avoid a technical recession during this period.
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.