Objectives

 of  Economic  Policies  

The   main   objectives   of   economic   management   are   to   achieve   a   sustainable   rate   of   economic   growth,   achieve  
internal   balance   (low   inflation,   full   employment),   maintain   external   balance   (sustainable   CAD   and   net   foreign  
liabilities   and   stable   exchange   rate),   and   achieve   an   equitable   distribution   of   income   and   wealth,   and   ecologically  
sustainable  development.  

Key  Domestic  Economic  Objectives:  

• Economic  Growth  involves  increasing  the  economy’s  production  of  goods  and  services  over  a  given  time  period  and  
is   measured   by   the   rate   of   annual   change   in   real   GDP.   It   is   generally   considered   the   highest   priority   of   economic  
management.    (attempts  to  maintain  a  sustainable  economic  growth  rate  around  3-­‐4%  

As  it  offers  substantial  benefits  to  a  nation  (or  reasons  for  its  importance),  including:  
o Increased  living  standards  
o Improved  job  prospects  for  the  labour  force  
o Opportunity  for  increased  investment  
o Productive  capacity  gains  from  international  trade  and  investment  
o opportunities  to  improve  environmental  quality  

• Full  employment  involves   the   full   use   of   resources,   but   in   reality   economists   generally   interpret   this   objective   as   the  
full   employment   of   labour.   This   is   because   when   labour   resources   are   not   fully   utilised,   some   people   will   be  
unemployed   –   resulting   in   social   and   economic   problems.   Full   employment   is   defined   as   the   level   of   employment  
where  the  demand  for  labour  is  equal  to  the  supply  of  labour  and  the  labour  force  is  fully  employed.  This  in  turn  will  
mean   that   the   other   factors   of   production   are   also   fully   employed.   It   refers   to   the   economy   at   natural   rate   of  
unemployment   or   the   non   accelerating   inflation   rate   of   unemployment   (NAIRU).   It   happens   when   there   is   no  
cyclical  unemployment  but  always  be  frictional,  structural,  seasonal  and  hard-­‐core  unemployment.  

The  benefits  of  achieving  full  employment  in  both  short  term  and  long  term  are:  
o Maximizing  economies  productive  potential,  leading  to  increased  living  standards  
o Minimizing  economic  and  social  costs  of  unemployment  

Okun’s  Law  –  the  important  relationship  between  economic  growth  and  the  rate  of  unemployment    
Okun’s  law  states  that  the  rate  of  economic  growth  must  exceed  the  sum  of  productivity  growth  and  
growth  in  the  workforce  in  order  for  unemployment  to  fall.  

Rate  of  economic  growth  =  productivity  growth  +labour  force  growth  +  employment  growth  

• Price  stability  (low  inflation)  refers  to  keeping  inflation  at  a  sustainable  level  ((2-­‐3%  over  the  economic  cycle)  that  
will  cause  minimal  distortion  to  the  economy.    

Inflation  is  a  problem  because  of  its  economic  consequences.  A  high  level  of  inflation  may:  
o Reduce  the  real  value  of  income  and  wealth  
o Worsen  the  current  account  deficit  
o Reduces  international  competitiveness  
o Cause  a  depreciation  in  exchange  rates  
o increase  unemployment  and  slow  economic  growth  
o Distort  resource  allocation  
o Lead  to  higher  inflationary  expectations  è  a  wage-­‐price  spiral  è  accelerate  the  rate  of  inflation  

The  underlying  rate  of  inflation/  core  inflation  refers  to  a  Treasury  calculation  of  inflation  that  removes  ‘one  off’,  
seasonal  or  volatile  factors  from  the  headline  or  CPI  calculation  of  inflation.  
• External  stability  refers  to  the  goal  of  Australia  meeting  its  short  and  long  term  financial  obligations  with  the  rest  of  
the  world,  i.e.  achieving  a  sustainable  current  account  and  foreign  debt  level,  and  maintaining  international  confidence  
in  the  Australian  economy  and  especially  the  Australian  dollar.  

There  are  three  key  elements  to  achieving  this:  

o Achieving  equilibrium  in  the  current  account  of  the  balance  of  payments  
o Maintaining  international  confidence  in  the  value  of  the  $A  
o Maintaining  an  acceptable  level  of  foreign  debt  (Best  measured  by  debt  servicing  ratio)  

• Distribution  of  income  and  wealth  –  Govts  generally  accept  that  when  free  markets  operate  without  govt  
intervention,  they  will  produce  unfair  outcomes  because  some  individuals  in  society  have  fewer  opportunities  than  
others.  Thus  the  govt  aims  to:  

o Create  a  fairer  distribution  of  income  and  wealth  in  an  economy  
o Provide  transfer  payments  to  disadvantaged  social  groups  
o Taxation  system  progressive  to  redistribute  income  
o Government  spending  on  elements  of  the  social  wages  
o Welfare  assistance  and  tax  relief  for  low  income  households  

• Ecologically  sustainable  development  -­‐  Economic  activity  may  create  side-­‐effects  for  the  environment,  such  as  
depletion  of  resources,  pollution  and  any  other  damage  to  the  environment.  Environmental  management  may  lose  out,  
if  there  is  to  be  stronger  growth.    

Environmental  objectives  are  part  of  the  govt’s  overall  framework  of  economic  management  and  may  sometimes  
establish  specific  environmental  objectives:  e.g.    
o The  Kyoto  Protocol;    
o The  Montreal  Protocol  improvement  in  energy  efficiency;    
o Adherence  to  a  set  of  environmental  standards;    
o The  preservation  and  conservation  of  both  renewable  and  non-­‐renewable  natural  resources,  etc  

Conflicts  in  government  policy  objectives  

Govts  face  significant  conflicts  in  seeking  to  achieve  the  goals  of  economic  growth,  low  inflation,  low  unemployment,  
environmental  sustainability  and  external  balance  simultaneously.  In  attempting  to  achieve  one  goal,  the  govt  may  have  to  
forego  its  chances  of  achieving  another  one.  Although  most  objectives  are  compatible  in  the  long  term,  they  are  conflicting  
in  the  short  term.  Some  examples  are:    

• Achieving  both  a  reduction  in  inflation  and  unemployment  (short  term)    

Governments  often  face  a  trade-­‐off  between  lower  unemployment  and  inflation  in  the  short  to  medium  term.  If  the  
government  implements  macroeconomic  policies  to  promote  economic  growth  and  full  employment  (e.g.  
expansionary  fiscal  policy  and  monetary  policy)  inflationary  pressures  may  rise  which  threaten  price  stability.  

In  the  short  term,  there  is  a  conflict  between  demand-­‐pull  inflation  

and  cyclical  unemployment.  
Economic growth ↑ è aggregate demand ↑è employment ↑
(reducing cyclical unemployment)
è Prices will increase causing demand-pull inflation è
inflationary pressures
Phillips  Curve    

The   Phillips   Curve   is   a   relationship   between   unemployment   and  

inflation.   There   is   a   trade-­‐off   between   unemployment   and  
inflation,   so   that   any   attempt   by   governments   to   reduce  
unemployment  was  likely  to  lead  to  increased  inflation.  
Implication:  It  is  important  to  contain  inflationary  expectations.  Expansionary  macroeconomic  policy  cannot  reduce  
the  level  of  unemployment  in  the  long  run  (converge  back  to  the  NAIRU)  and  will  only  increase  the  inflation  in  the  
long   run   through   inflationary   expectations.   Contractionary   macroeconomic   policy   may   increase   the   level   of  
unemployment  in  the  long  run  through  ‘hysteresis’.  The  only  way  to  reduce  unemployment  in  the  long  run  is  through  
supply-­‐side  or  microeconomic  policies  (shift  the  NAIRU  to  the  left)  

Economic  growth  Vs  inflation:  government  policies  to  promote  economic  growth  and  full  employment  
(e.g.  budgets  deficits  or  cuts  in  interest  rates),  growth  may  become  unsustainable  and  lead  to  inflationary  
pressures.  

• Achieving  economic  growth  Vs  maintain  external  balance  (short  term)    

Excessively   high   levels   of   economic   growth   can   result   in   external   instability.   This   is   because   higher   rates   of  
economic   growth   are   likely   to   coincide   with   higher   levels   of   spending   on   imported   goods   and   services,   contributing  
to  deterioration  in  the  current  account  of  the  balance  of  payments.  Hence,  high  current  account  deficits  impose  an  
external  constraint  on  domestic  economic  growth.  

• Deterioration   in   the   CAD   -­‐   increased   consumption   which   makes   up   60%   of   aggregate   demand   and  
investment  will  increase  the  level  of  imports  and  foreign  borrowings  à  raises  foreign  liabilities  and  increases  
servicing  costs  on  the  net  income  account,  worsening  the  current  account  deficit.    
• Reduce   international   competitiveness   of   Australia’s   exports   Growth   due   to   inflationary   pressure.   This   is  
known  as  the  Balance  of  Payment  constraint.    
• External   instability   can   also   cause   instability   in   the   exchange   rate,   which   may   affect   the   performance   of  
Australia’s  exports,  reducing  economic  growth.    
• To  slow  the  domestic  economy  through  implementing   contractionary   policies  à  economy  must  grow  below  
its  productive  potential,  resulting  in  a  conflict  between  growth  and  external  stability.  
• Reduce   the   level   of   investment  in  the  long  run  -­‐  if  overseas  financial  institutions  see  Australia  as  a  more  risky  
investment  destination  with  a  high  level  of  foreign    
 
• Economic  growth  Vs  promoting  environmental  sustainability  and  reducing    inequality  (Short  term)  

• Economic   growth   may   conflict   with   environmental   quality   in   the   short   term   as  if  growth  is  ecologically  
unsustainable  and  leads  to  a  depletion  of  renewable  and  non-­‐renewable  resources  and  increases  externalities  
such  as  pollution,  land  degradation  and  a  loss  of  biodiversity.    
• Structural   unemployment   and   higher   levels   of   inequality   in   the   distribution   of   income   appear   to   be   an  
undesirable   trade   off   for   the   structural   adjustment   required   to   ensure   the   longer   term   prosperity   of   the  
economy.   Structural   changes   induced   by   microeconomic   reform   measures   usually   have   a   harder   impact   on  
lower  income  earners.    

Prioritising   environmental   preservation   and   rising   equality   could   lower   economic   growth   (e.g.   rising   equality   by   tighter  
progressive  taxation  would  reduce  incentive  to  work),  hence  they  are  long  term  challenges  for  government  policy.  

Economic  policy  mix  

Macroeconomic  policy  

§ Macroeconomic  policy  influences  aggregate  demand  in  an  economy  

§ Its  main  role  is  to  manage  the  business  cycle  and  minimise  fluctuations  in  the  business  cycle,  so  that  economies  
experience  low  inflation  and  unemployment  and  stable  economic  growth  
§ Also,  counter-­‐cyclical  policies  in  periods  of  strong  economic  growth  
– Higher  tax  rates  
– Reduced  government  spending  
– Higher  interest  rates  
§ Macroeconomic  policy  is  effective  in  stimulating  or  dampening  economic  growth  in  the  short  term,  but  its  less  
effective  in  dealing  with  longer-­‐term  problems  and  achieving  complex  policy  goals  

 
Microeconomic  policy  

§ Microeconomic  policy  influences  the  aggregate  supply  in  an  economy,  such  as  by  improving  the  competitiveness,  
efficiency  and  productivity  of  industries  and  increasing  workforce  participation  
§ It  is  action  taken  by  the  government  to  improve  resource  allocation  to  maximise  output  from  scarce  resources  
§ It  is  central  to  long  term  aims  of  addressing  potential  constraints  on  economic  growth  (e.g.  CAD  and  inflation)  
§ Microeconomic  reform  aims  to  encourage  the  efficient  operation  of  markets  

 
Fiscal  Policy  
The  meaning  of  fiscal  policy  

§ Fiscal  policy  is  a  macroeconomic  policy  that  influences  resource  allocation,  redistributes  income  and  reduces  
fluctuations  of  the  business  cycle.  Its  instruments  include  government  spending,  taxation  and  the  budget  outcome  
§ It  involves  the  use  of  the  Budget,  which  is  a  statement  of  the  government’s  planned  expenditure  and  revenue  for  the  
next  financial  year,  to  achieve  the  government’s  economic  objectives  
§ The  Budget  includes  all  forms  or  revenue  including  direct  taxes,  indirect  taxes  and  other  revenues  (e.g.  dividends  
from  PTEs).  It  also  includes  expenditure  items  (e.g.  welfare,  health,  education  and  defence)  
§ Mid-­‐Year  Economic  and  Fiscal  Outlook  statement  includes  revision  forecasts  for  the  economy  and  the  budget  

Budget  outcomes  

§ The  budget  outcome  gives  an  indication  of  the  overall  impact  of  fiscal  policy  on  the  state  of  the  economy  
– Budget  surplus:  G  <  T  
– Budget  deficit:  G  >  T  
– Balanced  budget:  G  =  T  
§ There  are  2  measures  of  budget  outcomes:  
– The  fiscal  outcome:  calculated  as  total  revenue  minus  total  expenses  minus  net  capital  investment,  using  the  
accrual  accounting  method.  It  is  the  most  accurate  long  term  indicator  of  fiscal  policy  
– The  underlying  cash  outcome:  calculated  in  a  similar  way  to  the  fiscal  outcome,  but  uses  the  cash  accounting  
method.  It  is  the  best  indicator  of  the  impact  of  fiscal  policy  on  economic  activity  for  that  year  
§ The  Government’s  main  fiscal  policy  aim  is  to  achieve  fiscal  balance,  on  average,  over  the  economic  cycle  
§ One-­‐off  transactions  are  shown  on  the  headline  cash  budget  outcome  

Changes  in  Budget  outcomes  

§ Discretionary  changes  in  fiscal  policy  involve  deliberate  changes  and  influence  the  structural  component  of  the  
budget  outcome  
§ Non-­‐discretionary  changes  in  fiscal  policy  are  caused  by  changes  in  the  level  of  economic  activity  and  influence  the  
cyclical  component  of  the  budget  outcome  
§ Automatic  stabilisers  are  policy  instruments  in  the  Budget  that  changes  in  the  level  of  government  revenue  and  
expenditure  from  changes  in  the  level  of  economic  activity.  They  are  designed  to  play  a  counter-­‐cyclical  role.  The  2  
main  automatic  stabilisers  are:  
– Unemployment  benefits  
– The  progressive  income  tax  system  
§ Automatic  stabilisers  alone  are  rarely  strong  enough  to  counter  the  effects  of  the  economic  cycle  

Impact  on  economic  activity  

§ Expansionary  stance:    the  government  plans  to  increase  the  level  of  economic  activity  in  the  economy  
§ Contractionary  stance:  the  government  plans  to  decrease  the  level  of  economic  activity  in  the  economy  
§ Neutral  stance:  the  government  plans  to  have  no  effect  on  the  level  of  economic  activity  

Impact  on  resource  use  

§ Fiscal  policy  can  directly  affect  resource  use  through  government  spending  in  certain  areas  
§ Governments  will  use  direct  measures  if  they  expect  that  markets  will  not  provide  resources  quickly  enough  (e.g.  
natural  disaster)  or  may  pay  directly  to  provide  a  public  good  that  is  unlikely  to  be  paid  for  by  the  private  sector  
§ Governments  can  use  the  indirect  influence  of  fiscal  policy,  such  as  tax  and  spending  policies,  to  change  resource  use  
by  making  it  more  or  less  attractive  for  resources  to  be  used  a  certain  way  (e.g.  tax  on  tobacco)  

Impact  on  income  distribution  

§ Changes  to  taxations  arrangements  –  a  reduction  in  the  top  marginal  tax  rates  makes  the  tax  system  less  progressive  
or  an  increase  in  the  GST,  increases  income  inequality  
§ Budgetary  changes  involving  government  spending  –  greater  spending  on  community  services  and  welfare  
payments  reduce  income  inequality  
Impact  on  savings  and  the  current  account  deficit  

§ A  budget  deficit  decreases  national  savings  as  governments  finance  it  by  borrowing  from  private  sector  savings,  
leading  to  the  crowding  out  effect,    making  it  more  expensive  and  difficult  for  private  sector  investment  
§ As  such,  there  needs  to  be  an  inflow  of  funds  for  domestic  consumption  and  investment,  worsening  the  net  income  
deficit  and  the  CAD  as  net  foreign  liabilities  require  servicing  

Methods  of  financing  a  deficit  

§ Borrowing  from  the  private  sector  à  crowding  out  effect  

§ Borrowing  from  overseas  à  less  relevant  in  era  of  globalised  financial  markets,  minimises  crowding  out  effect  
§ Borrowing  from  the  RBA  à  printing  money,  increases  money  supply  and  adds  to  inflation  
§ Selling  assets  àdoes  not  reduce  the  budget  deficit,  another  way  to  finance  the  budget  deficit,  demand  for  funds  from  
domestic  savings  is  essentially  the  same  

Using  budget  surpluses  

§ Depositing  with  RBA  (low  interest  rates)  

§ Paying  off  public  sector  debt  (frees  up  funds  on  financial  markets)  
§ Placing  the  money  in  a  specially  established,  government-­‐owned  investment  fund  (e.g.  Future  Fund,  Building  Australia  
Fund,  Education  Investment  Fund,  Health  and  Hospitals  Fund)  

Public  sector  borrowing  and  debt  

§ The  overall  impact  of  the  public  sector  on  the  economy  is  reflected  in  the  public  sector  underlying  cash  outcome,  
showing  the  borrowing  needs  or  surplus  funds  from  all  levels  of  government,  government  authorities  and  PTEs.  
§ This  gives  the  most  comprehensive  indication  of  the  fiscal  impact  of  the  public  sector  on  the  Australian  economy  
§ Over  time,  running  public  sector  deficits  results  in  the  accumulation  of  public  sector  debt,  which  is  owed  both  
domestically  and  overseas  
§ Overseas  borrowings  involve  a  greater  risk  for  the  economy,  increasing  the  level  of  foreign  liabilities  and  their  
servicing  costs  and  placing  a  future  burden  on  the  current  account  

The  impact  of  recent  fiscal  policy  

§ Fiscal  policy  changes  are  less  important  when  the  economy  is  achieving  stable,  sustainable  rates  of  economic  growth  
§ However,  when  the  economy  experiences  a  downturn,  fiscal  policy  has  a  more  important  role  

Economic  growth  

§ For  many  years,  fiscal  policy’s  most  important  impact  was  its  influence  on  economy  growth  according  to  Keynesian  
economic  theory  
§ By  the  early  1990s,  the  role  of  fiscal  policy  in  influencing  economic  growth  has  been  reduced,  with  monetary  policy  
becoming  the  main  instrument  to  influence  economic  growth,  while  fiscal  policy  had  an  occasional  role  to  
counterbalance  economic  activity  
§ The  government  responded  quickly  with  fiscal  stimulus  with  the  onset  of  the  global  economic  recession.  The  2010-­‐11  
Budget  returned  to  a  mildly  contractionary  stance  to  avoid  overstimulating  the  economy  and  leading  to  high  inflation  
§ Experience  in  the  late  1990s  suggests  that  tighter  monetary  policy  can  increase  economic  growth  in  the  medium  term  
through  the  reversal  of  the  crowding  out  effect.    

Unemployment  and  workforce  participation  

§ In  stimulating  aggregate  demand,  expansionary  fiscal  policy  can  help  reduce  unemployment  
§ Specific  Budget  measures  introduced  in  recent  years  to  address  Australia’s  longer  term  labour  market  challenges,  such  
as  increasing  the  participation  rate  and  reducing  structural  unemployment  
– Low  Income  Tax  Offset,    Jobs  and  Training  Compact,  Job  Services  Australia  

National  savings  and  the  current  account  deficit  

§ In  the  late  1980s  and  1990s,  a  main  goal  of  fiscal  policy  was  to  increase  national  savings  and  reduce  the  CAD,  but  there  
has  been  little  evidence  to  suggest  that  Australia’s  increased  public  savings  helped  to  reduce  the  CAD  and  was  even  
higher  in  the  decade  to  2008  
§ Surplus  budgets  contribute  to  higher  public  savings  which  should  make  the  CAD  lower  than  if  the  government  ran  
budget  deficits  over  the  economic  cycle  

Distribution  of  income  

§ Increased  unemployment  benefits  and  other  welfare  payments  should  result  in  a  more  equitable  distribution  of  
income  (e.g.  increase  in  the  aged  pension,  investment  in  social  housing)  
§ Halving  of  the  private  health  insurance  rebate  and  reducing  Family  Tax  Benefit  indexation  increases  to  upper  income  
threshold  may  also  reduce  inequality  
§ General  fiscal  stimulus  in  2009-­‐10  should  boost  economic  activity  and  employment  growth,  thus  helping  to  reduce  
inequality  
§ Tax  cuts  in  July  2009  have  increased  inequality  as  higher  income  earners  had  larger  reductions  in  their  marginal  tax  
brackets  

   
Monetary  Policy  
Introduction  
 

Monetary  Policy  involves  action  by  the  RBA,  on  behalf  of  the  govt,  to  influence  the  cost  and  availability  of  money  and  
credit  in  the  economy  

• It  is  a  macroeconomic  countercyclical  policy  

• It  influences  the  level  of  economic  activity,  employment  and  prices  

Monetary  policy  in  Australia  is  conducted  by  the  RBA  without  the  direct  control  of  the  govt.    

AS  the  primary  monetary  authority  in  the  country,  the  RBA  is  the  only  organisation  in  the  economy  that  is  allowed  to  print  
money.  This  gives  the  RBA  some  degree  of  control  over  the  supply  of  money  in  the  economy  and  gives  it  a  special  
relationship  with  the  financial  sector.    

• The  govt  have  long  attempted  to  use  this  relationship  to  achieve  their  economic  policy  objectives  

The  main  instrument  of  monetary  policy  is  Domestic  Market  Operations  (DMOs  are  actions  taken  by  the  RBA  in  the  
short  term  money  market  to  buy  and  sell  second  hand  commonwealth  govt  securities  in  order  to  influence  the  cash  rate  
and  the  general  level  of  interest  rates)  

The  RBA  does  not  regulate  the  level  of  interest  rates  directly,  but,  its  actions  influence  market  interest  rates,  helping  it  to  
achieve  its  objectives  relating  to  the  level  of  economic  activity,  inflation  and  unemployment.  

The  objectives  of  Monetary  Policy  

 

Monetary  policy  is  the  primary  macroeconomic  policy  used  to  manage  the  level  of  economic  growth.  The  RBA’s  policy  
stance  can  be  described  as  expansionary  or  contractionary,  reflecting  its  impact  on  economic  growth.    

If  the  RBA  wished  to  boost  economic  activity,  it  could  do  so  by  loosening  monetary  policy  (reducing  interest  rates).    

• Lower  interest  rates  would  boost  C  &  I  

• This  leads  to  an  increase  in  AD  and  thus  a  higher  level  of  economic  activity  and  a  reduction  in  unemployment  
• However,  if  growth  rises  too  fast,  inflationary  pressures  will  also  increase,  putting  at  risk  the  low  inflation  
objective,  which  is  not  consistent  with  one  of  the  govt’s  long  term  aims  

On  the  other  hand,  a  tightening  of  monetary  policy  (increasing  of  interest  rates)    

• Higher  interest  rates  would  reduce  C  &  I  

• This  leads  to  a  fall  in  AD  and  thus  a  lower  level  of  economic  activity  and  an  increase  in  unemployment  

Because  of  this  tension  between  policy  objectives,  it  is  not  always  possible  for  the  RBA  to  pursue  all  the  goals  of  economic  
policy  at  once,  at  least  in  the  short  term.  Instead,  the  govt  needs  to  identify  its  priorities  and  provide  direction  to  the  RBA  
as  to  which  objectives  are  most  important  in  the  conduct  of  monetary  policy  

The  objectives  of  monetary  policy  are  laid  out  formally  in  the  Reserve  Bank  Act  1959  which  states  that  in  its  
implementations  of  monetary  policy  the  RBA  should  aim  for:  

• Stability  of  $A  –  which  means  maintaining  low  inflation  

• Full  employment  in  Aus  –  which  in  effect  means  reducing  the  level  of  unemployment    
• Promoting  the  economic  prosperity  of  the  people  of  Aus  –  which  means  encouraging  a  sustained  level  of  economic  
growth  

Inflation  Targeting  

Since  the  early  1990s,  Australia  has  followed  the  example  of  several  other  countries  including  Canada  and  NZ,  where  the  
central  bank  sets  a  target  range  for  inflation  and  then  operates  independently  of  the  govt  in  determining  the  interest  rate  
movements  necessary  to  keep  inflation  in  this  range.  This  reflects  several  important  aspects  of  monetary  policy:  

• Monetary  policy  is  particularly  suited  to  fighting  inflation  

 • When  assigned  to  a  no.  of  simultaneous  goals  monetary  policy  was  unsuccessful  in  achieving  any  of  them  
• Interest  movements  can  be  distorted  by  political  pressure,  but,  by  giving  independence  to  the  central  bank  in  its  
conduct  of  monetary  policy,  this  effect  is  minimised  
• Countries  where  the  central  banks  were  given  the  responsibility  of  targeting  inflation  have  achieved  low  inflation  
without  necessarily  incurring  the  cost  of  increasing  unemployment.  

Australia  adopted  the  2-­‐3%  inflation  target  range  in  the  1990s  

NOTE:  

• The  RBA  will  continue  to  pursue  its  other  2  goals  of  reducing  unemployment  and  promoting  growth  if  its  primary  
goal  of  price  stability  is  achieved  

In  making  decisions  about  the  future  movements  of  interest  rates,  the  RBA  considers  several  indicators  of  theh  financial  
conditions  and  economic  performance  of  the  Aus  Economy,  as  well  as  its  forecasts  about  these  indicators  in  the  near  
future.  

• The  inflation  rate  

• Inflationary  expectations  
• Wages  Growth  
• The  rate  of  unemployment  
• The  rate  of  economic  growth  
• Interest  Rates  
• The  exchange  rate  
• The  balance  of  Payments  

The  board  of  the  RBA  is  responsible  for  the  conduct  of  monetary  policy.  IT  considers  how  the  economic  variables  above  
contribute  to  inflation  not  only  in  the  short  term,  but  also  in  the  medium  to  long  term.  

• If  wages  growth  is  greater  than  labour  productivity  it  can  add  to  inflation  as  businesses  pass  on  increases  in  their  
real  labour  costs  to  consumers  in  the  form  of  higher  prices.  As  a  general  guide,  the  Rba  regards  wage  growth    in  
excess  of  4.5%  as  a  threat  to  low  inflation  
• While  the  RBA  does  not  have  a  specific  target  or  a  desirable  level  for  the  exchange  rate,  a  depreciation  of  the  
exchange  rate  adds  to  inflationary  pressures  through  higher  prices  for  consumer  imports  and  imported  inputs  to  
the  production  process  
• While  strong  growth  in  economic  activity  and  reductions  in  unemployment  are  in  themselves  positive,  they  can  
pose  a  significant  threat  to  inflation  if  the  economy  is  approaching  its  supply  capacity.  This  is  because  growth  in  
demand  beyond  full  employment  (or  the  natural  rate  of  unemployment)  can  only  produce  a  rise  in  general  price  
levels  and  not  an  increase  in  output  and  employment  

The  Implementation  of  Monetary  Policy  

 

Monetary  policy  involves  influencing  the  cost  and  availability  of  money  in  the  economy.  There  are  2  possible  instruments  
for  implementing  monetary  policy:  

1. The  RBA  ma  control  the  growth  in  money  supply  in  the  economy  through  its  control  over  the  money  base  –  This  
form  of  monetary  policy  implementation  is  referred  to  as  monetary  targeting  
2. The  RBA  may  influence  the  general  level  of  interest  rates  in  the  economy  by  setting  the  short  run  cash  rate  –  
sometimes  referred  to  as  rate-­‐setting  monetary  policy.  

Definitions:  Money  Supply  is  the  total  amount  of  funds  in  an  economy  that  can  be  used  asa  medium  of  exchange,  a  meaure  
of  value,  a  store  of  value  and  a  method  of  deferred  payment.  The  RBA  uses  M3  

• Monetary  Targeting  was  used  from  mid  1970s  to  early  1980s.  However,  this  was  not  successful  as  targets  were  
regularly  missed  and  the  money  supply  figures  were  distorted  by  the  movement  of  funds  from  banks  to  other  
financial  institutions  that  were  not  subject  to  RBA  controls  
• In  the  current  setting  of  a  deregulated  financial  sector,  the  RBA  does  not  directly  control  or  regulate  interest  rates.  
Instead  the  RBA  attempts  to  set  a  short  run  interest  rate  known  as  the  cash  rate,  through  its  DMOs,  knowing  
changes  in  the  cash  rate  will  lead  to  changes  in  market  interest  rates  
The  Overnight  Money  Market  

The  RBA’s  instrument  of  monetary  policy  is  the  cash  rate  (which  is  the  interest  rate  paid  on  overnight  loans  in  the  short  
term  money  market)  –  the  market  for  short  term  loans  between  banks  and  financial  institutions  

The  cash  rate  is  set  by  the  forces  of  D  &  S  but  the  RBA  can  increase  or  decrease  the  supply  of  funds  in  the  short  term  
money  market  through  DMOs  and  thus  target  the  cash  rate.  

1. The  RBA  influences  the  cash  rate  by  affecting  the  Exchange  Settlement  (ES)  accounts  that  banks  hold  at  the  RBA.  
(Banks  need  to  hold  a  certain  proportion  of  their  funds  with  the  RBA  in  ES  accounts  in  order  to  settle  payments  
with  other  banks  and  the  RBA  
2. At  the  end  of  every  trading  day,  these  settlements  between  banks  will  cancel  each  other  out  (i.e.  for  every  bank  
that  gains  funds,  another  will  lose  them),  having  no  net  impact  on  money  supply  (However,  some  banks  will  need  
to  borrow  to  settle  their  daily  transactions  while  others  will  have  surplus  funds  which  they  can  lend  and  gain  
interest  from)  

How  the  domestic  market  operations  work  

 
1. When  the  supply  of  funds  held  in  the  overnight  money  market  is  too  high,  the  price  of  borrowing  this  money,  the  
cash  rate  of  interest  falls  and  vice  versa  
2. If  the  RBA  wants  to  reduce  the  cash  rate  it  will  buy   second-­‐hand  government  securities  from  commercial  banks,  
and  in  exchange,  deposit  additional  funds  in  their  exchange  settlement  accounts  
• Increases  the  supply  of  settlement  funds  putting  downward  pressure  on  the  overnight  cash  rate  
3. When  the  RBA  sells  securities  to  a  bank,  it  withdraws  money  from  the  seller’s  ES  account  
• Decreases  the  supply  of  settlement  funds  putting  upward  pressure  on  the  overnight  cash  rate  
4. Thus  by  selling  or  buying  govt.  securities  the  RBA  creates  a  shortage  or  surplus  of  funds  in  the  short  term  money  
market  therefore  affecting  the  cash  rate  of  interest    
 
• In  recent  years  there  has  been  declining  govt.  debt  levels  reducing  the  supply  of  Commonwealth  Government  
Securities  (CGS)    
• The  RBA  has  shifted  from  using  outright  purchases  and  sales  of  CGS,  instead  using  repurchase  agreements  to  
conduct  DMOs.  
 
Repurchase  Agreements  (repos)  –  are  where  the  RBA  buys  (or  sells)  a  security  from  a  financial  institution  and  commits  
itself  to  sell  (or  buy)  the  security  back  to  the  same  institution  at  a  later  date  
 
• RBA  involvement  includes  the  constant  intervening  in  the  short  term  money  market  to  maintain  the  cash  rate  at  
its  target  level.  (due  to  the  demand  of  banks  for  ES  funds  changing  on  a  daily  basis)  
• RBA  cash  rate  provides  the  foundation  of  the  interest  rate  structure  in  the  economy  
 
Monetary  Policy   Domestic  Market   Overnight  Money   Cash  Rate   Market  Interest  Rates  
Stance   Operations   Market  

Tightening     RBA  sells  govt   Shortage  of   Rises   Rises  

securities   borrowable  funds  

Loosening   RBA  buys  govt   Excess  of  Borrowable   Falls   Falls  

securities   Funds  

The  current  stance  of  monetary  policy  

§ Since  December  2007,  the  RBA  has  published  official  minutes  from  its  meetings  to  improve  transparency  of  the  
monetary  policy  decision  making  process  
§ In  the  late  1980s,  monetary  policy  was  used  to  address  inflation  and  the  CAD  and  was  tightened  significantly  to  18%  
§ With  the  rise  in  unemployment  from  the  recession  in  the  early  1990s,  the  RBA  eased  monetary  policy  with  the  cash  
rate  falling  to  4.75%  by  1993  
§ Even  though  inflation  was  not  an  issue  in  1994,  the  RBA  raised  to  cash  rate  to  7.5%  to  prevent  it  from  re-­‐emerging  
§ As  inflation  fell  in  1996,  the  RBA  focused  on  supporting  economic  growth  and  employment,  reducing  interest  rates  to  
4.75%  
§ In  2000,  the  lower  values  of  the  $A  and  inflationary  expectations  from  the  GST  were  expected  to  contribute  to  
domestic  inflation,  prompting  the  RBA  to  pre-­‐emptively  tighten  monetary  policy  
§ By  mid-­‐2001  however,  monetary  policy  was  expansionary  in  response  to  a  mild  domestic  contractions  from  the  global  
recession  
§ In  the  mid-­‐2000s,  monetary  policy  settings  shifted  from  expansionary  to  contractionary  with  the  cash  rate  raised  12  
times  to  7.25%  between  2002  and  mid-­‐2008,  but  inflation  could  not  be  contained  as  the  economy  was  close  to  
capacity  
§ In  2008-­‐09,  fears  of  the  impact  of  the  global  economic  recession  cause  the  RBA  to  change  monetary  policy  settings  
from  contractionary  to  expansionary,  with  the  cash  rate  lowered  by  4.25%  to  3%  in  9  months,  increasing  
discretionary  incomes  
§ From  October  2009  to  May  2010,  the  RBA  has  raise  the  cash  rate  to  4.5%  to  contain  inflationary  pressures  
§ Inflation  has  averaged  2.7%  since  1996  and  monetary  policy  still  has  an  important  role  in  supporting  economy  growth  
and  employment  in  the  short  term  

Factors  that  explain  the  stance  of  monetary  policy  

§ The  low  inflation  objective  –  RBA  will  tighten  monetary  policy  if  inflation  moves  too  far  outside  the  target  range  
§ Inflationary  expectations  –  RBA  will  raise  rates  to  reduce  inflationary  expectations  
§ Wages  growth  –  major  determinant  of  inflation  
§ Achieving  economic  growth  and  lower  unemployment  once  lower  inflation  has  been  achieved.  They  also  indicate  
whether  the  economy  is  close  to  its  supply  constraint  
§ External  factors  (e.g.  needing  to  maintain  an  interest  rate  differential  to  attract  enough  foreign  capital  inflow  cause  of  
low  domestic  savings  and  high  domestic  investment,  falling  dollar  which  raises  inflationary  pressures)  

Statement  on  Monetary  Policy  Summary  |  August  2014  

Exports  

• Chinese  economic  activity  has  picked  up,  driven  by  a  rebound  in  exports  and  a  pick-­‐up  in  investment  –  target  of  7.5%  of  
GDP  growth  in  2014  
• Australia’s  trading  partner  growth  is  forecast  to  be  a  little  above  its  long-­‐run  average  in  2014  and  2015  –  reflects  the  
expectation  of  stronger  growth  in  advanced  economies  as  well  as  the  growing  share  of  Australian  exports  destined  for  
China  
• The  prices  of  bulk  commodities  have  declined  in  the  past  three  months  –  largest  fall  in  prices  been  for  iron  ore,  for  
which  supply  has  expanded  following  investment  in  global  capacity,  particularly  Australia  
• Declines  in  coal  prices  this  year  have  also  been  accompanied  by  an  increase  in  global  supply  from  lower-­‐cost  mines  
• The  global  supply  of  bulk  commodities  is  expected  to  increase  further  with  the  completion  of  mining  investment  
projects  already  in  train  –  there  is  expected  to  be  little  change  in  prices,  and  therefore  the  TOT  are  expected  to  remain  
at  a  high  level  historically  
 

Financial  Conditions  

• There  has  been  a  decline  in  interest  rates  (historically  low  levels)  
• Meanwhile  the  exchange  rate  remains  high  by  historical  standards,  with  the  Australian  dollar  little  changed  since  the  
previous  statement  
• The  exchange  rate  is  notwithstanding  the  decline  in  commodity  prices  and  a  narrowing  in  the  interest  rate  differentials  
between  Australia  and  most  other  advanced  economies  since  then  
 

GDP  

• Australian  GDP  growth  picked  up  significantly  over  second  half  of  2013  and  early  2014  –  much  of  the  increase  
accounted  for  by  a  surge  in  resource  exports.  
• There  has  even  been  signs  of  improved  economic  conditions  over  the  past  year  outside  the  resources  sector  –  pattern  
of  output  growth  reflects  the  transition  from  the  investment  to  the  export  phase  of  the  mining  boom,  and  the  gradual  
pick-­‐up  in  the  growth  of  non-­‐mining  activity  
 

 
Investment  

• Mining  investment  has  declined  noticeably  from  the  peak  almost  two  years  ago,  although  it  remains  at  a  high  level  and  
has  further  to  fall  over  the  coming  years  as  projects  reach  completion  and  few  new  projects  commerce  
 

Savings  

• The  very  low  interest  rates  have  contributed  to  increased  consumption  =  gradual  decline  in  the  savings  rate  over  the  
past  18  months  =  increased  international  borrowing  =  increase  CAD  
 

Domestic  Growth  

• Domestic  growth  continues  to  reflect  the  opposing  forces  of  the  decline  in  mining  investment  and  ongoing  fiscal  
consolidation  on  the  one  hand,  and  the  strong  growth  in  resource  exports  and  the  support  from  very  low  interest  rates  
on  the  other  
• GDP  growth  is  expected  to  be  a  little  below  average  over  2014/15  and  then  pick  up  gradually  to  an  above-­‐average  pace  
with  non-­‐mining  business  investment  and  LNG  exports  forecast  to  add  to  growth  
• A  pick  up  in  dwelling  investment  is  already  under  way,  supported  by  very  low  interest  rates  –  therefore  consumption  is  
increasing  and  is  further  expected  to  increase  given  growth  in  household  wealth,  low  interest  rates  and  improvement  in  
labour  market  conditions.  
 

Employment  

• Employment  growth  has  picked  up  following  the  improvement  in  economic  activity  since  early  2013  –  however  there  
remains  a  degree  of  spare  capacity  in  the  labour  market  now  
• The  measured  unemployment  rate  has  been  quite  volatile  from  month  to  month  over  the  year  to  date.  It  is  currently  
around  its  highest  level  in  over  a  decade  
• Meanwhile  the  participation  rate  is  around  its  lowest  level  since  the  mid  2000s  –  reflects  the  spare  capacity  in  the  
labour  market  =  growth  of  wages  has  been  subdued  
• The  expectation  of  economic  growth  should  lead  to  stronger  demand  for  labour  –  however,  growth  is  expected  to  be  
below  trend  over  the  year  ahead  and  the  unemployment  rate  is  likely  to  remain  elevated  before  it  gradually  declines  in  
2016  
 

Inflation  

• Domestic  inflationary  pressures  are  likely  to  remain  subdued,  reflecting  the  ongoing  spare  capacity  in  labour  and  
product  markets  
• Working  in  the  other  direction,  the  depreciation  of  the  exchange  rate  since  early  2013  has  pushed  up  import  prices,  
which  are  still  being  passed  through  to  prices  facing  consumers  
• Recent  abolition  of  carbon  tax  has  changed  the  forecast  for  inflation  –  inflation  expected  to  be  lower  in  2014/15  than  
previously  assumed  
 

Uncertainties  

• Key  uncertainties  centred  on  the  timing  and  extent  of  the  decline  in  mining  investment  and  how  this  is  balanced  by  the  
expansion  of  resource  exports  and  the  recovery  in  non-­‐mining  activity  
• With  the  TOT  declined,  the  exchange  rate  could  depreciate  over  time,  affecting  output  and  inflation  
 

 
Structural  Change  and  Microeconomic  Policies  

Microeconomic   policies   (Microeconomic   Reform)   is   action   taken   by   govts   to   improve   the   3   efficiencies   between   and  
within   industries,   in   order   to   maximise   output   from   scarce   resources.   It   is   central   to   the   govt’s   long   terms   aim   of  
increasing   the   level   of   sustainable   growth   in   Australia,   and   reducing   the   extent   to   which   CA   and   inflation   problems  
constrain  economic  growth  

Microeconomics   is   broadly   based   on   supply-­‐side   economics,   where   the   focus   is   on   aggregate  

supply,   rather   than   on   aggregate   demand   as   in   Keynesian   economics.   The   principal  
determinant   of   economic   growth   is   seen   as   the   allocation   and   efficient   use   of   the   factors   of  
production,   especially   labour   and   capital.   Microeconomic   reforms   are   therefore   designed   to  
improve  productivity  and  economic  efficiency.  Encourage  the  efficient  operation  of  markets    

Microeconomic  policies  are  characterised  by  the  following  important  features:  

• They  attempt  to  improve  the  economy’s  allocation  of  resources  in  the  long-­‐run.  
• They   are   directed   at   product   markets   where   final   goods   and   services   are   sold   and   factor   markets   where  
productive  inputs  such  as  land,  labour,  capital  and  enterprise  are  bought  and  sold.  
• They   impact   on   both   the   tradable   (export   and   import   competing   firms)   and   non-­‐tradable   (mainly   domestic  
public  sector  enterprises)  sectors  of  the  economy  
• They  target  both  government  owned  and  privately  owned  operated  business  enterprise.  
• They  are  also  complementary   to   the   government’s   macroeconomic   strategy.  If  the  government  can  achieve  
internal  and  external  balance  in  the  short  to  medium  term,  micro  policies  can  operate  simultaneously  to  improve  
the  efficiency  of  resource  allocation  in  the  economy  in  the  long  term.  

The  goals  of  Australia’s  Micro  Policy  

 
1. Increase   the   rate   of   growth:   By   increasing   the   supply   potential   of   each   business   area,   the   equilibrium   point  
moves  to  the  right,  and  the  growth  potential  of  the  economy  is  increased.    
2. Remove   pressure   on   prices:  Microeconomic  reforms  are  supply  side  reforms.  By  aiming  to  shift  the  supply  curve  
to  the  right,  not  only  will  the  equilibrium  point  shift  right,  it  will  also  move  down.  This  means  that  there  should  be  
no  upward  pressure  on  prices  –  the  inflation  rate  should  remain  low.  
3. Efficiency   in   resource   allocation:  Perhaps  the  major  goal  of  all  microeconomic  reform  policies  is  the  desire  to  
improve  the  efficiency  with  which  resources  are  allocated  in  the  Australian  economy.  If  the  Australian  economy  is  
able  to  create  a  higher  level  of  output  with  a  smaller  quantity  of  inputs,  then  our  growth  will  be  sustainable  and  
prices  should  remain  stable.    
4. External   stability:   If   businesses   within   Australia   are   more   efficient,   then   it   follows   that   they   will   be   more  
internationally  competitive.  This  means  that  our  goods  and  services  will  be  more  attractive  on  the  international  
market,   and   therefore   our   exports   will   increase.   This   should   help   to   make   the   CAD   stable,   and   therefore   the  
currency  should  benefit.  

Past   decade’s   sustained   improvements   in   productivity   is   the   single   best   explanation   for   Australia’s   strong   economic  
performance   over   the   past   decade   –   strong   growth,   rising   living   standards,   falling   unemployment,   sustained   low  
inflation,  and  (to  a  lesser  extent)  lower  CADs  –  and  this  improved  productivity  performance  is  in  turn  attributable  to  
microeconomic     reform.   According   to   the   Productivity   Commission,   Australia’s   GDP   was   2.5%   higher   in   2005-­‐06  
because   of   Australia’s   extensive   reforms   of   the   1990s.   However,   this   figure   is   significantly   lower   than   the   5.5%  
estimate  when  the  reforms  were  implemented.  In  the  1980s  average  annual  labour  productivity  growth  grew  by  an  
average  2%  per  year,  while  in  the  1990s  this  increased  to  a  rate  of  3%  per  year.    
The  Costs  and  Benefits  of  Microeconomic  Reform  
In   a   very   basic   sense,   microeconomic   policy   is   a   reform   that   is   implemented   in   one   sector   of   the   economy   to   improve  
efficiency.   Although   the   reforms   are   aimed   at   specific   sectors,   the   ultimate   goal   is   to   achieve   an  increase   in   the   productive  
capacity  of  the  economy.  In  other  words,  when  implementing  a  microeconomic  reform,  the  government  is  aiming  to  shift  
the  aggregate  supply  curve  to  the  right.  Once  the  policy  has  become  effective,  we  should  see  a  higher  level  of  output,  with  
no  upward  pressure  on  prices.  Microeconomic  reform  usually  results  in  a  number  of  short  term  costs  associated  with  the  
process  of  structural  adjustment,  but  a  number  of  long  term  benefits.  
 
Long  term  benefits   Costs  

Greater  efficiency  and  productivity  growth:   Closure  of  inefficient  businesses  

• Businesses   have   greater   flexibility   and   incentives   to   improve   production   • Exposes   the   inefficient   import-­‐
processes   and   management   (E.g.   telecommunications   and   electricity   -­‐>   the   competing   industries   to   foreign  
importance  of  promoting  competition  and  reducing  regulations).   competition   –inefficient   firms   will  
• Raising   the   level   of   efficiency,   productivity   of   the   factors   of   production   -­‐   be   forced   to   close.   (E.g.   National  
Firms  will  be  able  to  produce  more  output  with  the  same  input,  resulting  in   Competition   Policy   and   reductions  
greater  aggregate  supply  and  structural  change  in  the  economy.  (E.g.  labour   in  protection)  Those  businesses  that  
market  policy  aims  to  tie  increases  in  wages  to  increases  in  productivity,  which   close   bear   greatest   costs   of  
gives  workers  an  incentive  to  increase  productivity.)   microeconomic  reform,  but  all  firms  
• Improve  allocative  efficiency  -­‐  Over  time,  resources  will  flow  from  inefficient   may   experience   some   short-­‐term  
to   efficient   industries   and   increasing   aggregate   supply.   (E.g.   reductions   in   costs   in   the   loss   of   market   share   or  
protection   improve   the   level   of   allocative   efficiency   as   inefficient   import-­‐ in   the   cost   of   transition   to   newer,  
competing  firms  close.  This  frees  up  resources  which  can  flow  to  areas  in  the   more  efficient  production.  
economy  in  which  Australia  has  a  comparative  advantage)  
• Improvements   in   technical   efficiency   -­‐   Reforms   such   as   privatisation   and   Short-­‐term  economic  instability  
corporatisation   of   public   trading   enterprises   can   lead   to   improvements   in  
technical  efficiency  as  profit  motive  of  the  new  firm  encourages  it  to  adopt   • In   the   short-­‐term   microeconomic  
world’s  best  production  practices.   reforms   have   the   potential   to  
• Improve   their   dynamic   efficiency   -­‐   greater   levels   of   competition   encourage   contribute   to   economic   instability.  
firms   to   improve   dynamic   efficiency   in   order   to   adapt   to   changes   in   the   (E.g.   in   mid   2000,   changes   to  
pattern   of   consumer   demand   and   able   to   react   to   sudden   shocks   in   the   Australia’s   taxation   system   and  
market,   increases   their   chances   of   long   term   survival.   (E.g.   National   introduction   of   the   GST   doubled   the  
Competition  Policy)   inflation   rate   to   6%   and   caused  
consumers   to   change   their   spending  
patterns,   which   had   the   effect   of  
halving  growth  rate  to  1.8%  in  2000-­‐
01.)  

Higher  sustainable  economic  growth  and  living  standards   Higher  unemployment  in  short  term  

• Higher  productivity  growth  has  contributed  to  greater  economic  activity  and   • Some   individuals   will   suffer   in   the  
lower   unemployment.   In   the   long   term,   it   increases   an   economy’s   rate   of   short-­‐term   through   job   losses.  
sustainable   economic   growth   without   rising   cost   and   price   pressures   that   People   may   become   structurally  
cause   inflation.   As   a   result,   individuals’   income   and   living   standards   will   unemployed   when   the   businesses  
increase.  This  translates  into  higher  living  standards.     that   employ   them   close   because  
• As   consumers   benefit   from   access   to   a   broader   range   of   goods   at   lower   they   cannot   compete.   As   a   result,  
prices   as   aggregate   supply   increases   (E.g.  deregulation  of  financial  markets   these   individuals   will   experience   a  
has  given  individuals  greater  choice  and  flexibility  in  the  financial  sector.)   fall  in  their  living  standards.  
• Increase   in   aggregate   supply   reduces   the   production   cost   of   capital   goods   • Structural   unemployment   can   turn  
and   services,   thus   reduces   the   cost   of   production   in   other   industries   that   into   long   term   unemployment  
uses   those   goods   and   services   (E.g.   greater   competition   in   the   (Hysteresis)   unless   government  
telecommunications  industry.)   assists   with   labour   market  
• In  2005-­‐06  GDP  was  2.5%  ($25  bn)  higher  due  to  microeconomic  reforms  of   retraining  programs.    
the  1990s  but  this  is  short  of  the  5.5%  predicted    

Lower  unemployment   Greater   work   intensity   and  

insecurity  
• Microeconomic   reforms   should   help   to   reduce   unemployment   rate   and  
create   jobs   in   newer   industries,   hence   more   individuals   will   gain   • People   working   longer   hours  
employment  as  job  opportunities  arise  in  efficient  industries.   without   extra   pay   –   means   that  
• Allocative   efficiency   –   A   more   flexible   labour   market   facilitates   the   flow   of   ‘increase   in   labour   productivity’  
 labour  to  the  markets  in  which  it  is  most  needed.   may   in   fact   disguise   the   fact   that  
people   are   simply   working   longer  
hours  without  extra  pay.  

Lower  inflation   Less  equal  distribution  of  income  

• Lower  underlying  inflation  because  of  greater  competitive  pressures   • The   distribution   of   income   is   likely  
• Higher   aggregate   supply   creates   sustainable   economic   growth   and   higher   to   worsen   in   the   short   run   due   to  
income   levels   without   higher   inflation.   If   aggregate   supply   is   increasing,   it   is   the  increase  in  unemployment.      
able   to   match   increases   in   aggregate   demand,   achieving   higher   dynamic   • Its   benefits   have   been   delivered   to  
efficiency,   which   ensures   that   prices   do   not   need   to   rise   by   as   much   in   higher-­‐income  earners.  
response   to   increases   in   aggregate   demand   and   minimising   demand-­‐pull  
inflation.  

Improvement  in  CAD  in  long  run   Deterioration  in  CAD  in  short  term  

• Efficient   Australian   exporters   will   gain   access   to   new   markets   overseas.   As   • Microeconomic   reform   involves   a  
domestic   producers   increase   the   quantity   and   quality   of   their   products,   shift   away   from   protection.   In   the  
demand   for   imports   may   fall.   As   a   result,   the   current   account   balance   may   short   term,   consumers   may  
improve.   However   because   of   the   structural   component   of   the   CAD   problem   purchase   cheaper   imports   in   place  
(low   savings   rate   and   over-­‐reliance   on   foreign   debt)   there   will   be   a   of   domestic   goods   which   lead   to  
constraint  on  the  effectiveness  of  general  micro-­‐reforms.   deterioration   in   the   balance   on  
goods   and   services   component   of  
the  current  account.  
 
Increased  costs  for  governments  

• Reduced   revenue   from   taxation  

(personal   income   tax   and   from  
tariffs)   and   increased   expenditure  
on   unemployment   benefits.  
Implementation   of   reforms   such   as  
infrastructural   projects   cost  
government  as  well.  
 
Regulatory  Failure  

• Recent   experiences   highlight   the  

possibility   of   weak   regulatory  
regimes   failing   to   address   major  
problems   due   to   deregulation.   (E.g.  
tighter   regulations   might   have  
prevented  the  GFC)  
 

Productivity  refers  to  the  quantity  of  output  which  can  be  produced  with  a  given  level  of  input  such  as  capital  and  labour.  
An  increase  in  productivity  will  lead  to:  
• The  economy  would  be  able  to  produce  more  output  with  the  same  number  of  inputs  As  a  result,  aggregate   supply  
increases.    
• Increases  the  incomes  of  the  factors  of  production  seen  by  an  increase  in  economy  growth  
• Inflationary  pressures  remain  low  despite  economic  growth,   as   productivity   increases   allow   for   economic   growth  
that  can  be  sustained  into  the  long  term.
 Types  of  efficiency  

• Allocative   efficiency  refers  to  the  economy’s  ability  to  shift  resources  to  where  they  are  most  valued  and  can  be  used  
most  efficiently.  Resources  need  to  be  allocated  to  industries  that  reflect  demand  by  consumers.  Competition  increases  
allocative   efficiency   because   firms   who   can   use   certain   resources   more   efficiently   can   bid   those   resources   away   from  
firms  that  are  less  efficient.    
The  reduction  in  tariffs,  for  example  in  the  textile  industry  has  seen  a  reallocation  of  resources  to  more  efficient  industries.  

• Technical  efficiency   is   the   ability   of   an   economy   to   achieve   the   maximum   level   of   output   for   a   given   quantity   of   inputs.  
This  occurs  where  individual  firms  combine  resources  to  produce  goods  and  services  at  the  lowest  possible  prices  for  
consumers.    
For  example,  labour  market  reforms  and  enterprise  bargaining  have  reduced  labour  costs  and  increased  productivity.  

• Dynamic   efficiency   refers   to   the   economy’s   ability   to   shift   resources   between   industries   in   response   to   changing  
patterns  of  consumer  demand  and  technology  to  maintain  competitiveness.  As  a  general  rule  the  weaker  the  competition  
the  lower  the  dynamic  efficiency.  
For  example,  the  deregulation  in  the  telecommunications  industry  has  led  to  reduced  costs  and  increased  access  to  new  
technologies.  

• Inter-­‐temporal  efficiency  (?)   ensures   that   Australia’s   resources   are   effectively   allocated   between   current   consumption  
and  future  investment.  

Structural  Change  

Structural  change  refers  to  the  long-­‐term   changes   in   the   nature   and   pattern   of   production   in   the   economy.  Structural  
changes   that   occur   because   of   the   operation   of   the   price   mechanism   are   said   to   be   market   induced.   These   include  
changes  in  consumption  patterns,  technology,  demographic  factors,  and  international  factors  such  as  globalisation.  
Microeconomic  policies  involve  structural  changes  in  the  economy  to  make  it  more  productive,  efficient  and  competitive.  
Structural   change   has   been   occurring   since   the   industrial   revolution   when   labour   started   to   move   from   agriculture   to  
manufacturing  and  service  industries.  Structural  change  involves  the  shift  of  resources  from  slower  growing  areas  of  the  
economy  to  faster  growing  areas.  

Factors  causing  structural  change  

Market   induced   Structural   changes   that   occur   because   of   the   operation   of   the   price   mechanism.   These   include   changes   in  
consumption  patterns,  technology,  demographic  factors,  and  international  factors  such  as  globalisation:  
• Changes   in   the   pattern   of   consumer   demand   –   will   lead   to   new   products   emerging   and   others   becoming  
obsolete.   Rising   levels   of   income   will   also   increase   the   range   of   G+S   and   luxuries   that   consumers   can   afford,  
leading  to  a  change  in  the  pattern  of  production  and  greater  expenditure.    
• Technological   change   –   consumer   tastes   and   preferences   can   be   affected   by   introducing   new   products.  
Innovation   and   technological   progress   also   leads   to   more   efficient   processes   of   production   that   change   the   way  
that  G+S  are  produced  and  delivered  to  consumers.    
• International  factors  –  (The  importance  of  trade)  the  increasing  integration  of  the  Aus  economy  with  the  global  
economy,  with  the  exports  and  imports  now  accounting  for  more  than  20%  of  GDP  The  growth  of  the  East  Asian  
market  in  influencing  Aus  Trade  patterns  
• Demographic  factors  –  the  increasing  importance  of  the  services  sector  as  a  contributor  to  GDP  and  employment,  
The  changing  composition  and  distribution  of  the  Aus  workforce  

 
 Government  induced  structural  changes  in  the  product  and  factor  markets,  such  as    
 
Objectives   Changes  In  The  Product  &  Factor  Markets  

1995  to  strength  competitive  pressure  in  markets  to   National  Competitions  Policy  
raise  efficiency  and  lower  consumer  prices  

reforms  to  increase  the  competitiveness  of  Aus   tariff  reforms  

industry  and  the  volume  of  exports  

to  increase  in  the  efficiency  of  public  trading   policies  of  privatisation,  deregulation,  
enterprises   commercialisation  and  corporatisation  of  PTEs  

Increase  in  the  productivity  of  labour  and  capital   reforms  to  capital  and  labour  markets,  e.g.  financial  
deregulation  and  productivity  based  wage  bargaining  

strengthening  of  the  incentives  to  work,  save  and   taxation  reform  with  the  introduction  of  the  GST  in  
invest   2000  

The  major  constraints  to  the  speed  of  structural  change  

The  speed  of  structural  adjustment  depends  on  how  quickly  the  economy  can  respond  and  adjust  to  changing  conditions  in  
both  the  domestic  and  global  market:  
• Speed  with  which  factors  of  production  can  shift  between  industries  and  sectors  -­‐  Workers  need  to  acquire  new  skills,  
existing   capital   equipment   must   be   modified   or   replaced;   and   entrepreneurs   must   find   ways   to   convince   consumers   to  
buy  new  products.    
• Government   policies   -­‐   E.g.   Protectionist   policies   favour   existing   industries   and   shield   inefficient   producers   from  
declining,   and   labour   market   policies   that   do   not   allow   for   variations   in   wage   levels   mean   that   workers   in   declining  
industries  do  not  have  the  incentives  to  retrain  and  move  to  other  sectors  of  the  economy.  
   
•  

Overview  of  past  Microeconomic  reforms  

Areas   of   Microeconomic   Issues  
Reform  

First  wave  began  in  1980s  

Deregulation  of  financial   • Floating  the  Aus  dollar  

sector  in  1983   • Removal  of  the  RBA  controls  over  interest  rates  and  use  of  market  operation  by  RBA  to  
conduct  monetary  policy  
• Grant  bank  licences  to  allow  foreign  banks  to  enter  the  Aus  market  and  compete  with  
domestic  banks  
Deregulation  of  key   • Aviation  industry  in  1990  
industries  to  allow  firms  to   • Railway  industry  in  1997  
enter  and  boost  competition  in   • Telecommunication  Industry  in  1992  
key  sectors  of  the  economy   • Agricultural  industry  in  1995  

Reform  of  Public  Trading   • Corporatisation  of  PTEs-­‐  E.g.  Australian  Post  
Enterprises  (PTEs)   • Privatisation  of  PTEs  –  E.g.  CBA  in  1996,  Qantas  in  1995  and  Telstra  
• Outsourcing-­‐  highway  construction,    
• User-­‐pays  principles  
Labour  Markets  and   • Labour  market  reform  began  in  1985  under  the  Accord,    
Industrial  Relations  Reform   • Enterprise  bargaining  introduced  in  the  1990s,  instead  of  extensive  use  of  arbitration  

Unilateral  tariff  reductions     • Over  a  range  of  industries  -­‐  particularly  manufacturing  and  textiles  clothing  and  
footwear  
Second  wave  began  in  mid  to  late  1990s  

The  implementation  of   Began  with  the  Trade  Practice  Act  (1974)  base  of  recommendation  of  Hilmer  Report  
National  Competition  Policy   (1993)  
in  1995  
• establishment  of  NCC  and  ACCC    
• reforms  to  state  government  instrumentalities  
• implementation  of  uniform  National  Competition  Rules  
• provision  of  access  rights  for  essential  infrastructure  
• reform  to  govt  business  enterprises  
• reform  of  the  professions    
Labour  market  reforms   • Introducing  Australian  Workplace  Agreements  (AWAs)  
• Reducing  the  power  of  unions  by  ending  compulsory  unionism  and  limiting  the  use  of  
industrial  action  
• Reducing  the  regulatory  power  of  AIRC  
Overhaul  of  the  taxation  system   • Introduction  of  GST  
-­‐  New  Tax  System    in  2000   • PAYG  system  

Howard  government’s  micro-­‐reform  since  2000  

Overhaul  of  the  industrial   • Encouragement  of  individual  contracts  

relation  system   • Introduction  of  Work  for  the  Dole  Scheme,  show  the  principle  of  “mutual  obligations”  
• The  establishment  of  Centrelink  to  streamline  and  simplify  social  security  payments  
such  as  the  Youth  Allowance  
• The  replacement  of  the  CES  with  Employment  National  and  other  private  agencies  and  
creating  a  competitive  job  placement  market  known  as  the  Job  Network    
A  broader  “National  Reform   • Increase  competition  
Agenda”   • Reducing  the  regulatory  burden  
• Improving  Human  Capital  
Rudd’s  budgets  

Review  of  existing  taxation   Simplification  of  the  Australia’s  tax  system  and  reduction  of  inefficient  taxes,  emphasis  on  
framework     environmental  taxes  and  structure  of  company  taxation  to  increase  international  
competitiveness.  Henry  Tax  Review  

Significant  investment  in   • 08-­‐09  budgets  announced  $12.9  billion  will  be  invested  in  Water  for  the  Future  
national  infrastructures  to   initiative.  
improve  health  services,   • 09-­‐10  budget  announced  over  $8  million  will  be  invested  in  crucial  road,  rail  and  port  
competition  and  adapt  markets   infrastructure.  
for  climate  change  (particularly   • 09-­‐10  budgets  announced  further  energy  reforms  as  part  of  the  Clean  Energy  Initiative.  
in  areas  of  transport  and  energy   • In  2009  govt  announced  the  establishment  and  implementation  of  the  National  
reforms)   Broadband  Network  which  will  provide  90%  of  Aus  homes  and  businesses  with  access  
to  super-­‐fast  broadband  services.  
  • 09-­‐10  budgets  announced  3  new  “national  building”  funds  on  expansion  in  
infrastructure.  
 

Improving  human  capitals   In  08-­‐09  budgets  –  A  comprehensive  “Education  Revolution”  and  Education  Investment  
Fund  –  increasing  investment  in  vocational  education  and  training  ($19.6  million  for  Skills  
Australia  to  advise  govt  on  relevant  skill  shortages  +  $2.5  billion  over  ten  years  for  the  
Trade  Training  Centres  in  School  Program  –>  increase  the  qualification  and  skills  of  
workforce)  

Reducing  the  cost  of  regulation   Attempts  to  cut  bureaucratic  “red-­‐tape”  for  Aus  businesses  by  eliminating  overlapped  
by  eliminating  the  overlapping   regulatory  areas  such  as:  registering  a  business  name  and  acquiring  a  business  number,  
areas   compliance  with  OHS  regulations,  and  trade  licensing.  

Deregulation    
Deregulation  involves  the  simplification  or  removal  of  legislation  which  reduces  government  controls  over  an  industry  so  
it  is  more  responsive  to  the  operation  of  market  forces,  hence  aims  to  improve  the  efficiency  of  industries.  Deregulation  
can   involved   removing   regulations   affecting   entry   into   an   industry;   pricing   arrangements;   or   other   controls   on  
businesses   in   order   to   promote   competition,   efficiency;   lower   prices   and   to   strengthen   incentives   for   technological  
innovation.   In   the   past   three   decades,   Australia   has   deregulated   its   financial   services,   telecommunications,   electricity,   gas,  
aviation,  rails  and  agricultural  industries.  

Financial  sector    
Importance:   The   financial   sector   is   critically   important   to   the   success   of   an   advanced   economy.   The   financial   sector   plays  
an  important  role  in  ensuring  that  businesses  can  access  funds  for  investment  and  growth,  and  the  investors   can  have  
the   confidence   to   make   their   funds   available   for   new   investments.   A   competitive,   sound   and   well   regulated   financial  
sector  can  make  a  significant  contribution  to  an  economy’s  success.    
Aims:  to  make  sure  capital  resources  were  allocated  in  the  most  efficient  way  by  market  forces  of  supply  and  demand  also  
to  increase  the  amount  of  competition  in  the  financial  system.  These  changes  have  contributed  to  the  growth  of  portfolio  
investment  into  the  Australian  financial  markets  and  the  growth  of  Non-­‐Banking  Financial  Intermediaries.  
Process:  It  was  one  of  the  first  areas  targeted  for  reform  in  1983  and  the  main  reforms  were:  
• The  exchange  rate  was  floated  in  Dec  1983,  leading  to  RBA  intervention  when  necessary  -­‐  ‘dirtying  the  float’  
• Removal  of  the  RBA  controls  over  interest  rates  and  domestic  bank  lending  
• Granting   bank   licences   to   16   foreign   banks   to   increase   competition   in   the   domestic   market   -­‐   In   1983,   only   five  
operators   held   licenses   to   operate   as   banks   in   this   country.   Today,   that   number   is   closer   to   55.   Increasing  
competition   has   resulted   in   lower   margins   for   loans,   and   as   a   result   lower   interest   rates   for   retail   customers.   This  
has  contributed  to  the  increase  in  credit  growth,  and  the  huge  increases  in  investment  in  the  Australian  economy.  
• The  use  of  market  operations  by  RBA  to  conduct  monetary  policy  
• The  distinction  between  savings  and  investment  banks  was  removed  
Outcome:  much  lower  interest  rates  and  profit  margins  –  however  arguably  contributed  to  the  economic  problems  that  
were  exposed  by  the  sub-­‐prime  mortgage  issues  in  the  USA  in  2008.  Intense  competition  forced  some  banks  to  under-­‐
value  the  risk  of  the  loans.  This  caused  problems  all  over  the  world,  including  in  Australia.  

Domestic  airline  industry    

Importance:   Transport   industries   are   crucial   to   Aus’s   economy   because   of   the   distances   both   within   Australia   and  
between  Australia  and  other  nations.    
Aims:  the  market  was  open  for  new  operators  to  be  established.  It  also  meant  that  existing  international  operators  had  the  
opportunity   to   fill   seats   that   may   otherwise   have   remained   empty.   For   example,   a   flight   originating   in   Melbourne,  
stopping  in  Sydney  and  then  finishing  in  an  international  location  could  now  carry  passengers  from  Melbourne  to  Sydney.  
As   these   seats   would   have   remained   empty   prior   to   deregulation,   these   carriers   were   being   provided   with   an  
opportunity  to  allocate  their  resources  in  a  more  efficient  manner.  
Process:  Australia’s   domestic   airline   Industry   was   deregulated   in   Oct   1990,   ending   the   “Two   Airlines   Policy”.   (This   policy  
held  that  only  two  carriers  –  QANTAS  and  Ansett  could  legally  carry  passengers  on  domestic  routes)  
Outcome:   These   remove   resulted   in   lower   air   fares   and   a   large   increase   in   the   number   of   air   passengers,   as   airline  
developed   new   routes   and   engaged   in   a   vigorous   product   differentiation.   Quanta   now   still   dominates   the   aviation  
industry   with   around   two-­‐thirds   of   market   share,   although   it   faces   increasing   competition   on   many   of   its   routes   from  
Virgin   Blue,   its   own   offshoot   Jetstar   and   Singapore   based   Tiger   Airways.   Overall   the   Aus   airline   industry   enjoys   only  
limited  competition,  perhaps  reflecting  the  relatively  low  traffic  on  domestic  routes  compared  with  other  countries.  

Railway  industry    
Importance:  Transport  industries  are  crucial  to  Aus’s  economy  because  of  the  large  distances  both  within  Aus  
Aims:  making  rail  transport  more  competitive  and  reducing  rail  transport  costs  
Process:   In   1997,   the   Commonwealth   and   State   Government   established   the   Aus   Rail   Track   Corporation   (ATRC)   to  
manage   the   10,000   km   national   interstate   rail   network.   The   ATRC   sells   access   to   private   and   government   owned   freight  
businesses  such  as  Pacific  National  and  Queensland  Rail  and  oversees  maintenance  of  the  network  and  new  capital  work.  
In  2001,  most  government  owned  rail  freight  business  were  privatised  
Outcome:   The   efficiency   of   the   rail   freight   industry   has   been   imposed   by   a   range   of   reforms   over   the   past   decade.  
However,   the   rail   sector   still   requires   further   reforms   because   of   inconsistent   pricing,   access   and   safety   regulations   in  
different  parts  of  the  country.  

Telecommunication  industry    
Importance  +  Aims:   Telecommunication   is   an   important   contributor   to   the   level   of   business   productivity   and   as   a   sector  
contributes  to  around  3%  of  economic  output.    
Process:  Until  1992,  the  telecoms  industry  was  dominated  by  Telecom  Australia  (now  Telstra)  as  the  monopoly  provider  
of   services   to   businesses   and   consumers.   The   market   was   opened   up   to   Optus   and   Vodafone   in   the   early   1990s   and   then  
was   opened   up   to   full   competition   in   1997.   Australia   now   has   one   of   the   most   deregulated   telecoms   industries   in   the  
world,  in  which  several  carriers  compete  for  business  and  consumer  markets.  
Outcome:   the   telecoms   market   and   industry   grew   quickly,   the   industry   has   seen   an   increase   in   employment,   introduction  
of   a   broad   range   of   new   services,   prices   fell   dramatically   particularly   in   “long   distance   calls”,   and   there   was   a  
proliferation   of   services   connected   with   Internet   usage.   However,   Telstra   still   operates   as   a   virtual   monopoly   to   provide  
residential   phone   connections   and   local   calls,   where   some   prices   (such   as   line   rental   costs)   have   risen   significantly   in  
recent   years.   The   ACCC   has   argued   in   favour   of   stronger   regulatory   powers   in   order   to   prevent   Telstra   from   over-­‐
charging  consumers  and  abusing  its  market  power.  

Agricultural  industries    
Importance:   the   agricultural   sector   has   gone   through   extensive   change   over   the   past   two   decades,   moving   away   from  
market   structures   in   which   monopoly   marketing   boards   were   often   the   only   buyer   and   seller   of   farm   output   in   the  
domestic  market.  
Aims:  moving  away  from  market  structures  in  which  monopoly  marketing  boards  
Process:  some  of  the  major  changes  include  the  deregulation  of  the  domestic  dairy,  wool  and  wheat  industries.  Federal  
government   lifted   the   embargo   on   sugar,   tobacco,   dried   and   citrus   fruits   in   1995.   Milk   marketing   support   removed   in  
2000  and  Egg  marketing  is  now  deregulated  in  NSW,  South  Australia  and  Victoria.  Wheat  marketing  was  deregulated  in  
1989,   and   in   2008,   the   Australia   Government   introduced   reforms   to   wheat   export   marketing,   replacing   a   monopoly  
regime  with  a  competitive  system  overseen  by  new  regulator,  Wheat  Exports  Australia.  
Outcomes:   while   the   total   production   of   farms   has   been   increasing,   the   total   number   of   farms   is   falling.   Over   the   past  
decade,  farm  production  has  increased  by  24%  while  the  number  of  farms  has  declined  by  13%.  This  reflects  the  shift  
towards  larger,  more  efficient  farms  as  government  regulations  have  been  removed.  As  result  of  reforms,  and  advances  
in   farming   technology   and   chemicals,   agricultural   productivity   has   grown   faster   than   the   average   for   the   rest   of   the  
economy  over  the  past  two  decades.    
   
Reform  of  Public  Trading  Enterprises  (PTEs)  
Microeconomic   reforms   have   promoted   structural   change   in   Public   Trading   Enterprises   (PTEs)   –   also   known   as  
Government  Business  Enterprises  –  through  two  main  approaches  (corporatisation  or  privatisation).    

Corporatisation  of  PTEs  

• Corporatisation   occurs   when   the   govt   changes   the   rules   around   how   government-­‐owned   businesses   are  
operated  so  that  they  behave  like  private  sector  businesses,  independent  from  the  government.    
- This  involves  eliminating  political  and  bureaucratic  supervision  and  making  public  enterprise  managers  accountable  
for  enterprise  performance  so  that  it  is  run  like  a  private  firm  with  a  profit  motive.  
- This  means  that  they  will  no  longer  receive  preferential  treatment  from  the  government,  and  they  often  operate  in  
competitive   markets   (although   in   some   cases   they   continue   to   operate   as   regulated   monopolies).   Applying   the  
principle   of   competitive   neutrality   to   government   businesses   so   that   they   pay   taxes,   and   interest   on   any   loans   to  
ensure   a   level   playing   field   with   any   private   companion   in   the   same   industry.   These   businesses   will   be   unable   to  
access  government  grants,  they  will  not  receive  low  cost  government  loans,  and  they  will  not  be  “bailed  out”  
• Examples:  Australia  Post,  Energy  Australia  and  the  Sydney  Water  Corporation  
**Government   business   enterprise   will   still   be   owned   by   the   government   after   it   has   been   corporatized.**   As   such,  
businesses   which   undergo   this   transformation   tend   to   be   those   firms   which   have   access   to   sensitive   information,   or  
provide  a  good  or  service  which  is  best  kept  in  government  hands.  One  such  example  is  the  Australia  Post.  

Privatisation  of  PTEs  

• Privatisation  is  the  process  of  selling-­‐off  PTEs  to  the  private  sector,  either  completely  or  in  part.  This  is  usually  
done  through  the  share-­‐market.  A  number  of  shares  will  be  allocated  to  a  government  business  enterprise,  and  these  
shares  will  then  be  allocated  an  issue  price.    
- Once  privatised,  the  new  company  can  no  longer  be  controlled  by  the  government.  
- Dividends  are  paid  to  shareholders;  share  price  will  fluctuate  based  on  expected  future  returns  of  the  business.  
• Governments   implemented   privatisation   with   the   aim   of   increasing   competition,   encouraging   more   rational  
management  and  pricing  behaviour,  and  forcing  businesses  to  become  more  efficient.  
• Australia   has   undertaken   extensive   privatisation   in   recent   decades   and   the   total   value   of   privatised   businesses   is  
among   the   highest   in   the   world.   Examples   of   privatised   PTEs   are   Qantas,   major   airports,   Commonwealth   Bank,  
Telstra  and  the  Victorian  power,  gas  and  public  transport  sectors.    
- Example:   The   Commonwealth   Bank   was   owned   by   the   federal   government   until   1996,   when   the   final   shares   were  
sold   to   the   public   via   a   share   float.   In   selling   the   CBA   to   the   Australian   public,   the   government   was   avoiding   the  
problem  of  crowding  out  the  private  sector.  By  putting  this  large  firm  into  the  hands  of  the  public,  the  government  
was  encouraging  the  new  owners  to  pursue  profits.  This  would  ultimately  ensure  that  resources  would  be  allocated  
efficiently,  and  therefore  costs  to  consumers  would  be  lower.  
• In  recent  years  there  are  fewer  high  profile  privatisations  because  there  is  not  much  PTE  left  for  the  government  to  sell.  
Despite   this,   remaining   government   share   of   Telstra   was   sold   during   final   term   of   the   Howard   government.   State  
governments   have   also   been   strong   advocates   of   the   privatisation   process,   with   electricity,   gas,   public   transport   and  
even  roads  (such  as  City  Link)  being  operated  by  private  companies.  

National  Competition  Policy  

 

Importance:  It  began  with  the  Hilmer   Report  in  the  early  1990s,  but  became  policy  in  1995.  The  National  Competitive  
Policy  is  generally  regarded  as  the  most  extensive  single  package  of  microeconomic  reforms  in  Australian  history.  The  
reforms  have  had  a  major  effect  on  the  economy  because  they  affect  businesses  in  many  different  sectors  of  the  economy,  
and  increased  the  level  of  competition  across  many  sectors  of  the  economy.  
Key  elements  of  the  National  Competition  Policy  are:  
• establishment   of   the   National   Competition   Council   (NCC)   and   Australian   Competition   and   Consumer   Commission  
(ACCC)  
- The  National  Competition  Council  dictates  policy  initiatives;  
- The  ACCC  enforces  the  Trade  Practices  Act  and  is  responsible  for  consumer  protection  and  maintaining  competition  
to  ensure  the  efficient  allocation  of  resources  in  the  product  market.    
- The  Australian  Competition  Tribunal  (ACT)  reviews  appeals.  
• reforms  to  state  government  instrumentalities  
• implementation  of  uniform  National  Competition  Rules  
• provision  of  access  rights  for  essential  infrastructure  
• reform  to  govt  business  enterprises  
• reform  of  the  professions  
These  reforms  have  increased  the  level  of  competition  across  many  sectors  of  the  economy.  
Sector   Impact  of  National  Competition  Policy  
    • The  breakdown  of  the  electricity  sector  into  three  separate  structural  groups  –  generation,  transmission  
    and  distribution.  This  has  allowed  for  new  operators  to  enter  the  market.  In  NSW,  there  are  now  over  
Electricity   20   companies   able   to   provide   electricity   at   a   retail   level   to   consumers.   The   ultimate   result   of   these  
changes  has  been  lower  prices  for  consumers.    
• According   to   the   Productivity   Commission,   real   average   prices   fell   by   16%   between   1991   and   1998.  
However,   nationwide   employment   in   the   electricity   sector   fell   from   80,000   people   in   1985   to   37,000  
people  by  1997.  
    • Privatisation   of   all   state   owned   gas   provision   services-­‐   There   were   two   significant   results  
    from  these  changes:  gas  provision  networks  were  expanded  at  a  rate  far  quicker  than  would  
Gas   otherwise   have   been   expected,   and   retail   prices   fell   by   22%   (in   real   terms)   between   1994   and  
1998.    
• However,   once   again   there   was   a   negative   impact   on   employment.   Around   3,400   jobs   were  
lost  in  the  provision  of  gas  in  Australia.  This  represents  a  loss  of  almost  40%  of  all  jobs  in  the  
sector.  
    • Road   transport   employs   over   193,000   people   (2.3%   of   total   employment)   and   contributes  
Road   slightly   more   than   2%   to   GDP.   However,   prior   to   the   reforms   made   possible   under   the  
Transport   National   Competition   Policy,   there   were   no   national   standards   for   drivers   moving   between  
states.    
• Reforms   implemented   included   the   national   uniformity   of   licensing   requirements,   common  
laws   regarding   dangerous   loads   and   driving   hours,   and   a   national   standard   for  
roadworthiness.  Reforms  such  as  these  have  increased  efficiency  in  the  sector,  and  one  study  
has  concluded  that  these  reforms  alone  have  added  $1.2  billion  to  GDP  in  Australia.  

Outcomes:   Under   these   laws,   it   is   illegal   for   anyone   to   limit   the   ability   of   another   to   enter   and   compete   in   almost   any  
market.  Benefits  of  this  microeconomic  reform  will  continue  to  accrue.    In  fact,  some  people  estimate  that  the  National  
Competition   Policy   laws   have   added   up   to   1%   to   our   GDP   each   year   since   they   have   been   in   operation.   However,  
Productivity   Commission   research   in   2008   estimated   that   micro   reforms   in   infrastructure   sectors   have   produced  
changes  in  prices  and  incomes  that  have  contributed  to  an  increase  in  Aus’s  Gini  coefficient  of  around  0.5,  i.e.  a  widening  
of  income  inequality  

Competition  restrictions  

Many  industries  in  Australia  have  regulatory  barriers  which  make  it  difficult  for  new  operators  to  enter  the  market.    

Perfect  (Pure)  competition  –  describes  the  theoretical  market  structure  where  there  are  many  buyers  and  sellers.  They  
each   sell   a   homogenous   product   and   there   are   no   barriers   to   entry   into   the   industry.   They   are   price   takers,   as   individually  
they  have  no  power  to  influence  price.  
• One  of  the  assumptions  of  the  “perfect”  market  place  is  that  there  are  no  barriers  to  entry  –  deregulation  aims  to  help  
move  the  Australian  economy  closer  to  this  ideal  situation.  

Workable   competition  –  is  the  government’s  objective  to  achieve  the  maximum  level  of  competition  within  an  industry  
that  is  compatible  with  the  market  structure  and  specific  conditions  of  the  industry,  i.e.  a  situation  where  all  markets  are  
contestable.  This  means  that  other  firms  can  enter  these  markets  and  compete  against  existing  businesses.  
• As  perfect  competition  is  not  generally  possible,  nor  is  it  necessarily  desirable,  what  the  government  strives  for  instead  
is  workable  competition.    
• Workable   competition   may   sometimes   mean   that   in   order   to   achieve   international   competitiveness,   it   may   be  
necessary  to  reduce  the  number  of  firms  in  an  industry.    
• Those   remaining   firms   can   then   operate   on   a   larger   scale   and   achieve   the   lowest   possible   long   run   average   costs   of  
production   (improved   technical   efficiency).   Workable   competition   policies   attempt   to   achieve   a   situation   where  
markets  are  contestable.    

Future  Reforms  
 

In  recent  years  a  new  microeconomic  reform  policy  agenda  for  the  decade  ahead  has  begun  to  emerge.  

• In  2006  at  a  meeting  of  the  COAG,  state  and  federal  govts  agreed  to  launch  a  new  wave  of  microeconomic  policies  
called  the  COAG  reform  agenda  
 • It  attempts  to  boost  productivity  in  the  economy  through  regulatory  reforms  and  competition  reforms  to  Cth-­‐
State  arrangements  
• In  2008-­‐09  a  “seamless  national  economy”  was  the  focus  of  reforms  because  overlapping  and  inconsistent  
regulations  impede  productivity  growth  and  the  competitiveness  of  the  economy  
• Regulatory  reforms  have  focussed  on  establishing  a  uniform  national  system  for  OHS,  National  occupational  
trading  licensing,  business  reporting  requirements  and  the  national  regulation  of  consumer  credit  
• Priorities  include  anti-­‐dumping  laws,  national  transport  policy  and  infrastructure  reform    
• Will  be  monitored  by  COAG  Reform  Council  
• The  competition  and  regulatory  reforms  could  produce  benefits  up  to  2%  GDP  in  the  long  run    
• Productivity  Commission  suggests  that  the  policies  to  improve  “Human  Capital”  (e.g.  health  and  education)  are  
potentially  even  larger  with  workforce  participation  estimated  to  increased  GDP  by  6%  and  productivity  
increasing  GDP  by  3%  

Protectionism    
 

Importance:  Prior  to  the  reforms  in  1990s,  Australia  has  had  strong  protection  from  the  overseas  sector  in  the  form  of  
tariffs.  The  goal  of  imposing  a  tariff  is  to  protect  the  local  industry  and  maintain  local  jobs.  With  the  high  levels  of  
protection  of  Australian  industry  from  internal  and  external  competition,  there  was  little  incentive  for  producers  to  reduce  
costs  and  prices,  to  produce  new,  innovative  products  or  to  use  resources  as  efficiently  as  possible.  

Aims:  Began  in  the  1998,  designed  to  dismantle  industry  protection  and  lower  barriers  to  trade  on  a  large  scale  to  
promote  import  competition;  raise  industry  efficiency;  and  increase  the  volume  of  exports  by  Australian  industry.  

Process:    

These  unilateral  measures  included:  

• The  reduction  of  the  majority  of  tariffs  for  manufacturing  to  5%  by  1996  
• The  abolition  of  quotas  and  the  reduction  of  tariffs  for  PMV  to  10%  in  2005  
• Abolition  of  quotas  for  TCF  in  1993  and  the  reduction  of  tariffs  between  5%  and  25%,  but  the  maximum  allowable  
fell  to  17.5%  in  2005  for  clothing.  The  motor  vehicle  and  textile  industries  have  been  given  special  considerations  
to  save  jobs  and  promote  investment.  
• Eliminating  protection  of  the  milk  markets,  ending  regulations  for  the  sugar  and  rice  markets  and  reviewing  the  
monopoly  in  the  wheat  market  
• Zero  rating  for  GST  for  exporters  under  The  New  Tax  System  which  means  tax  credits  can  be  claimed  on  inputs  
but  exports  are  GST  exempt.  This  lowered  export  production  costs.  

Direct  policies  to  promote  Australia  trade  (i.e.  through  the  expansion  of  export  markets)  include  the  various  forms  of  
direct  assistance  to  exporters  provided  by  AUSTRADE  such  as  the  Export  Market  Development  Grants  Scheme  (EMDGS)  
and  the  global  network  of  AUSTRADE  offices  in  major  cities  of  Aus’s  trading  partners.  EMDG  provides  $200  million  in  
grants  to  over  4.000  Aus  businesses  to  help  them  find  export  markets  and  enhance  export  promotion.  It  has  been  found  to  
be  effective  with  each  dollar  spend  generating  $13.5  to  $27  in  export  revenue.  

Other  direct  policies  cover  Aus’s  active  involvement  in  bilateral  and  multilateral  trade  agreements  and  negotiations  to  
promote  free  trade  such  as:  

• The  Uruguay  Round  of  GATT  (1986  and  1994)  -­‐  This  process  resulted  in  agreements  to  lower  general  tariff  rates  
across  the  globe,  particularly  industrial  tariffs  for  developed  economies.  
• the  Doha  Round  of  Trade  Talk  under  the  WTO  
• APEC  deliberations  and  the  signing  of  the  Bogor  Declaration  in  1994  -­‐  This  group,  of  which  Australia  is  a  member,  
has  committed  to  free  and  open  trade  in  the  Pacific  region  by  2010  (for  developed  countries),  and  developing  
nations  by  2020.  Since  1996,  member  nations  have  completed  Individual  Action  Plans  (IAPs)  as  to  how  this  
process  is  to  be  achieved.  Given  that  70%  of  our  exports  are  destined  for  countries  covered  by  the  APEC  
agreement,  it  is  significant  that  the  Australian  economy  has  committed  to  a  tariff  free  approach.  
• Bilateral  trade  agreements  such  as  ANZCERTA  to  promote  mutually  beneficial  trade  

(For  More  See  Chapter  6)  

Industry  Policy    
 

This  involves  measures  to  support  the  development  of  key  industries  and  increase  the  competitiveness  of  domestic  
industries  against  foreign  competitors.  Industry  policies  can  have  an  indirect  impact  on  our  trading  performance,  if  they  
lead  to  the  emergence  of  successful  and  competitive  exports.    

• More  recently,  the  focus  of  industry  policy  has  shifted  towards  fostering  innovation  within  key  industries  and  
across  the  economy.  
• innovation  policy  aims  to  encourage  firms  to  develop  new  goods  and  services  and  more  efficient  ways  of  doing  
business  so  as  to  become  more  competitive  (thus  indirectly  improve  trade  performance)  
• In  2009  the  Govt  released  a  10  yr  innovation  strategy  with  the  aim  of  increasing  the  proportion  of  businesses  
engaging  in  innovation  by  25%  and  doubling  the  level  of  collaboration  between  businesses,  universities  and  
publically-­‐funded  research  agencies    

Measures  to  promote  innovation  across  the  economy  include:  

• Introduction  of  a  45%  Research  and  Development  Tax  Credit  for  small  firms  (40%  for  large)  to  encourage  R&D  
• Commonwealth  Commercialisation  Institute  to  help  Unis,  research  orgs  and  small  firms  commercialise  ideas  and  
research  into  innovative  G&S  
• A  network  of  12  Enterprise  Connect  centres  that  advise  small  and  medium  businesses  on  how  to  improve  their  
skills,  competitiveness  and  productivity  

The  Govt  also  has  many  programs  that  are  designed  to  assist  the  development  of  specific  sectors.  The  most  significant  
industry  policies  of  recent  years  are  for  the  following  industries:  

• Motor  Vehicle  Industry:  In  2008  the  Govt  introduced  the  New  Car  Plan  for  a  Greener  Future  –  a  13  yr  $6.2  billion  
plan  to  assist  the  Australian  car  industry  to  become  more  environmentally  sustainable.  Companies  receive  grants  
for  investment  in  assistance  resulting  from  tariffs  falling  from  10%  to  5%  in  2010  
• TCF:  In  2009  the  govt  announced  $401  million  in  assistance  to  the  TCF  sector  with  a  focus  on  attracting  
investment,  encouraging  innovation  and  improving  ethical  standards  and  sizing  measurements  in  the  industry.  
Assistance  will  extend  to  2015-­‐16  (this  will  likely  offset  he  reduction  in  assistance  from  tariff  reductions  taking  
effect  in  2010  and  2015  
• Green  Industries:  Recent  years  have  seen  a  major  expansion  of  govt  regulations  and  programs  to  encourage  
businesses  to  become  more  environmentally  sustainable  and  to  foster  the  development  of  new  “green  industries  
such  as  renewable  energy.  Assistance  is  provided  through  free  carbon  emission  permits  to  trade  exposed  
industries,  “Green  loans”  top  households  to  install  water  and  energy  saving  devices  and  Cth-­‐funded  research  into  
low0emission  technologies  that  will  benefit  private  companies.+  

 
Labour  Market  Policies  
Role  of  National  and  state  systems    

-­‐ Traditionally   regulated   labour   market   through   a   mix   of   federal   and   state   laws.   These   systems   established  
minimum  wages  and  conditions  for  employees  through  a  system  of  industrial  awards  based  on  their  industry  or  
their  occupation.    
-­‐ Australian   Constitution   only   gave   the   Commonwealth   the   power   to   resolve   industrial   disputes   that   cross   state  
barriers,  but  Commonwealth  has  expanded  regulation  of  labour  markets  through  other  constitutional  powers.  
-­‐ Inefficiency   of   separate   state   and   federal   systems   created   growing   pressure   towards   a   national   industrial  
relations  system.    
-­‐ Howard   Government   announced   in   2005   that   it   would   legislate   to   override   the   states   and   establish   a   single  
national  industrial  relations  system  by  using  its  constitutional  powers  to  regulate  companies.  Workplace  Relations  
Amendment   (Work   Choices)   Act   2005   was   opposed   by   state   governments   while   it   sought   to   reduce   existing  
minimum  employment  standards.    
-­‐ Work   Choices   abolished   and   replaced   by   the   Fair   Work   Act   2009.   This   established   a   unified   national   industrial  
relations  system  for  the  private  sector.  Estimated  that  this  will  reduce  compliance  costs  by  $4.8  billion  over  a  ten  
year  period.    
-­‐ Through  Fair  Work  Act,  the  modernisation  of  the  award  system  resulted  in  around  4300  state  and  federal  awards  
to   be   replaced   by   a   system   of   just   122   modern   awards   that   apply   at   a   national   level.   A   national   system   of  
occupational  health  legislation  was  also  established.  

The  national  system  for  determining  

-­‐ Fair  Work  Act  2009  replaced  the  Workplace  Relations  Act  1996  with  a  national  system  of  labour  market  regulation.    
-­‐ Formal  System:  
o 16.5%  covered  by  industrial  awards  only  
o 39.2%  covered  by  collective  agreements  (tradeoffs  of  award  conditions  and  subject  to  BOOT)  
-­‐ Informal  system:  
o 36.5%  covered  by  individual  common  law  contracts,  0.6%  covered  by  collective  common  law  contracts  
o 5.0%  are  working  owner  of  incorporated  business    

Minimum  employment  standards  

Provisions  include:  
-­‐ Maximum   weekly   hours   of   work   of   a   full-­‐time   employee   must   not   exceed   38   hours   per   week,   plus   reasonable  
additional  hours  
-­‐ Right  to  request  flexible  working  arrangements,  eg.  caring  for  a  child.  Employers  may  only  refuse  on  ‘reasonable  
business  grounds,’  and  must  justify  actions  in  writing  
-­‐ Right   to   paid   annual   leave,   public   holidays   and   carers   and   compassionate   leave.   Also   have   the   right   to   unpaid  
parental  leave,  community  service  and  long  service  leave.  
-­‐ Required  to  give  between  one  and  four  weeks’  of  notice  of  job  termination.  Workers  are  entitled  to  redundancy  
pay.    

Minimum  wages  

-­‐ National  minimum  provides  safety  net  for  any  employee  not  covered  by  an  award.    
-­‐ Panel  within  Fair  Work  Australia  must  assess  the  performance  and  competitiveness  of  the  national  economy  and  
consider   macroeconomic   impact   of   decision.   Must   also   balance   the   needs   of   both   unemployed   and   low   paid  
workers,  as  high  minimum  wages  may  discourage  employers  from  hiring  additional  employees.  
-­‐ Panel   increased   the   national   minimum   wage   and   all   modern   award   minimum   wages   by   $26,   raising   the   minimum  
wage  to  $15  per  hour  or  $569.90  per  week.  

Awards  

-­‐ Awards  are  a  set  of  pay  and  conditions  that  are  specific  to  an  employee’s  work  or  industry  sector.  This  provides  a  
safety  net  of  minimum  wages  and  conditions.    
-­‐ During  the  industrial  relations  reform,  Australia’s  award  system  was  streamlined  from  around  4300  awards  to  an  
estimated  122  awards.    
 -­‐ Modern   awards   extend   the   protections   of   the   National   Employment   Standards,   with   provisions   tailored   to   the  
needs  of  the  specific  industry  or  occupation.        
-­‐ A   flexibility   clause   enables   an   employee   to   vary   the   effect   of   an   award   to   meet   individual   needs   without  
negotiating   a   separate   agreement.   Applies   to   some   award   terms   such   as   when   work   is   performed   and   overtime  
rates,  and  is  conditional  that  there  is  no  overall  reduction  in  conditions  of  employment.  

Enterprise  Agreements  

-­‐ Workplace   agreement   is   negotiated   collectively   between   an   employer   and   employees,   usually   represented   by  
unions.  
-­‐ Under   the   Fair   Work   Act,   employers   are   required   to   engage   in   enterprise   bargaining   with   employees   if   a   majority  
of  employees  vote  in  favour  of  seeking  a  collective  agreement.  
-­‐ All  agreements  must  comply  with  National  Employment  Standards.  Agreements  must  pass  the  “Better  off  Overall  
Test”  (BOOT),  requiring  that  employees  be  made  better  off  overall  by  an  agreement  comparable  to  an  applicable  
award.    
-­‐ Collective   agreements   cover   issues   such   as   wage   increases,   loadings   for   additional   work   hours,   changes   to  
workplace  practices  and  other  changes  that  are  intended  to  increase  productivity.    
-­‐ Since  the  early  1990s,  annual  wage  increases  averaging  around  4%  has  been  produced.    

Employment  contracts  for  high  income  earners  

-­‐ Fair   Work   Act   abolished   individual   contracts   as   part   of   the   formal   industrial   relations   system.   Argued   that  
Australia   Workplace   Agreements   were   unfair   because   employer   have   greater   bargaining   power   than   individual  
employees.  
-­‐ Made  an  exception  for  employment  contracts  for  higher  income  earners.  Modern  awards  do  not  apply  where  an  
employee  is  earning  in  excess  of  a  threshold  (2010  -­‐  $113  800  per  year).  Employees  are  covered  by  the  provisions  
in  the  agreement,  known  as  a  common  law  contract,  and  by  National  Employment  Standards.    
-­‐ Since   employees   on   high   incomes   do   not   need   to   be   protected   by   the   award   system,   they   are   placed   into   informal  
contracts  that  provide  extra  pay  or  condition  in  addition  to  their  award  entitlements.    
-­‐ Common  law  contracts  are  made  individually,  and  cannot  remove  or  trade  off  minimum  award  conditions  such  as  
penalty  rates.    
-­‐ Common  in  small  business  and  are  enforced  through  ordinary  law  courts.  

Dispute  Resolution  

-­‐ Industrial   dispute  occurs  when  employers  or  employees  take  action  to  disrupt  the  production  process  in  order  
to  highlight  a  disagreement  between  employers  and  employees.  
-­‐ Disputes  arise  due  to  changes  to  wages,  work  conditions,  business  restructuring  and  specific  actions  of  employers  
-­‐ Different   forms   of   industrial   action   include   strikes,   where   employees   refuse   to   work;   work   bans,   where   employee  
refuse  to  undertake  a  certain  aspect  of  work;  and  lockouts,  where  employees  are  refused  access  to  workplace  
-­‐ Australia  has  mostly  relied  on  a  unique  system  of  specialist  industrial  tribunals  to  administer  dispute  resolution  
process  
o Conciliation   is   where   firms   and   employees   meet   to   discuss   their   differences   in   the   presence   of   a   third  
party   (such   as   from   an   industrial   tribunal)   who   attempt   to   bring   the   parties   to   an   agreement   Tribunal  
does   not   impose   a   resolution.   Used   in   most   instances,   with   employers   and   employees   taking  
responsibility  resolving  their  disputes.    
o Arbitration  is  where  an  industrial  tribunal  makes  a  ruling  that  resolves  a  dispute  and  is  legally  binding  
on  the  parties.  Used  when  conciliation  is  unsuccessful.      
-­‐ Fair  Work  Australia  only  intervenes  to  resolve  disputes  
o Compulsory  dispute  settlement  terms:   Awards   and   enterprise   agreements   must   explain   the   process   that  
the  parties  will  adopt  if  they  have  a  dispute  relating  to  their  argument.  If  parties  cannot  resolve  dispute  
themselves,  it  must  refer  to  a  third  party  organisation  such  as  Fair  Work  Australia  or  a  non-­‐governmental  
organisation.    
o Bargaining   in   good   faith:   Obliges   employers   and   employees   to   adhere   to   certain   provision   at   the  
bargaining   table.   These   includes:   participation   in   meetings,   disclosing   relevant   information   and   giving  
consideration   if   proposals.   Legally   binding   orders   can   be   made   if   provisions   are   not   adhered   to.  
Bargaining  rules  thus  put  pressure  on  both  parties  in  a  negotiation  to  be  constructive.    
 o Resolving  industrial  action:  Industrial  action  is  permitted  during  the  process  of  enterprise  bargaining.  Fair  
Work  Australia  can  suspend  industrial  action  if  there  is  a  threat  of  significant  harm  to  the  economy  or  the  
population,  or  that  it  is  causing  damage  to  bargaining  parties  since  it  has  been  going  on  for  a  long  period  
of  time.    
-­‐ Measure  of  the  level  of  industrial  disputes  is  the  number  of  working  days  lost  in  industrial  disputes.  
-­‐ There   is   now   less   conflict   and   a   stronger   focus   on   employers   and   employees   working   together   and   resolving  
disputes  themselves  through  cooperative  process.  Also,  the  right  to  strike  has  been  curtailed  by  laws  that  limit  the  
right  to  industrial  action.    

Arguments  for  and  against  the  use  of  centralised,  decentralised  and  individualised  methods  of  determining  
employment  contracts  

A  centralised  labour  market  is  one  in  which  wages  and  other  labour  market  outcomes  are  primarily  determined  by  a  
government,  or  a  tribunal  such  as  Fair  Work  Australia  
-­‐ Highly   centralised   wage   determination   system   for   most   of   the   twentieth   century,   reflecting   the   strength   of   the  
union   movement   and   the   belief   that   a   fairer   society   is   created   with   workers   are   paid   the   same   for   doing   the   same  
work.    
-­‐ Tribunals   determined   wage   outcomes,   through   a   formal   process   in   which   representatives   of   employers   and  
unions  presented  their  arguments  for  or  against  a  wage  increase  or  a  change  in  working  conditions.    
 
A  decentralised  labour  market  determines  wage  outcomes  at  an  enterprise  level  or  workplace  level,  with  a  more  limited  
role  for  industrial  tribunals.  Market  forces  of  supply  and  demand  for  labour  and  individual  firm’s  capacity  to  pay  play  a  
great  role  in  determining  wage  increases,  ensuring  flexibility.    
-­‐ Current  system  is  where  wages  are  determined  through  enterprise  bargaining  at  the  level  of  individual  businesses  
and  workplaces.    
-­‐ Wages   increase   faster   in   more   efficient   sectors,   and   wage   increases   need   to   be   closely   tied   to   productivity   growth  
so  that  employees  have  the  incentive  to  improve  skills  and  work  practices.  
-­‐ Highly  centralised  award  system  provides  a  safety  net  of  minimum  wages  and  conditions.      
 
Arguments  for  decentralisation    
-­‐ More  efficient  allocation  of  resources  and  structural  change.  Firms  that  are  more  efficient  afford  to  pay  more  and  
attract  higher  skilled  employees.  
-­‐ Promotes   productivity,   as   employees   are   given   the   incentive   to   work   more   productively   as   they   are   rewarded  
directly  for  their  productivity  improvements.  Helps  to  reduce  inflationary  pressures.  
-­‐ Labour   market   adjusts   when   the   economy   is   affected   by   negative   shocks,   helping   to   keep   unemployment   at   a  
lower  rate.  This  allows  wages  to  fall  while  keeping  people  in  jobs  

Arguments  against  decentralisation  

-­‐ Greater  inequality  through  increased  wage  dispersion.  Industry  or  firms  where  unions  have  little  power  are  less  
likely  to  achieve  wage  increases  as  they  lack  bargaining  power  with  employers.  Low-­‐skilled  workers  are  easy  to  
replace  and  less  able  to  demand  pay  rises.  
-­‐ Wage-­‐push   inflation   emerges   when   economic   growth   is   strong   and   the   labour   market   is   close   to   full   employment.  
Employees  may  use  their  bargaining  power  to  demand  substantial  wage  rises,  which  may  lead  to  an  inflationary  
spiral.  
-­‐ Centralisation  provides  an  additional  policy  tool  for  achieving  economic  objectives.  Can  restrain  wages  growth  to  
avoid  cost-­‐push  inflation.    
 
Education,  training  and  employment  programs    

Education  and  training:  economy  is  more  productive  and  grows  faster  if  it  has  a  higher  quality  and  more  responsive  
education  and  training  program.  Key  changes  include:  
-­‐ Increasing   early   childhood   education,   strengthening   basic   literacy   and   numeracy   skills   during   early   years   of  
education  
-­‐ Investing  in  trade  learning  centres  and  computers  for  year  9-­‐12,  increasing  training  places  for  students  pursuing  
careers  in  trades  
-­‐ Skills  Australian  to  identify  industries  with  skills  shortages  and  recommend  where  retraining  programs  should  be  
targeted    
 -­‐ Increase   school   retention   rates   to   90%   by   2020   and   raising   the   number   of   25-­‐34   year   olds   with   a   university  
degree  to  40%  by  2025,  and  achieving  this  goal  by  funding  more  government-­‐subsidised  places  at  universities  and  
encouraging  more  students  from  disadvantaged  background  to  attend  university.    
 
Labour  market  programs  
-­‐ Job   Services   Australia   oversees   the   provision   of   training   and   job   search   services   provided   by   the   Australian  
Government  through  a  mix  of  government,  non-­‐profit  and  private  sector  organisations.    
o Employment  service  providers  are  paid  on  the  basis  of  getting  results  in  placing  the  unemployed  into  jobs  
o This   single   integrated   service   focuses   on   individualised   assistance   for   job   seekers,   enhancing   job   seekers’  
skills  and  providing  greater  assistance  for  employers  to  find  suitable  job  seekers  
o Aim  to  be  more  effective  in  transitioning  people  who  face  multiple  disadvantages  
-­‐ Income  support  and  welfare  policies  focus  on  providing  greater  incentives  for  people  to  participate  in  work  force.  
Imposes   job   seeking   requirements   on   welfare   recipients   in   return   for   welfare   support.   Unemployed   people  
required   to   participate   in   ‘Work   for   Dole’   program   or   a   training   course.   By   requiring   unemployed   people   to  
undertake   community   work,   part   time   work   or   study,   they   have   an   obligation   to   improve   their   skills   and   job  
prospects.    
-­‐ During  2009  economic  slowdown,  programs  were  expanded  to  reduce  the  risk  of  growth  in  structural  and  long  
term  unemployment.  Training  programs  targeted  those  most  at  risk  –  young  people  and  workers  made  redundant  
-­‐ Skills   for   Sustainable   Growth   Strategy   announce   in   2010-­‐11   Budget   gives   industry   main   role   in   determining   form  
of  training  to  provide  for  an  additional  70  000  employees.    
-­‐ Treasury’s   2010   Intergenerational   Report   predicted   the   ageing   of   population   would   reduce   the   labour   force  
participation   rate   from   around   65%   to   60   by   2050.   Paid   Parental   Leave   scheme   from   2011   aims   to   increase  
participation  by  encouraging  women  to  stay  in  the  workforce.    
 

 
National  and  global  context  for  environmental  management  
Regulations  
 
-­‐ Laws  that  govern  economic  behaviour.  Prohibit  a  person  from  littering,  producing  polluting  chemicals,  and  other  
environmentally  damaging  practices.  May  specify  how  a  good  or  service  is  produced  or  consumed.  
-­‐ Fuel   Quality   Standards   Act   2000   regulates   the   quality   of   fuel,   aiming   to   reduce   the   levels   of   pollutants   and  
emissions  
-­‐ Environmental   Protection   and   Biodiversity   (EPBC)   Act   provides   a   framework   for   the   protection   and   management  
of  significant  national  environmental  matters.  This  includes  the  protection  of  World  and  National  Heritage  sites,  
Commonwealth   marine   areas   and   nationally   threatened   species.   Under   EPBC   Act,   developers   must   provide   an  
environmental  impact  assessment  of  proposals.  
-­‐ To  regulate  climate  change,  new  standards  of  lighting  introduced  in  2007  will  see  incandescent  bulbs  eventually  
replaced  by  more  energy  efficient  fluorescent  light  bulbs.    
 
Market-­‐based  policies  

-­‐ Involve  financial  incentives  and  disincentives  to  influence  the  behaviour  of  households  and  businesses.    
-­‐ Environmental  costs,  known  as  negative  externalities  are  borne  by  the  whole  society  and  not  taken  into  account  
by   producers   and   consumers   in   the   market   place.   This   results   in   the   equilibrium   price   being   too   low   and  
production  being  too  high.    
-­‐ Market-­‐based   response   would   be   to   levy   a   tax   or   fee   on   production   that   is   approximately   the   same   as   the  
environmental   costs   associated   with   this   economic   activity.   A   tax   equal   to   the   vertical   distance   between   curves  
shifts   the   supply   curve   from   S1   to   S2.   This   internalises   the   externality   as   consumers   and   producers   pay   for  
environmental  costs.  
-­‐ Taxes  can  increase  government  revenue,  which  can  then  be  used  for  environmental  programs  
-­‐ Subsidies  are  grants  that  aim  to  reduce  costs  of  production  and  promote  environmentally  beneficial  activities.  $2  
billion   Carry   for   our   Country   scheme   subsides   projects   that   improve   biodiversity   and   sustainable   farming  
practices.    
-­‐ Introduce  a  ‘cap  and  trade’  emissions  trading  scheme.    

Targets  

-­‐ Guides   environmental   management   policies.   Increase   use   of   renewable   energy   is   supported   by   Mandatory  
Renewable   Energy   Target   (MRET)   of   sourcing   20%   of   Australia’s   electricity   supply   from   renewable   energy  
sources  by  2020.  MRET  places  legal  liability  of  electrical  companies  to  contribute  to  target  by  producing  or  paying  
for  renewable  energy.  
-­‐ NSW   Government   Targets   –   4000   GWh   of   annual   electricity   consumption   savings   through   energy   efficiency  
programs;   training   for   clean   energy/green   jobs   to   5%   by   2013;   increase   water   recycling   from   15   billion   litres   per  
year  in  2005  to  70  billion  litres  of  water  per  year  by  2015;  save  145  billion  litres  of  water  per  year  2015  (25%  
reduction)    
-­‐ Under   Kyoto   Protocol,   Australia   will   reduce   its   emission   by   between   5   –   25%.   Australia   must   reduce   carbon  
emissions  by  60%  by  2050.    

International  agreements  

-­‐ 1987   Montreal   Protocol   phased   out   production   of   chlorofluorocarbons   by   2000   to   tackle   the   depletion   of   the  
ozone  layer.  Ozone  layer  over  the  Antarctic  has  shrunk  by  15%  in  recent  years.    
-­‐ To   prevent   the   overuse   of   common   international   resources   (tragedy   of   the   commons),   the   United   Nations   Fish  
Stocks  Agreement  was  developed  to  ensure  the  long  term  conservation  and  sustainable  use  of  highly  migratory  
fish  stocks.    
-­‐ Kyoto  Protocol  requires  that  industrialised  countries  reduce  average  national  emissions  by  5%  below  1990  levels  
over  the  period  2008-­‐2012.  
-­‐ United   Nations   Framework   Convention   on   Climate   Change   in   Copenhagen   2009   aimed   to   negotiate   successor  
agreement  to  Kyoto  Protocol.  Key  challenge  was  to  balance  interests  of  high  income  countries,  which  have  large  
per  capita  greenhouse  gases,  and  developing  countries,  which  have  rising  levels  of  emissions  as  they  rely  on  cheap  
fossil  fuels  to  expand  output  and  improve  living  standards.    
Limitations  of  economic  policies  
Time  lags  

Policy   Implementation  time  lag   Impact  time  lag  

Fiscal   Medium  term  (annual  budget)   Short  term  (a  few  months)  

Monetary   Short  term  (monthly  RBA   Medium  term  (6-­‐18  months)  

meeting)  

Microeconomic  reform   Long  term  (a  few  years)   Long  term  (up  to  20  years)    

-­‐ Monetary  policy  can  be  implemented  very  quickly  and  can  have  an  immediate  effect  on  the  cash  rate  
-­‐ Implementation   of   fiscal   policy   can   take   a   substantial   amount   of   time.   Major   changes   occur   on   an   annual   basis  
with  the  May  budget.  
-­‐ Most  spending  and  revenue  changes  go  through  a  complex  process  of  budget  committee  meetings  
-­‐ Microeconomic   policies   involve   extensive   planning   and   detail.   Often   occurs   in   response   to   a   major   government  
study   into   a   particular   issue   e.g.   proposals   to   introduce   a   carbon   emissions   trading   scheme   following   the   Garnaut  
Climate  Change  Review  
-­‐ Necessary   to   secure   support   of   state   governments   for   microeconomic   policies   e.g.   national   occupational   health  
and   safety   rules,   reforms   to   the   structure   of   Australia’s   health   and   hospitals   system.   Considerable   time   due   to  
different  interests.  
-­‐ Fiscal   policy   changes   have   an   immediate   impact.   It   is   more   important   during   a   downturn,   as   fiscal   policy’s  
targeted  impact  and  short  transmission  lag  makes  it  the  most  effective  policy  in  stimulating  aggregate  demand.    
-­‐ Monetary   policy   changes   have   a   time   lag   of   around   6   to   18   months.   It   takes   time   for   changes   in   the   level   of  
interests  to  impact  on  changes  in  the  borrowing  and  savings  behaviour  of  consumers  and  businesses.    
-­‐ Difficult   for   RBA   has   it   has   to   take   into   account   of   the   anticipated   level   of   inflation   and   other   economic   conditions  
in   a   year   to   eighteen   months   time.   Eg.   in   late   2008   GFC,   RBA   made   large   cuts   in   interest   rates   even   though  
inflation  was  above  the  2-­‐3%  target  range  
-­‐ Microeconomic   reforms   have   the   longest   time   lag.   The   benefits   of   structural   change   can   take   several   years   to  
become  apparent  resources  are  reallocated  from  one  sector  to  another  within  the  economy.  Full  effects  of  changes  
are  felt  in  terms  of  costs,  business  profits,  export  growth  and  productivity  
-­‐ Difficult  to  measure  impact  of  microeconomic  policies  since  several  might  be  implemented  at  the  same  time  and  
may  be  hard  to  distinguish  the  impacts  

Global  influences  

-­‐ High   priority   is   placed   on   maintaining   the   confidence   of   international   investors   and   global   financial   markets.  
Governments  that  adopt  alternative  policies  may  face  loss  of  foreign  investor  confidence  and  fall  in  their  currency.  
(financial  markets  may  have  a  positive  effect  by  putting  pressure  on  governments  to  adopt  better  policies)    
-­‐ Influences   the   conduct   of   monetary   policy.   If   interest   rates   rise   in   other   countries,   rate   of   return   will   be   relatively  
less  attractive  for  overseas  investors  if  interest  rates  are  not  raised.    
-­‐ International  business  cycle  is  a  restriction  in  that  it  is  difficult  for  an  economy  to  increase  its  level  of  economic  
growth  if  the  rest  is  going  through  an  economic  downturn.  Faster  domestic  growth  causes  an  increase  in  imports  
while  export  growth  weakens,  which  may  increase  the  CAD,  forcing  the  government  to  slow  down  the  economy  
through  tighter  fiscal  and  monetary  policy.  
-­‐ International  organisations,  such  as  World  Trade  Organisation  is  able  to  place  trade  sanctions  on  economies  that  
do  not  comply  with  international  trade  agreements.  WTO  has  forced  Aus  to  change  export  assistance  policies  or  
Australia’s  strict  quarantine  regulations  eg.  when  forced  to  abandon  its  ban  on  fresh  salmon  imports    
-­‐ The   G20   group   has   a   significant   influence   over   global   economy.   Growing   integration   of   economies   through  
globalisation   leaves   limited   scope   for   small   countries   to   adopt   a   different   macroeconomic   policy   stance   to   that  
adopted  by  major  industrialised  countries.    

 
Political  constraints    

-­‐ Need   to   take   into   account   whether   policy   direction   will   be   supported   by   own   political   party,   and   by   other  
stakeholders,  including  influential  businesses    or  union  groups  who  contribute  to  the  party’s  campaign  funds    
-­‐ Constraint  of  implementing  unpopular   policies  is  a  consideration  for  economic  management.  Governments  can  
manage   unpopular   decisions   by   delegating   its   authority   to   government   organisations.   Eg.   RBA   making   interest  
rate  decisions,  ACCC  approving  pricing  decisions  to  regulated  sectors    
-­‐ Economic   policies   can   only   be   implemented   through   legislation,   including   budget   measures,   changes   to   industrial  
relations   system   and   changes   to   business   laws.   Must   receive   majority   of   votes   in   both   the   House   of  
Representatives  and  the  Senate.  Governments  have  often  been  forced  to  make  compromises  to  win  the  support  of  
other  senators  (from  opposition  or  minor  parties)  
-­‐ System  of  federalism  means  that  Commonwealth  and  State   governments  share  responsibility  for  major  parts  of  
economy,   including   the   education   system,   health   care,   infrastructure   and   business   regulation.   Commonwealth  
must  win  the  cooperation  and  agreement  of  States.  
o Council  of  Australian  Governments  (COAG)  established  to  facilitate  agreements  between  Commonwealth  
and  State  governments.    
o When  a  Commonwealth  tries  to  legislate  over  a  state,  length  constitutional  challenges  in  the  High  Court  
may  occur.  Eg.  Commonwealth  won  a  constitutional  case  where  the  states  challenged  its  takeover  of  their  
industrial  relations  powers    
-­‐ Special   interest   groups   have   strong   relations   with   governments   –   business   groups   tend   to   have   significant  
influence  on  the  Coalition  parties’  policies,  while  unions  have  a  close  relationship  with  the  Labor  party.    
o Large  businesses  employ  lobbyists  as  government  policies  have  a  potential  financial  impact  on  activities.  
May  fund  public  campaigns  against  the  government  to  publicise  their  perspective.    
o Mining  industry  ran  major  public  advertising  campaign  against  Resources  Super  Profits  Tax.  
o Union  movement  advertised  widely  against  the  Coalition’s  industrial  relations  policies  
o Campaigns  run  against  plain  packaging  laws  for  cigarettes  (tobacco  industry)