Australia has had one of the strongest economies in the world in recent years, more competitive, open and vibrant than ever.

3. Standard of living

The final and most important economic measure of success is the objective of standard of living. An economy’s standard of living is measured using a variety of qualitative and quantitative measures. The previous objectives can be seen as the quantitative measures of an economy’s well-being. Below are the qualitative components of this objective:

• Standards of health
• Food consumption and nutrition levels
• Education and literacy
• Employment and work conditions
• Equity
• Degree of independence
• Development sustainability

We must bear in mind that there can never be one single measure of standard of living. In order to determine whether or not an economy is successful in providing a high standard of living, we must consider many factors together, from a more holistic perspective. (Alcorn, 2003)

4.          Economic Indicators

Below is a detailed investigation into the trends of various indicators over the past decade. It is imperative that we explore all aspects of these indicators as they allow us a further insight into the achievement of government objectives, which will ultimately become the criteria on which we assess our government’s economic management efficiency.

4.1        Gross Domestic Product (GDP)

Over the last ten years we can note a general upward trend in the Australian GDP figure. There is a noticeable drop in GDP around 1990 which occurred as a result of the recession which was taking place at that point in time. Together with other countries, Australia saw a general increase in GDP through the 1993/94 period. From 1994, Australia’s level of GDP seems to stagnate, remaining fairly stable. Although we can note many ups and downs throughout this period, these can be attributed to fluctuations within the business cycle. (RBA, 2002)

The year 2000 was a strong year for both Australian and global growth. GDP rose by almost 5%, and growth in major world economies (the G7 – see Fig. 1) was about 3½%. This growth was led by the US, which enjoyed a very strong period of growth through the second half of the nineties leading into 2000. This growth was not restricted to the US, and many countries, including Australia, followed in the United States’ footsteps (See Fig. 2). Asian nations generally recovered from the economic crisis of 97/98 with several countries riding the global boom. Towards the end of 2000, however, it became clear that a slowing down in the US economy was finally beginning to occur. This slow down was disguised for a while, but when the events September 11 took there toll, there was no question about where the US economy was headed. This slow down in the global economy, coupled with the institution of the GST in Australia (in 2001), led our economic growth to suffer as well. When the RBA cut back interest rates by about 2% in 2000/2001 to encourage economic growth, underlying inflation crept up, which, in turn, caused Real GDP to decrease further. Thankfully, however, the Australian economy has since managed to escape the global downturn in economic growth with GDP standing between 3 and 4% in 2002, predominantly thanks to smart policy instruments such as the First Home Buyer’s Grant, which was instituted along with the GST. This is evident from Graph 3 (Previous page) which depicts construction as the largest contributing sector to GDP for the September quarter 2002 (RBA, 2002/CIT, 2002)

Finally, we must bear in mind the fact that often with strong growth comes a high level of inflation. In Australia, however, we can note that our strong economic growth has been accompanied by low inflation rates. Australia’s compound average inflation over the 1990’s was 2.26% compared with the US inflation rate of 2.9% and it is arguable that this shows a degree of success within the government’s management of our economy. Australia’s economic growth, albeit it slower in recent years, is a definite strength of our economy, and policy instruments which encourage further growth (especially in the housing sector) will ensure stability within this aspect of our economy. (Australia Now, 2003)

2.             Inflation

Since 1992, Australia’s inflation rate has remained at a fairly stable level, again experiencing high and lows at the hands of the business cycle (See Fig. 4). In 2000, Australia’s CPI shot up from approximately 2.5% to between 5 and 6 percent. This increase was effected through the Reserve Banks tightening of monetary policy in response to increased oil prices in late 1999. Tax reforms such as the goods and services tax (GST) further upped inflation, raising it to approximately 6%. By the end of 2001, however, inflation had dropped back to 3.1%. Since a further drop in mid 2001 to 2.5%, economists have noted a steady increase in inflation. Increases in 2001 can be attributed to the September 11 events and the collapse of HIH (a major Australian insurance firm) and Ansett (Australia’s second largest airline). These upward CPI movements were, however, offset by a significant decline in petrol prices due to a fall in global oil prices, and so, were not as severe as expected. In 2002/2003 inflation is again seen to wander beyond the borders of the reserve bank target inflation rate of 3%. These recent fluctuations in inflation, however, have occurred due to the drought which Australia is suffering through at the moment. This has led to drastic increases in the price of fruit and vegetables which consumers are forced to sustain. Whilst this may be seen to lower Australia’s population’s standard of living and show ineffective economic management on the part of the economy, it is arguable that this slight increase in inflation was inevitable due to the onset of the drought, and if one was to examine Australia’s underlying inflation rate (Fig. 5), one may find the situation to be far more manageable. Underlying inflation has remained fairly stable over the past few years, and is still within its target band today. Real inflation rates may distort this image through the consideration of the drought. It is argued that without taking this aspect into consideration, the government has done very well to have kept underlying inflation within its target band so successfully. For this reason, it is argued that inflation is a strength of the Australia economy. (Australia Now, 2003/APEC, 2002/RBA, 2003)

3.            Unemployment

Dating back ten years, Australia’s unemployment was very high (Fig. 6 – A). Being a lagging indicator, we noted the effect of the 1990/91 recession as the economy went into a recovery stage in 1993. Unemployment rose to approximately 11.5%, a far cry from the government’s objective of “full employment”. A value of between 5 and 6 percent is deemed reasonable for the Australian economy, as the government has stated that an unemployment rate of 5% is achievable (Prince et al. 2002). Unemployment then set about on a slow decline in the rest of the 1990s, reaching a low of 6% in 2000. This steady decrease came as a result of solid economic growth for the early part of the 1990s and the subsequent increased spending by firms and industries which allowed further jobs to be created (Prince et al. 2002). Unfortunately, slow economic growth in 2000/2001 through a slow down in the global economy led to a lagged rise in unemployment to 7.2% in 2001/02. Thankfully, however, a stronger rate of growth in 2001/2002 has led to the unemployment rate to be dragged back down to 6.1%. Australia’s unemployment rate has been a great strength of the economy over the last few years, as we have seen a gradual decline in it for a long period of time. If this decrease could be sustained even longer, unemployment could arguably become the greatest strength in our economy. (Bulmer, 2003/APEC, 2002)

4.            Current Account Deficit

The current account deficit (CAD) has become a contemporary watchpoint for foreign investors. Australia’s CAD reflects our nation’s ability to fund its own growth, or its reliance on foreign investment into our country. Obviously, we rely on foreign saving because national saving is not sufficient to fund national investment. For the past two decades, Australia’s CAD has averaged 4. 5%. In the 1980s, Australia borrowed heavily to fund our CAD, and this increased our foreign debt dramatically. Interest charges on our new debts then increased the net budget deficit which then became the largest component of the CAD. In 99/00 Australia’s CAD was $33.5 billion, $18.7 billion in 00/01, and $22.2 billion in 01/02. In the December quarter of 2002, Australia’s trade deficit stood at its largest ever, up 40% from the previous quarter, at $11.6 billion (This is depicted in Fig. 7 on the previous page). Fiscal policy is the closest related government form of management in terms of CAD, and it is arguable that the volatility of this figure over recent years has been as a result of bad debt management on the part of the government through inappropriate fiscal policy approaches. Australia’s current account deficit has been, unquestionably, its greatest flaw, and needs to be managed in a far more professional manner. (Anderson, 2003/Bulmer, 2003/Australia Now, 2003)

5.           Macroeconomic Policies

Macroeconomic objectives of the government can be achieved through 2 forms of government policy, monetary policy and fiscal policy. (Alcorn, 2003)

5.1         Monetary Policy

Monetary policy aims at influencing the level of interest rates in order to achieve the desired economic objectives of a country. Monetary policy is today effected by the Reserve Bank of Australia (RBA) which is independent of government control. Whilst in theory this may be seen to be true, the bulk of employees sitting on the board of directors are government appointed. (Bulmer, 2003)

Australia’s monetary policy aims to ensure that inflation remains low and that the swings of the business cycle are kept under control. Ultimately, monetary policy is aimed at ensuring internal balance by stabilising aggregate demand and controlling inflation. (Bulmer, 2003)

5.1.1        Monetary policy at work in our economy

In 1993 the RBA adopted a target for monetary policy. This target was to maintain underlying inflation to a rate between 3 and 4 percent, and it is argued the government has done well to realise this objective (Fig. 9). The early 90s saw a high inflation rate, predominantly as a result of the 90/91 recession. CPI remained fairly constant, around the 2.5% mark until the mid 90s. Fears of an accelerated inflation figures in the period between 1994 and 1996 prompted the Reserve Bank to raise interest rates (See Fig. 8). The cash rate stood at 7.5% at the end of 1994. Until 1996, it stayed at this level – the RBA then declared the inflation had fallen enough, and with the slowing down of the Australian economy in 1996, the RBA cut the cash rate back to 6% in an attempt to encourage economic growth. In 1997, the RBA cut back the cash rate a further 1% to 5%, where it remained until late 1998. This was a move to try to increase growth further than previous expansionary moves in 1996 had allowed, however it did not have the effect the RBA were looking for. The financial crisis in Asia led to a further reduction in cash rate to 4.75% amidst fears that problems in our major export markets would produce a significant slow down in economic growth. Finally, in November 1999 the RBA tightened monetary policy, raising the cash rate to 5%. The RBA had since tightened monetary further to a peak of 6.25% before it was once again eased back to approximately 4.15%. Finally, after having lifted the cash rate to 4.75% last year, the RBA have maintained interest rates in the second half of 2002 and the first quarter of 2003. In a recent statement, they cited the weak global economy and the Australian drought as factors against increasing interest rates further. (Bulmer, 2003/Axiss Australia, 2003)

2.           Fiscal Policy

Fiscal policy comprises adjustments of government income and expenditure in, thus making the main instrument of fiscal policy the Federal Budget. The aim of fiscal policy is to achieve a desired level of economic activity within our nation. It has three roles, those of allocation, distribution and stabilisation. (Alcorn, 2003)

The policy’s allocation role ensures that economic resources are allocated efficiently across the various sectors of the Australian economy. This can be achieved by various means, for example taxing particular goods or services. Generally, this facet of fiscal policy aims to decrease the allocation of resources to the production of demerit goods, these goods being those which can cause a ripple of ill effects to arise from their production. An example of a demerit good is cigarettes, as it can cause discomfort for people who are around the consumers of the good. Another example of the policy’s impact on resource allocation can be seen through the ability of the government to indirectly legislate against the production of certain demerit goods if the social costs of production outweigh the social benefits (For example, legislation surrounding pollution). (Alcorn, 2003/Bulmer, 2003)

The distribution role of the policy is very simple, and influences the way in which goods and services in Australia are shared between people. This would include such things as wages and salaries. Basically, this role is achieved through the implementation of income taxes and transfer payments to the poor and needy. (Alcorn, 2003/Bulmer, 2003)

The stabilisation role is submitted to be the most substantial role that fiscal policy plays in our economy. It is this aspect of the policy which the government utilizes as a tool to achieve its short term objectives of full employment and price stability. This component of fiscal policy is split into two distinct sections, those policy initiatives which are automatic, and those which are as a result of deliberate government intervention. Automatic stabilisers are those elements of the policy such as income tax and welfare benefits which operate automatically, independent of government action. Discretionary fiscal policy is any deliberate action taken by the government in an attempt to stimulate or reduce aggregate demand AD. (Alcorn, 2003/Bulmer, 2003)

1. Fiscal policy at work in our economy

Over the past decade, the effectiveness of Australia’s fiscal policy has been notable, with the economy having been pulled out of a budget deficit in the late 90s (See Fig. 10). Following the 90/91 recession, discretionary fiscal changes were seen to be fairly substantial, as a result of the failure of monetary policy to slow rising unemployment rates at the time and the onset of the recession. In 92/93 the government adopted expansionary fiscal policy (in the form of increased spending and decreased taxation revenue), and this led to an increase in GDP by 3.2% (Fig. 11). This, in turn, allowed Australia to emerge from the recession in 1994 and growth for the country remained fairly stable at around 4.1% for the next three years. The government, amidst fears that the economy (and hence, GDP) was growing too rapidly, then decided that aggregate demand needed to be reduced, and fiscal policy was tightened.

The government adopted contractionary fiscal policy, and this, in conjunction with automatic stabilisers, caused the cash deficit to drop by 2%. In 96/97 growth fell below 4% as a result of contractionary fiscal policy, and unemployment rose to 8%. The year 97/98 brought no problems for Australia, despite the Asian financial crisis – perhaps a testament to Australia’s floating exchange rate, having proven itself as an insulation measure against crisis’s such as this. This was the first year in the 90s in which Australia did not have a budget deficit. In 2000/2001, GDP dropped to 1.9% and inflation rose to 6% - this was, obviously, at the hands of the GST. In this year, the government again eased fiscal policy, and the budget surplus grew to 2%. By 2002, government initiatives such as the First Home Buyer’s grant had taken their toll, and the budget deficit lay at around 0.2% of GDP. (Lewis et al. 2002; Prince et al. 2002; Gittins et al. 2002)

5.3           Effectiveness of Australia’s policy mix

In terms of monetary policy, one can base their judgment as to the effectiveness of the policy by establishing whether or not the policy’s goals have been achieved. As previously mentioned, the RBA’s aim was to reduce inflation to a sustainable level, between three and four percent. Obviously, the onset of a recession in the late 80s led to a dramatic increase in the CPI of Australia, however, once the government set its goal in 93 to maintain CPI, it is submitted they have done well to come very close to achieving that goal. Unfortunately, however, the RBA has been slow to move from contractionary to expansionary policy in the later years of the 90s. Its interest rate cuts have also been less than those of the US Federal Reserve Bank, however this may be as a result of prioritising Australia’s inflation rate, which is near the top if its target band. (Bulmer, 2003)

In relation to fiscal policy, the policy stance has changed from focusing on external balance to a focus on internal balance. The policy has taken focus off the topic of increasing savings to reduce CAD pressures, as saving is no longer the priority it once was. Whilst this is not necessarily a bad focus-shift, one must consider the possible effects lower GDP (as a result of the drought) will have on our CAD – this must be reviewed to ensure it does not get out of hand. Overall, however, it is submitted that the policy has achieved its focus to a certain degree near the end of the 90s and into the present day. Policy initiatives and careful government planning have allowed the nation’s budget balance to be fairly stable in recent years, proving the strengths of our fiscal policy. In relation to one of fiscal policy’s main objectives, that of unemployment, one can note that unemployment is at its lowest in years, and this can, for particular reasons, be as a result of smart management on the government’s part. (Bulmer, 2003)

On a whole, in deciding whether or not the government’s policy mix has been successful or not, we must consider whether or not the government’s economic objectives have been achieved. In terms of economic growth, Australia’s real GDP figure has fallen marginally over the past few years, and will arguably continue to fall as a result of the drought. We must bear in mind, however, the impact that certain global events in recent times. Incidents such as the September 11 attacks have caused a global economic downturn to ensue. For this reason, it is submitted that the government should have a finger pointed at them for poor economic management. It is submitted that independent events (such as September 11, the introduction of the GST etc.) have caused GDP to fall slightly, and this is no fault of the government. It is argued smart policy initiatives such as the first home buyer’s grant have ensured stability within our economy of late, and will prove to be fundamental in the success of the Australian economy in the future. (Australia Now, 2003)

Whilst full employment itself has not been achieved, the probability of seeing any country achieving this objective in its entirety remains infinitely small, and it is submitted that Australia has claim to one of the best unemployment rates worldwide. Whilst our country may not be seen to have the lowest unemployment rate in the world, it has proven to be continually decreasing, and we have not seen any sharp upturns in unemployment over the last decade. It is hereby contended that it is successful implementation of certain allocation measures of fiscal policy which have allowed for this constant decrease in unemployment since the recession of the early 90s. (Australia Now, 2003, APEC, 2002)

Price stability over the last decade has been fairly well regulated through the implementation on monetary policy. The Reserve Bank has a very fine degree of control over the CPI of Australia, and whilst they are often slow to adjust monetary policy, they have generally, over the past 8-10 years succeeded in keeping inflation within the boundaries of its target band, that being between 3% and 4%. (APEC, 2002)

Australia’s CAD remains an issue of much contention, having been fairly volatile over the past few years. Whilst Australia’s CAD has pointed towards a general decline over the past two decades, signs point towards an increase in debt following a global down turn in world economies and a decrease in national saving as a result of events such as September 11. This decrease has led to an increase in the reliance on foreign investment, and this is a fundamental weakness in our economy. (APEC, 2002)

Australia is categorised as a first-world-nation, and our standard of living stands to prove exactly why. In terms of the final, and arguably most important, economic objective, the government is achieving its goal very well. Statistical measures such as the mortality rate in Australia have continued to decline over the past few years, showing a higher standard of living. Contrasting this, other statistics have increased, such as the life expectancy of Australians. In males, Australia has the second highest life expectancy in the world, and in females, the third. This further substantiates the fact that Australia has a healthy workforce, arguably through economic investment into the health and general standard of living of Australian citizens. Education levels also remain at a very high standard in Australia, further establishing the firm foundation of which our future workforce is based. Unfortunately, however, household disposable income and consumer sentiment have fallen, indicating insecurity in the Australian market. It is argued, however, that as a result of government measures to invest in the future of our economy (through health/education), consumer confidence will return. This return in confidence will in turn cause spending to increase, leading to increased GDP, and finally, increased disposable income. (Australia Now, 2003)

6.         Economic outlook for the future

In attempting to predict the future state of our economy, it is necessary to examine the main indicators of a government’s economic objectives and any other relevant indicators, grouped as coincidental indicators and leading indicators. It is submitted that lagging indicators are irrelevant to this discussion as they depict an image of the past rather than a foresight into the future. (Ozyildirim, 2003)

6.1        Coincidental indicators

Coincidental indicators afford us an insight into the current workings of our economy, and should therefore be considered first. The coincidental index is merely a weighted combination of the five most important coincidental indicators. The coincidental index of Australia has been increasing over the past year, showing positive signs for the future. In particular, retail trade (As depicted above, Fig.12), company profits and new vehicle registrations have stood out, showing increased consumer confidence within our economy. These are very healthy signs, and show that the Australian economy is perhaps reaching the end of a recovery period and is headed towards a boom. Unfortunately, however, this will undoubtedly be combated by the drought, which may take its toll on GDP in the very near future. (Ozyildirim, 2003)

2.            Leading indicators

Leading indicators are the economist’s crystal ball – a far greater insight into the future than any other indicators. As would be expected, a move in a leading indicator would effect a similar move in the economy very soon after. An example of this in practice is a case wherein the supply of money in the country increases. This increase in the leading indicator of money supply would cause household gross disposable income to rise, which would in turn lead to increased spending and hence, growth. Evidently, this makes them very valuable in the process of predicting economic performance. The leading index, like the coincidental index, is a group of weighted leading indicators (in this case, eight). (Alcorn, 2003/Ozyildirim, 2003)

Unlike the coincidental index, however, the leading index has suffered a slight decline of approximately 0.1% in recent times. This occurred in January 2003 and was the first fall in this index in seven months. This was, arguably, an unusual occurrence, and can be attributed to, as Ozyildirim states, “a sharp drop in building approvals coupled with weakening rural goods exports. Reductions in the amount of rural goods exported can be accredited to the drought. The agricultural sector is thought by Peter Costello to be the only underperforming sector of our economy, as “non-farm sectors of the economy are expected to continue to grow solidly.” The drop noted in building approvals is indicative of a lack of consumer confidence in our economy. (Ozyildirim, 2003)

3.           Indicators relating to government objectives

Whilst the Australia economy does seem to be slowing down, we are not experiencing an economic downturn, but rather a slow down in a very consistent recovery over the last ten years. In relation to economic indicators relating to government objectives, this means many things. In terms of GDP, the drought will undoubtedly have an impact, however, will be sustained by the rest of the economy. With overperforming sectors such as the construction sector forming the basis of our growth, GDP is still predicted to rise the approximately 3.75%. Unemployment is predicted to drop by approximately 1% in 2004. This is substantiated by Anderson who states that “job advertisements are up 3.2 percent” – this shows vacancies in the workforce which will inevitably be filled. Unfortunately, Australia’s CAD will only increase in 2004, as a result of a drop in exports and an expected rise of 10% in imports (Allan, 2003). This will obviously create a budget deficit which will lead to greater foreign debt. As a result of this, fiscal policy is likely to adopt contractionary policy. Monetary policy should remain fairly constant for the moment. As the economy reaches its peak and begins to decrease, however, the RBA will adopt an expansionary stance in relation to monetary policy, and will lower interest rates. In relation to the final government objective, therefore, CPI will decrease initially as a result of a break in the drought and the return of agricultural goods to lower prices. In the longer run, however, as the RBA ease monetary policy, CPI will rise once more. (NOIE, 2003/Anderson, 2003)

7.        Conclusion

As has already been discussed, the Australian economy has experienced a sustained period of recovery over the last ten years. This recovery period is nearing its end, suggesting that the economy is nearing a boom period. The indicators of GDP, CPI, Unemployment and CAD have been discussed and with exception of the latter, have all been found to be strengths of the economy. Arguably, with careful fiscal policy management in the future, CAD can also become a strength for Australia. In terms of monetary and fiscal policy, the RBA and government respectively are doing an excellent job of managing our economy, with the exception of foreign debt, which fiscal policy needs to target in the future.

The future seems to be bright for Australia, with growth expected in spite of the recent drought. This can be attributed to a lively and productive housing and construction sector, which form a solid foundation on which our economies growth is built. Unemployment is also set to improve as is the price stability of our economy. As previously mentioned, however, CAD is still an area of concern. Ultimately, however, the Australian economy is headed in the right direction and should remain a world-competitor for years to come.

8.         Bibliography

Internet sources

1.        Anon. 2002. Australia – Political and economic profile. CIT Publications Ltd.

2.        Anon. 2002. Economy Report – Australia. Asia-Pacific Economic Corporation

http://

3.        Anon. 2003. The Economic Outlook. Reserve Bank of Australia

4.        Anon. 2002. Economic Performance and Issues in 2002. Reserve Bank of Australia

        

5.        Anon. 2003. Australia’s Economic Performance. Axiss Australia

6.        Anon. 2003. NOIE - Australia’s Information Economy. The National Office for the Information Economy

        

7.        Anon. 2003. Australia Now – The Australian Economy. Australia Now

        

8.        Ozyildirim, A. 2003. Australia Leading Index Sees First Decline in a Year. The Conference Board

http://www.conference-board.org/economics/press.cfm?press_ID=2106

Newspaper sources

9.        Anderson, F. 2003. Economy gets high marks but it could still do better. The Courier Mail

Book sources

10.        Gittins, R. Marris, S. Garnaut, J. 2002. The Australian Economy. Victoria: Warringal Publications.

11.        Lewis, P. Garnett, A. Hawtrey, K. Treadgold, M. 2003. Issues, Indicators and Ideas. NSW: Pearson Education, Australia

12.        Prince, R. Prince, M. Forsyth, A. 2002. Australian Economic Statistics.

13.        Bulmer, J. 2003. Updated Economics B. Bulmer Chapman & Co. Pty. Limited        

Human sources

14.        Alcorn, P. 2003 – Economics Teacher

15.        Galagher, P. 2003 – Reserve Bank Representative