Issues of Economic growth and government policies promoting economic growth

Economic Growth

Definition

Economic growth refers to a constant increase in a country’s supply, as measured by the changes in real GDP over time. The annual rate of change in real GPD is the percentage increase in the value of goods and services produced in an economy over a period of time, usually one year, adjusted, or the rate of inflation.

Summary of economic growth

Economic growth has been the major objective of economic management. The annual rate of change in real GDP is seen by many economists as indicative of a country’s performance and success. This change represents the percentage increase in the value of goods and services produced in a country over a certain period of time, adjusted for the rate of inflation. There are three different time periods used to measure Australia’s economic growth including quarterly rate of economic growth, year on year of economic growth and annual growth rate. The annual growth rate if Australia’s economy, according to the Budget forecast, is expected to be 3.75% in 2007-08.

It is crucial for countries, especially a small country such as Australia, to observe the factors that influence the level of economic growth in order to sustain it. According to John Maynard Keynes, the most important influence on economic growth was the total expenditure by firms, government and net exports; that is, the levels of aggregate demand (AD). The economy is used to be in equilibrium when the aggregate demand is equal to the aggregate supply [AD=AS] and there is no tendency for the income level in the economy to change.

Any change in the components of consumption and savings, investment, government spending and taxation, exports and imports will ultimately change the overall level of the economic activity. Consumption is a crucial determinant of the level of economic growth because consumption by household typically makes up over 60% of expenditure in the economy. According to this article, Shoppers ease up but there’s plenty in store, “strong labour markets, rising incomes and wealth are providing momentum to consumer spending.”1 Due to the strong economic outlook, there is a 6.7% surge in spending on infrastructure and an increase of 1.4% of food sales. However, it is also noted that the growth as a result if ‘the retail spending …were unlikely to affect the Reserve Bank of Australia’s interest rate deliberations because recent data has shown inflation is tracking well within the RBA’s target band and wages seem contained.’ Australia has also experienced an increase in the exports and investments of minerals due to the commodity boon, which contributed to the faster economic growth, ‘at least 0.25 % higher ‘2 according to The Australian Newspaper.

The changes in the levels of aggregate demand will cause a change in the equilibrium level of income via the simple multiplier process. The multiplier can be defined as the extent to which an initial change in the expenditure is multiplied to give a larger change in the level of nation income (Y). According to the calculations in figure 4, the size of the simple multiplier co-efficient is influenced by the relative sizes of the MPC and MPS. The larger the MPC or the smaller the MPS, the larger the value of the multiplier and vice versa.

Economic growth has both positive and negative effects on the society. One of the major benefits of economic growth is the higher real incomes per capita and higher living standards due to an increase in output. Increase in output has also created jobs as domestic firms increase their levels of employment in response to increases in aggregate demand. As evident in the Budget, unemployment rate is falling to 4.5% in the March quarter 2007. Higher levels of employment also increase income levels, which lead to further increases in aggregate demand.

Nevertheless, excessive economic growth has been known to result in demand-pull and cost-push inflation. Prices can increase as consumes increase their demand for a limited stock of resources or goods. This is evident in the article Booming badly for the housing sector where the ‘rental market is in crisis, with a vacancy rate of 0.8%; the lowest record,’ as ‘about 500 people repeatedly move to Western Australia each week for job opportunities linked to the boom.’4

This is due to the fact that the growth in aggregate supply cannot keep pace with the growth in aggregate demand. A high level of economic growth can also result in a surge in the current account deficit due to the higher demand in imports. CAD as a % of GDP remains at a high level of 5.75 in 2006-07. The external stability will worsen in 2007-08 as the CAD is forecasted at 6.0% of GDP.

Another potential cost of faster growth is that the benefits of growth are often not evenly distributed. This is the case with the “gap between south-east Australia and resource-rich states of Western Australia and Queensland” 5 Faster economic growth can also place pressure on the stocks of natural resources as countries place little regard to its impacts on the environment. In Australia’s case, our reliance on primary production for export revenue has accelerated problems such as resource depletion (for non-renewable resources) and degradation (such as salinisation or land clearance). However, Australia has addressed this issue through introducing various measures to reduce greenhouse gas emissions and setting money aside in the Budget for the conservation of Australia’s resources including Phase Three of the Natural Heritage Trust, National Landcare Programme and Stewardship Programme.

The recent growth trend in Australia shows that Australia has sustained a long period of relatively strong economic growth since emerging from the early 1990s recession. According to the Budget, “Australia’s economic expansion is set to continue into its seventeenth year.” Australia’s sustained economic growth, low employment rate and falling inflation has been attributed to a favourable external environment, strong confidence in the Australian economy, successful macroeconomic policies and effective microeconomic policies. Some challenges, however, are beginning to emerge such as the impacts of the ageing population.

Government policies to address economic growth

The main objective of the government’s economic policy is to achieve a sustainable high rate of economic growth in order to achieve higher living standards and growing accumulation of national wealth and income. Australia has successfully maintained its economic growth since the 1990’s, averaging around 4% in real terms, due to a combination of successful macroeconomic policies, microeconomic reforms and a favourable world economic environment.

The main macroeconomic policy instruments used by the Australian government include monetary and fiscal policy. Fiscal policy involves the use of government powers of revenue collection and expenditure to influence economic outcomes and policy objectives, as implemented through the Budget. The Australian government has paid off Australia’s public debt in 2005-06 and achieved a budget surplus for the tenth time in a row by 2006-07. To sustain the economic growth, ‘the government will spend $7.2 billion of the $17.8 billion resource boom bonus on tax cuts and just over $10 billion on spending measures.’ The spending measures include a range of reforms in education, child care, infrastructure, health care, defence and climate change. The budget surpluses and the lack of debt, has led to lower interest rates and non-inflationary fiscal where business investments and low unemployment levels are encouraged.

Monetary policy aims to influence the supply and cost of credit in the economy in order to influence economic outcomes such as stability of the currency, non-inflationary economic growth and full employment. Since 1996 the Reserve Bank has set an inflation target of 2% to 3% CPI inflation in economic cycle. The RBA’s most recent inflation forecast, in its May statement of monetary policy, was for the underlying inflation to fall to 2.5% or even a little lower over the rest of this year. Thus, the Reserve Bank is on hold until August when it gets to see the inflation figures for the June quarter. Monetary policy is crucial in containing inflationary pressures, achieving economic growth and maintaining Australia’s international competitiveness.

Microeconomic reform policies aim to promote economic growth in the longer term by addressing structural problems which may constrain economic growth within the future.

Australia has undergone some microeconomic reforms including the introduction of National Competition Policy Reforms, deregulations, reduction of trade barriers, labour market reforms and taxation reforms.