Recent Implementation of Fiscal and Monetary Policy
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Course
Preliminary HSC
Institution
Preliminary HSC
Essay on the use of fiscal and monetary policy by the Australian government, in answer to the question: "Discuss the effectiveness of the use of fiscal policy and monetary policies in stabilising economic activity in the Australian economy".
Draft your response to 2020 preliminary economics essay:
Discuss the effectiveness of the use of fiscal policy and monetary policies in stabilising
economic activity in the Australian economy (20 marks)
1. Introduction
The main instruments of macroeconomic stability and government control of the economy
are fiscal and monetary policies, which regulate the market to allocate resources most
efficiently. In recent years, the government was obliged to increasingly interfere in the
Australian economy to address the recessions related to the global financial crisis (GFC) and
the Covid-19 pandemic in light of increased international economic uncertainty to maintain
key economic objectives, such as economic growth, inflation between 2 and 3% and full
employment . The monetary and fiscal policies have been relatively successful in stimulating
short and medium-term demand and meeting the objectives, but at a possible cost of future
economic growth.
2. Macroeconomic policy during the GFC
From 2007-08 to 2008-09, the unemployment rate in Australia rose from 4.2% to 5.8%,
compared to the OECD’s average peak of 8.8%. Between November 2007 and August 2008,
ASX equities plummeted by 27%, but the economic downturn in Australia was much smaller
and recovered more quickly than other nations, because of the successful use of monetary
and fiscal policies in the crisis, and Australia was able to recover from the shock and remain
on track to achieve key economic objectives.
2.1: Monetary policy during the GFC
Monetary policy is the control of interest rates in the economy and the supply of money
through the cash rate and the supply of cash in the financial sector to achieve sustainable
growth of the economy over time. The GFC globally affected the financial system, and due
to the interconnected nature of the modern economies, it reached Australia and increased
pressure on the economy. To maintain stability and confidence in the financial system in
Australia, the Reserve Bank of Australia (RBA) cut the cash rate by 0.25% on the 3 rd of
September 2008, and it reached a minimum of 3% from 7.25% since the beginning of the
GFC. The effect of these drastic measures by the RBA was the rapid increase in confidence
and growth started to recover in Australia. This cheaper source of finance for financial
intermediaries flowed onto lower interest rates in financial markets, such as credit and
housing loan markets, allowing individuals and businesses to obtain finance more cheaply,
thus leading to less expenditure on interest, hence more consumption, which stimulates the
economy, as was the aim and outcome of the RBA’s monetary policy operations as a result
of the GFC. For instance, the Overdraft Lending rate in Australia decreased from 11.7% to
8.7% though the course of the GFC as a result of the decrease of the cash rate, which was
the case in all financial markets, thus stimulating the economy. Hence, monetary policy was
successful in Australia, as it injected confidence and potential for growth into the Australian
financial system. From 2007-08 to 2008-09, the unemployment rate in Australia rose from
4.2% to 5.8%, compared to the OECD’s average peak of 8.8%, showing Australia’s success
, and the resilience of the economy is meet key objectives. The economic downturn in
Australia, as seen from Figure 1, in Australia was much smaller and recovered more quickly
than other nations, because of the successful use of monetary and fiscal policies in the crisis,
which maintained Australia on track with its inflation and unemployment targets.
Figure 1: Real GDP comparison
2.2: Fiscal policy during the GFC and its effect
Australia entered the GFC with a long-running budget surplus, which was put to use in the
crisis. The GFC led to a large increase in consumer saving, and decreased spending, hence
decreasing business revenue, leading to upward pressure on the unemployment rate, thus
more government welfare spending and less taxation revenue. The government adopted an
expansionary fiscal policy, which features higher government expenditure with decreased
revenue. The Rudd government introduced the $10 billion Economic Security Strategy
stimulus package, which was delivered particularly to low-income consumers as cash
cheques to boost aggregate demand in the economy. It was also followed by a Nation
Building and Jobs Plan worth $42 billion that boosted job creation and industry. As seen
Figure 2, private consumption did increase following the government stimulus packages
under fiscal policy, hence this fiscal policy led to increases in the standard of living after the
GFC, showing the policy’s success. However, Australia’s government debt increased from
negative 3.8% to 6.0% of GDP by the end of the GFC. Government budget deficit increased
from -$29.7 billion in 2008-09 to -$53.8 billion in 2009-10, hence the high government
spending during the crisis will be accompanied by higher debt repayment expenditure in the
future, putting pressure on future growth and the ability of Australia to meet key economic
targets. Hence, the effect of fiscal policy in response to the GFC in Australia had mixed
efficiency.
Figure 2
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