Economic Policy Brief

Economic Policy Brief

Economic Policy Brief

Briefing for the Secretary to the Treasury

Subject: Australia: Realizing Economic Stability and Consumerism

Executive Summary

The current economic assessment reveals inflation and one-time structural economic growth for period 2016/2017. The inflation is caused by uncontrolled money supply in the economy while the economic growth is because of price changes as opposed to alterations in output and income levels. The policy underscores the need to create a responsive economic growth determined by productive factors of output. Thus, the brief recommends implementation of contractionary monetary measures, review of reserve requirements, market openness, and entrepreneurial development as real drivers of economic growth.

Recommendation

The policy recommends reinstatement of a stern contractionary monetary measure that would ensure price stability. There is also a need to revise Reserve Requirements to usurp excess money supply causing inflation. In addition, promotion of entrepreneurial development and market openness would ensure realistic economic growth driven by an increase in output and income as opposed to price changes.

Economic Rationale

The Treasury is concerned about the current economic disparity between the consumerism effect and total economic output. The two indicators give a substantive economic position in Australia. The nation is apparently not in the right economic direction according to the statistical representations of the consumers’ purchasing power and economic growth. Thus, an interventional policy would be required to correct the situation and create a new path to ensure the economic prosperity of the nation and its citizens.

The current economic position through the consumer price Index (CPI) and Gross domestic product (GDP) give a diverse interpretation that made the Treasury enact a policy direction that will ensure economic stability and consumerism protection. The nation’s long-term CPI in 2018 was at 113.5 points while the index point for 2017 was at 111.4 points (Figure 1). The trends illustrate that prices of commodities were higher in 2018 compared to 2017. The increase in price level indices measures the inflation level of the country for the 2018 period (ECON1010, 2019). The rise in CPI and subsequent inflation indicates a possible reduction in consumers’ purchasing power since consumers today pay more for the same commodities compared to the previous years. Thus, the situation complicates the life of many Australians considering that there are no substantive increases in individual consumers’ income.

Figure 1: Trend of Consumer Price Index

There is substantial proof of consumers’ dissatisfaction in the short-term CPI points. At an approximate 0% CPI difference between last the quarter of 2018 and the first quarter of 2019, the consumers earn no extra utilities in value of their extra cash paid for commodities. The quarterly CPI measures show negligible changes in index points that neither confirms deflation nor inflation. However, commodities’ prices have steadily increased throughout the years. The inflationary effect of the previous years may jeopardize consumers further by reducing utilities harnessed from the same commodities today compared to the previous years. Thus, the values confirm a generally negative consumerism effect of the economy.

On the other hand, the nation realized GDP growth between 2016 and 2017. However, the realized US$113.42 billion is a recapture from a previously dwindling economy from 2013 to 2016. In addition, the GDP growth attained in 2017 is lower compared to previous years excluding 2016, which acts as a recovery base. The recent GDP increase indicates the quantitative growth of the economy. Growth implies an increase in the production of good and services. Alternatively, the growth can be caused by increased income from the various factors of the economy including labor and entrepreneurship. Thus, consumers can be assumed to gain more purchasing power due to income growth for the year 2017.

Figure 2: Gross Domestic Product from 2012 to 2017

Concisely, the short-term GDP assessment shows an increase in national output. However, the contrast between CPI and GDP contradicts statures of a progressive economic. CPI as a measure of price levels and inflation should have a negative correlation with GDP growth for a reliable economy (Koser, 2009). There is great concern that GDP growth realized in 2017 could be as a result of price increase for the same output level as of 2016. Thus, there is a need to review money supply and progressive economic growth as highlighted by this policy review.

Economic Justification for the Recommendations

Contractionary Monetary Framework and Reserve Requirement

The Treasury’s primary focus is drawn on the current contractionary monetary framework. The institution has all reasons to believe that the current inflation level is considerably influenced by the unresponsive monetary framework used over the recovery period between 2012 and 2017. The Treasury believes that it is time to create a progressive monetary framework as part of the recovery policy to achieve economic stability and consumerism. The contractionary monetary framework will take care of the short term and long term inflation cases. The proposed framework will ensure a complicit reduction in money supply in the markets as a way of pulling back extra cash from the consumers. Thus, the Treasury proposes a 10% increase in interest rates and an increase in treasury bonds. The regulatory framework aims at reducing expenditure and withdrawal of excess money from the markets (McCombie & Thirlwall, 2016). Reduction of money supply will spur economic growth, environments, and mitigation of inflation. The Treasury will increase the Federal Reserve interest rates and redirect its lending interest rates. Therefore, the policy requests the financial institutions to act appropriately as per the policy framework to curb excess money in the economy that makes consumers pay more for commodities and enhance economic growth.

The Treasury considers reviewing statutory Reserve Requirements in response to inflation and high CPI. The policy proposes a review of the amount of money held by banks against withdrawals. As the banks hoard more cash, they are left with a lesser amount to lend thereby reducing the amount of transactional cash in the economy. The Federal Bank will be required to increase its reserve by at least 5% to comb out excess cash out of the economy. The current high price levels and inflation are caused by more cash in circulation (Berkelmans, 2005). In this case, consumers have more cash to spend thereby creating an internally exaggerated price competition for commodities. Moreover, consumers are willing to pay more for the same quantity of commodities. Thus, an upward review of the Reserve requirement will suck out the inflationary surplus from the economy.

Market Openness

Once more, the Australian government aims to promote policies that drive market openness and an integrated global competition. Market openness in export and import products and services has a positive effect on the productivity and economic growth of the country (Abbott & Lee-Makiyama, 2017). The nation has already achieved a two-third trade roll-over in the Asian-Pacific region. However, the recent economic assessment reveals high potentiality in global trade sphere considering the many untapped potentialities of the country. The approach includes setting up an enabling environment for more strategic bilateral trade agreements with regional and international partners. The policy also seeks the realization of free trade between the nation and its partners to allow local businesses to enjoy unrestricted trade that maximizes their utilities.

The policy will also promote inter-institutional transparency with support of the Regulatory Impact Assessment. The project will help domestic traders through consultations on regulation changes that might affect their businesses. Even though the plan will trade off privacy for transparency, it ensures value for investment and economic growth. The economic transparency threshold of the policy reinstates commitment to ensure that GDP growth shows a true reflection of increased income as opposed to surged commodities’ prices (Baker, Merkert, & Kamruzzaman, 2015). In addition, it reinforces the 2008 quarantine trade requirement that was opposed by foreign traders at the expense of the local economic development. Thus, the realistic reflection of the economic development will allow the government to inject the necessary economic booster to promote the nation’s economic growth.

Entrepreneurial Development

The policy also fronts the interest of entrepreneurial development in attaining proper economic growth. The government plans to roll out investment incentives for the SMEs such as supported registrations, coaching, and low-interest loans that propel entrepreneurship involving the departments of Trade, Labor, Treasury, and Finance (McCombie & Thirlwall, 2016). The policy gives the Treasury the authority to formulate a microloan fund scheme to support SME enterprises that cannot afford large loan securities. Thus, the entrepreneurial loan scheme targets standardized credit facilities that offer alternative sources of income and revenue to low and middle earners.

The entrepreneurial development also comes alongside investment incentives under strict money supply management to avoid structural inflation. The pre-implementation studies suggest diversifying SME funding to boost economic development and create free competitive consumerism based on increased supply of goods and services. In addition, increased awareness in implementation intermediary control through regulations would wipe out pullbacks to set a free economy determined by forces of supply and demands.  The policy further suggests a redress of the demand side of the equation to address the utility gap in the market. Therefore, the program will ensure price stability, reduction of inflation, and real economic growth.

Concisely, the policy considers the achievement of domestic economic growth as a factor of income earned from production factors. The framework outlined will ensure the promotion and maximum utilization of resources available. The government aims to increase the production of goods and services at an affordable cost to ensure affordable but competitive prices for the consumers, for instance, funding the SMEs at low-interest rates and other state incentives such as tax weavers and producers benefit from a subsidized cost of production. The manufactures can then sell their commodities at inflated consumers’ purchasing powers (Hally-Burton, Shirodkar, Winckler, & Writer, 2008). In addition, an increase in production waters down monopoly but increases competition in the market thereby leading to favorable prices in the market. Therefore, the economy will realize real economic growth as a factor of income earned from labor, land, capital, and entrepreneurship.

References

Abbott, R., & Lee-Makiyama, H. (2017). EU and Australia: Europe’s Challenges and Policy Options for Future Trade. Australia, the European Union and the New Trade Agenda, 215. Retrieved from. https://www.oapen.org/download?type=document&docid=633015#page=231

Baker, D., Merkert, R., & Kamruzzaman, M. (2015). Regional aviation and economic growth: cointegration and causality analysis in Australia. Journal of Transport Geography, 43, 140-150.

Berkelmans, L. (2005). Credit and monetary policy: An Australian SVAR. Retrieved from. http://www.rba.gov.au/publications/rdp/2005/pdf/rdp2005-06.pdf

ECON1010, (2019). Assignment Template. Part A:Diagnostics Analysis. Semester 1. Classroom Notes. (file attached).

Hally-Burton, S., Shirodkar, S., Winckler, S., & Writer, S. (2008). Harnessing the demand side: Australian consumer policy. Economic Round-up, (4), 91.

Koser, K. (2009). The global financial crisis and international migration: Policy implications for Australia. Geneva: Lowy Institute for International Policy.

McCombie, J., & Thirlwall, A. P. (2016). Economic growth and the balance-of-payments constraint. Springer.

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