Applied Economics

1. What Economic Measures Has the Government Undertaken?

The Australian government has announced $17.6 billion economic stimulus package to keep Australians in jobs, to support households, businesses and the economy as a whole. The main focus of the economic measures like the said stimulus package is to support business investment and providing targeted support for the most severely affected regions, communities and sectors (Treasury.gov.au c. 2020). In addition to this, economic measures are also implemented to provide cash flow assistance to small and medium-sized businesses in order to support their business and to ensure employment. The overall household stimulus payments are also included in the economic measure to benefit the wider economy (Klapdor 2020).

The measures are targeted, proportionate and temporary and are designed to respond to the immediate threat of economic decline. The economic measures provide temporary help to support businesses which will ensure employment and stimulus to households. Moreover, according to the media release by the prime minister office, the said measures will support over 3.5 million businesses that are employing around 9.7 million individuals (Treasury.gov.au c. 2020). Furthermore, the media release reported that the measures are designed for short-run and are put in place to support businesses to stick with their planned investment and to encourage further investment.

The implemented measure also include special consideration for severely affected regions and includes a waiver of charges for tourism businesses, and targeted measures to support businesses find alternative supply chains and export markets. In addition to this, the government is also providing administrative relief from certain tax obligations such as deferred tax payments for up to 4 months (Klapdor 2020). The Australian Taxation Office (ATO) will also set up temporary shopfronts in Cairns to assist small business, and to make it easier to apply for relief.

2. Why Do You Believe the Government Has Had to Action, Compile and Enact Such Large Fiscal Stimulus Packages?

The driving need behind the implementation of such large fiscal stimulus packages was the unprecedented setback of the Australian economy which was already suffering from the impact of bushfire. Compounded by the effect of bushfire, the advent of COVID-19 pandemic is expected to tip the country into its 1st recession in 3 decades. Moreover, the economic fallout of the pandemic deepened in Australia with a surge in local coronavirus cases from less than 100 in March to more than 7000 in early June (Mercer 2020). According to economic theory, the aggregate demand in an economy is the sum of government expenditure (G), private consumption (C), business investment (I) and imports deducted from exports (X-M), i.e. C+G+I+X-M. The introduction of external shock like the Coronavirus to one of more components requires offsetting change in another component to restore the market equilibrium, or else, the risk of economic recession increases (Palley, Caldentey & Vernengo 2020). This is exactly what is unfolding in the Australian economy, as the coronavirus has resulted in declining household consumption, investment in business and exports. The said fiscal stimulus package was needed to restore the economic equilibrium by counterbalancing the effected components of aggregate demand. The economic shock from coronavirus flows to the aggregate economy through the following process.

First, due to illness, social isolation and deaths, the short-run supply of labour decreases which results in declining household consumption. This is mainly because households cannot travel for consumption and are concerned with savings and income. Thus, the most immediate impact is borne by leisure, tourism, and hospitality and travel industry. Tourism and Transport form (TTF) confirmed the same by forecasting a significant decline in international tourism (TTF Australia 2020).

Furthermore, the reduced household consumption discourages businesses to employ and invest, which further deteriorates the employment outlook. Also, reduction in consumption and investment adversely impact government revenue, and imports and exports. Australian Treasurer Josh Frydenberg agreed with the statement and mentioned that in the June quarter, the Australian GDP will fall more than 10% (Frydenberg 2020). The only possible solution is to break this spiral, which requires government spending to offset the reduction in other sectors.

Moreover, in order to do so, fiscal policy is preferred as the official interest rates are at or close to zero around the globe, which gives little room for manoeuvre by monetary policy (Sims 2016). Therefore, the Australian government has had to action, compile and enact such large fiscal stimulus packages

3. What Has the Rba Done in Regards to Monetary Policy? What Effect Do You Believe This Will Have on The Overall Economy, Given Recent Interest Rate Moves?

In order to deal with the unprecedented public health emergency, the Reserve Bank of Australia (RBA) has engaged in quantitative easing (QE) which involves printing new money to discharge funds into the nation’s financial system. In addition to this, the Reserve Bank Board has agreed to reduce the cash rate target to 0.25 per cent, as a part of its monetary policy measures to stabilise the economy (Klapdor 2020). Monetary policy is a form of macroeconomic policy which is formulated by the apex bank to manage the interest rate and money supply, in order to realise macroeconomic objectives like consumption, growth, inflation and liquidity (Sims 2016).

Under RBA’s policy regime, new money will be created to buy long term bonds. In theory, this will incentivise greater investment and borrowing and will facilitate employment and growth by reducing long term interest rates on risk-free government debt, which in turn will result in the reduction in the cost of risky corporate debt markets borrowing (Gunji & Yuan 2018).

Considering the size of the Australian corporate debt market, the stimulative effect of QE on investment and corporate borrowing is likely to be limited. Moreover, there are also concerns related to borrowing appetite of business in the current environment. Regardless of its drawbacks, the policy can be effective in providing short term loans for SMEs and will also allow Australian banks to borrow more money. Moreover, reducing the cash rate will boost cash flow for household and businesses and will also help trade-exposed industries by making the exchange rate more favourable. However, it will have a negative impact on individuals relying on interest income (Gunji & Yuan 2018).

4. Has the Government Targeted Certain Groups or Demographics in These Fiscal Stimulus Package Measures? Why Do You Believe the Government Has Targeted These Particular Groups?

Even though the stimulus package is aimed at stimulating economic stability by supporting household consumption and industries, it especially targets low-income earners population (Treasury.gov.au c.2020). According to the details of the stimulus package, more than 6 million low-income earners will get a cash payment of $250, in order to keep them in work and to avoid a recession (Klapdor 2020).

The government has especially targeted low-income earners as they tend to spend their income which contributes to the multiplier effect, as illustrated by Keynes. Moreover, this consideration is according to the short-run approach of the Australian government which is aiming to stabilize the economy in the short run by having an immediate effect (Palley, Caldentey & Vernengo 2020).

5. What Other Key Macro-Economic Factors Do You Believe Could Be Utilised in These Packages; or Would Be ‘Important Elements’ Within This Fiscal Strategy to Be Successful?

Two of the most important macroeconomic factors within the fiscal strategy are demand and disposable income, and unemployment rate. The key emphasis of the Australian government on supporting demand and employment illustrates the importance of their impact on the success of the fiscal strategy. Aggregate demand is the bedrock principle of macroeconomics and without an increase in aggregate demand, the stimulus package is worthless. The underlying idea of the stimulus package is to boost aggregate demand which will support industries and provide employment and economic sustenance (Li & Spencer 2016). This cycle is the main reason behind the implementation of this fiscal strategy which makes aggregate demand and disposable income one of its most important elements. Moreover, employment is another important element which will determine the effectiveness of the fiscal strategy. In Australia, part-time employment decreased by 373,800, and full-time employment decreased by 220,500 between March and April (Taylor 2018). Apart from the social impact of increasing unemployment, it is also directly related to the consumption function of aggregate demand and can lead to a shortage of demand and further detrimental effect on industries. Therefore, it is important for the Australian government to ensure that its fiscal strategy is able to increase the aggregate demand by providing employment and more disposable income (Taylor 2018).

6. What Possible Obstacles Could the Fiscal Strategy Encounter that Will Decrease or Weaken Its Effectiveness? (Not Direct Health Factors).

Given the ineffectiveness of stimulus packages implemented by the US and Japan makes it important to consider the possible obstacles the Australian fiscal strategy could face while realising its intended goals.

One of such obstacles is created by the fact that the proposed stimulus package, generous though it is, does not include measures for part-time and casual workers. In industries like education with casual school teachers, university research assistant, entertainers and aged care works, short term employment contacts are the norm. Considering the importance of such workers in the economy, excluding them from financial support will have a negative effect on the effectiveness of the fiscal strategy (Lechevalier & Monfort 2018).

In addition to this, restoring consumer confidence is another challenge, as people tend to avoid spending during the crisis and focus on savings for the future. Without encouraging consumers to spend the fiscal strategy will not be able to deliver a positive impact on the Australian economy to the extent it is capable of (Hur 2018). 

7. What Are the Consequences of Such a Large Fiscal Stimulus Package? Are They Short-Lived and Easily Corrected; or Are They More Likely to Have Long-Term Effects?

Large scale stimulus packages are mainly aimed for short term economic stabilization; however, they can also have long term effects on the economy. Stimulus packages such as spending increases and tax cuts can increase the incomes and output in the short run by improving the overall demand level in the economy (Lechevalier & Monfort 2018). However, the long term effects of such packages are mainly negative in case they are not effectively implemented. Poorly timed fiscal policy can intensify, rather than dumping the nation’s business cycle and can lead to higher inflation and overexpansion in the long run (Hur 2018). Moreover, in the long run, increases in government spending and tax costs can lead to a reduction in national savings which means more foreign borrowing and fewer investments. This, in turn, reduces future national income and economic growth (Charlton 2019).

Simply put, fiscal stimulus packages should be temporary as the government with the help of monetary policy keeps the economy operating at full capacity and full employment. Their fore, such packages are not expected to have long term effect, rather than a stabilization of the economy.

8. Why Is the Fiscal Package Strategy (keynesian Policy) Likely to Have a Greater Positive Effect, than A Strategy that Relies More Heavily on Monetary Policy (classical Policy)?

In order to influence macroeconomic outcomes, governments usually rely on two primary approaches, namely, changes in fiscal or monetary policy. The monetary policy includes the management of interest rates and money supply by central banks. In this approach, banks cut interest rates, which make it less expensive to borrow money. This, in turn, increases the supply of money within the economy. On the other hand, fiscal policy determines the way the government spends and collects money (Hur 2018). To assist the economy through monetary policy, the government increases its spending and cuts tax rates. Although both of the strategies have their pros and cons in respect of stimulating economic growth, fiscal package strategy is likely to have greater positive mainly because it can direct spending to specific purposed, and can use taxation to control negative externalities (Charlton 2019). Moreover, the effects of fiscal strategy can be seen in a short time while monetary measures take a relatively long time period to bear fruit. In contrast to this, monetary tools affect the entire nation and are general. Such tools are present the risk of hyperinflation due to a speculative bubble and out of control inflation (Lechevalier & Monfort 2018).

9. Has the Volatility of The Aud Affected the Australian Economy? Do You Believe It Has Had a Positive or Negative Effect and Why?

Yes, the volatility of AUD because of the impact of coronavirus in the international and domestic market has affected the Australian economy. Currency fluctuations create economic instability and uncertainty which affects international trade and flow of capital (Blitz, van Vliet & Baltussen 2019). However, a weaker currency presents Australian with an opportunity to increase its exports and boost sales which can drive economic growth and employment. Also, at the same time, it makes imports more expensive and increases the cost of production (Sims 2016). Thus it can be said that currency volatility has both positive and negative impact on the Australian economy, but in the long run, it would be better to have a stable currency.

10. if Asset Prices Decrease (or Deflate), What Impact Is This Likely to Have on Consumers/investors; and The Overall Economy? 

Deflation refers to the decrease in the asset price level in an economy. In the short run, it can positivity impact customer behaviour by enabling them to purchase more with their income and by alleviating the burden of debt on consumers. However, a widespread deflation can lead to economic depression which can have a severe negative impact on economic stability and growth (Eichengreen 2018). In case it is not managed, deflation can lead to a deflationary spiral which happens when a decrease in prices lead to the low level of products, which further drives down wages and contribute to lower demand by consumers and producers. This, in turn, further reduces the prices (Oulton, Rincon-Aznar, Samek & Srinivasan 2018).

References for Applied Economics

Blitz, D, van Vliet, P & Baltussen, G 2019. ‘The volatility effect revisited’, The Journal of Portfolio Management, vol.46, no. 2, pp.45-63.

Charlton, A 2019, ‘Fiscal policy in extraordinary times: A perspective from Australia’s experience in the global recession’, Economic Analysis and Policy, vol. 64, pp.83-90.

Eichengreen, B, 2018, ‘Deflation and monetary policy’, In Economic Stagnation in Japan. Edward Elgar Publishing.

Frydenberg, J 2020, Jobkeeper update, Office of the Hon Josh Frydenberg, viewed 19 June, 2020, < https://joshfrydenberg.com.au/wp-content/uploads/2020/04/Treasurer-Media-Release-JobKeeper-Update.pdf>

Gunji, H & Yuan, Y, 2018, ‘Bank diversification and monetary policy’, Applied Economics Letters, vol. 25, no.15, pp.1087-1090.

Hur, S.K, 2018, ‘Did fiscal stimulus lift developing Asia out of the global crisis?’.

Klapdor, M 2020, COVID 19 economic response social security measures part 2: $750 lump sum payments, Parliament of Australia, viewed 18 June

Lechevalier, S & Monfort, B 2018, ‘Abenomics: has it worked? Will it ultimately fail?’. In Japan Forum (Vol. 30, No. 2, pp. 277-302). Routledge.

Li, S.M. and Spencer, A.H., 2016. Effectiveness of the Australian fiscal stimulus package: A DSGE analysis. Economic Record, 92(296), pp.94-120.

Mercer, P 2020, Coronavirus: Australia’s economy faces unprecedented setbacks, BBC News, viewed 18 June, 2020, < https://www.bbc.com/news/world-australia-52131939>

Oulton, N., Rincon-Aznar, A., Samek, L. and Srinivasan, S., 2018. Double deflation: theory and practice.

Palley, TI, Caldentey, EP & Vernengo, M 2020, ‘Do current times vindicate Keynes and is New Keynesian macroeconomics Keynesian?’, Review of Keynesian Economics, vol,8, no.1, pp.21-22.

Prime minister of Australia 2020, Economic stimulus package, media release, Prime minister of Australia, viewed 18 June 2020, <https://www.pm.gov.au/media/economic-stimulus-package>

Sims, CA, 2016, ‘Fiscal policy, monetary policy and central bank independence’, In Kansas Citi Fed Jackson Hole Conference.

Taylor, JB 2018, ‘Fiscal Stimulus Programs During the Great Recession’. Economics Working Paper, 18117.

Treasury.gov.au c.2020, Economic response to the coronavirus, Treasury.gov.au, viewed 18 June, 2020

TTF Australia 2020, Estimated impact of coronavirus on the australian visitor economy, TTF Australia, viewed 19 June, 2020, < https://www.ttf.org.au/wp-content/uploads/2020/03/Economic-Impact-of-Coronavirus-TTF.pdf>

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