Macroeconomic Strategy

Macroeconomic policy is the policy framework managed by the Commonwealth Government in Australia that addresses the policy needed to develop the overall economy. In particular, macroeconomic strategy follows Keynesian ideology in which the governments should be responsible for economic problems (i.e. unemployment or inflation etc) rather than relying on market mechanisms. This article will examine important components of macroeconomic policy while compare and contrast to the alternative policy (i.e. microeconomic policy). In relation to Global Financial Crisis (GFC), it then critically reviews the current government’s macroeconomic policies such as the stimulus packages and adjusted monetary policy, and evaluates the costs and benefits of those policies.

Macroeconomic policy

Macroeconomics is one division of Keynesian economics that deals with issues of the entire economy. Keynes schools of thought studies aggregate indicators such as GDP, unemployment rates, and inflation etc to understand operations of the economy as a whole. Their models explain the relationship between aggregate factors such as national income, output, consumption, unemployment, inflation, savings, investment, international trade and finance. To stabilise the economy during economic crises, government use these models to assist them in making policy adjustments. The State believes that the economy’s strength and growth would be retained through the success of these adjustments.

Policy’s goals

The goals of macroeconomic policy include achieving economic growth. Economy should be expected with full employment, and incomes increases. Policies ensure stable monetary system and prices. Resources would be allocated to correct areas and used efficiently. Government should be responsible to provide public services such as national defence, public infrastructures, education and health.

Policy instruments

Policy instruments of macroeconomic management include fiscal policy, monetary policy, income policy, investment and industry policy (Stillwell 2006, pp. 291)

Fiscal policy manages the overall level of income, output and employment. The government macroeconomic policy adjusts budgetary behaviour to provide either expansionary or contractionary stimulus to the economy. According to Stillwell (2006, p.291), the budget’s deficit should deal with recession and unemployment. During recession, social security expenditures increase as there are more claims for unemployment benefits. Tax revenues tend to fall because less people are working thus lower average incomes. Injection of government expenditure into the flow of income helps to boost the overall level of economic activity and thus survive the recessions. In contrast, excess demand and inflation appear during economic boom because of falling government expenditures and rising tax revenues.  Budget’s surplus helps to reduce the rate of economic growth and inflationary pressures.

Monetary policy influences the supply of money and the cost of borrowing. This instrument can be used as a supplement or an alternative to fiscal policy. According to Stillwell (2006, p.292 – 293), because governments control the supply of money and level of interest rates, they may indirectly influence the ability of banks and financial institutions to provide credit facilities. These measures then influence the levels of consumption and investment in the private sector. With higher interest rates, cost of servicing debt will be more expensive and, thus discourage consumer spending and business investment, while low rates have expansionary effect. Interest rate policy can be a powerful mechanism of stabilising the economy’s growth path.

The government also influence economic activities through income policies and investment and industry policies. Minimum wage standards, centralised arbitration systems, direct controls over professional fees and rent, and other policies to control income sources can have some indirect effects in managing economic affairs. In addition, investment and industry regulations imposed by government also result in direct controls of investment expenditures (Stillwell 2006. p. 294 – 296).

Criticisms of macroeconomic policy

There are number of central criticisms with macroeconomics policy. There are problems in measuring aggregates such as GDP, national income, investment, employment and prices (e.g. CPI). The interactions between these aggregates are complicated. Manipulations of interest rates may influence exchange rates, thus levels of imports and exports. This may adversely affect the policy’s objectives. There are also significant time lags between the policy process and its economic effects (Stillwell 2006, p.294). Before the authority sees the need for a policy adjustment and an adjustment is decided, there may be a long period of time. Then consumer and businesses’ adjustments to their consumptions and investments’ behaviour may take another while, and more time before those decisions affect the output of goods and services. By that time the national economic conditions may have already changed. Moreover, ‘crowding-out’ effect may make fiscal policy to have no real effect on the economy (Peter Kriesler, p.8). If government expenditures were financed by taxation or by borrowing from the private sector, some private investments would be choked off. But, if increases in expenditures were raised by monetary expansion, the only effect would be inflationary.  Furthermore, there is also trade-off between inflation and unemployment as explained by the Phillips Curve. Fiscal policy could have no long run effect on the economy because it only influence inflation levels (Peter Kriesler, p.8). These criticisms of macroeconomic policy give rise to microeconomic policy as an alternative to manage the economy.

Microeconomic policy: the alternative

Microeconomic reform is seen as an alternative to macroeconomic policies designed to manage the economy. Instead of dealing with aggregate quantities to indirectly control the entire economy’s operations, microeconomic policies seek direct reforms in specific industry, organisation and individual to improve efficiency and productivity. Microeconomic reform is the application of market mechanisms to the provision of products and services to maximise the volume of outputs for given inputs available.

The first benefit of microeconomic reform is improved efficiency. Microeconomic reform improves the allocation of inputs to production activity. Efficient allocations of inputs are achieved through the removal of distorting policies. According to Borland (2001, pp. 4), an example would be a removal of tariffs on imported goods. Tariffs on imports raise the profitability of production of import-oriented goods in Australia. Hence more resources are assigned to production of import-competing goods. But Australian firms are not profitable from the tariffs because they might be less efficient than international firms that produce the same product.  A removal of tariffs would indirectly transfer resources to other areas where Australian firms are more efficient. Secondly, it raises the quality of inputs applied in production. For example, the value of output produced by a worker will increase if the skill of that worker is improved. Workers may be willing to undertake more training to increase their skills and hence increasing the range of tasks can be performed. Finally, the reforms result in localised decision making and responsiveness. These systems enable timely decisions to be made without time lags.

However, a microeconomic reform also has number of negative costs to the economy. There is loss of public service’s neutrality. Public goods or services cannot be charged individually for consuming them (Stillwell 2006, p.201), they should be freely provided to the public. Accountability may be lost for the services that have been contracted out. There is also loss of flexibility due to contract orientation. Capacity to produce previously in-house services might be eliminated as the required skills and knowledge are no longer practiced.

Current macroeconomic policy

In 2008-09, Australia had experienced massive implementations of macroeconomic strategy in confronting with the GFC. As the economy was facing the biggest slowdown since the early 1990s, the government announced two stimulus packages which were the $10.4 package in October 2008 and the $42 billion package in February 2009. As reported by the Daily Telegraph (2009), these stimulus plans mainly aimed to save 90,000 jobs over the next two years and protecting Australia against the worst of the GFC. The package was predicted to stimulate the economy by 0.5 per in 2008-09 and up to 1 per cent in 2009-10. At the same time, the Reserve Bank cut official interest rates to 3 percent, the lowest rate in 45 years (Ning 2009, p.4). As predicted by Grattan (2009), if this cash rate cut was fully passed on to commercial rates, it would take off $186 a month from the cost of servicing a $300,000 loan, and bring to more than $700 saving since peaked rates in mid 2008. The aim of this rate cut and bank guarantee were to boost investments in the private sector by reducing their financial expenses and enhance investor’s confidence. The Rudd’s government has simultaneously chosen two major macroeconomic instruments, i.e. the expansionary fiscal policy and monetary policy, to rescue the country from the GFC. The goals of fiscal policy in 2009 – 10 is to support economic growth though boosting aggregate demand by expansionary policy, to minimise unemployment, to boost Australia’s productive capacity and to increase spending on priority areas such as infrastructure, education, pension support (Ning 2009, p. 2). It is necessary to investigate the trade-offs between costs and benefits of these government policies.

The stimulus plan has resulted in number of positive outcomes. Businesses responded favourably to the stimulus packages. Business leaders agreed that it was released ‘quickly and responsibly’, and would create jobs and provide long-term economic benefit (Stafford, 2009).  Switzer (2009, p.4) reported that although the jobless rate rising from 4.5 per cent to 4.8 per cent, the figures however came from a greater number of people looking for work.  Accordingly, Davidson (2009) pointed out that the increase in unemployment is less than the size of the stimulus package suggested. He also suggested that “if our unemployment rate had followed with average OECD expectations, the unemployment rate would be 7.9 percent but still less than the budget forecast of 8.5 percent”. Inflation level has been reduced in from 5 per cent to 3.7 per cent and is expected to be in the 2 to 3 per cent target range of the Reserve Bank by 2010 (Davidson 2009). The export performance has been recorded as the largest annual increase in over 34 years (Switzer 2009, p.4). In addition, the Emerging Market Monitor (2009. p.9) assessed that Australia’s GDP growth remained positive with real GDP rising by a seasonally-adjusted 0.6% in the second quarter of 2009, up from 0.4% in the earlier quarter.  Also, the same statistics insist that Australia economy is revising the full-year growth forecasts upwards to 0.3%, from an earlier -0.8%, while maintaining our 2010 forecast of 1.9%. Private consumption rose by 0.8%, the retail trade sector expanded by 3.8% in quarter 2/2009. Australia’s economy has experienced good results from the government macroeconomic policy.

The costs associated with the stimulus package cannot be overlooked. Its long –term effectiveness is however doubtful. Grattan (2009) reported in her article that growth forecast has fallen from 2 per cent in the 2008 November to 1 per cent in 2008-09 and 0.75 per cent in 2009-10. Nevertheless, the threatening issue is the massive government and Balance of Payment deficits. The fiscal deficit is recorded of $53.1 billion in 2009-10 which will result in equivalent to 4.5 percent in 2009/2010 and 4.7 percent in 2010/2011 (Ning 2009, p.3). This deficit is projected to remain until 2015. Even though, Australia has a lower deficit relatively to OECD countries but it has been increasing rapidly. Mr Turnbull (The Daily Telegraph 2009) has stated that a budget was going from a $22 billion surplus to a $22 billion deficit in nine months. There are concerns about the prospect of a long-term budget deficit, especially if the Government must impose more stimulus measures. This massive deficit means a heavy duty for next generations to work harder to repay these debts. Australia would be in a threat of ending up as in recent ‘Greek debt crisis’ (Bryan, 2010). The stimulus packages may fail to keep the economy from the effects of recession if its consequence is another crisis.


In conclusion, macroeconomic strategies, particularly 2009 stimulus package and interest rate cut, have played an important role in the GFC recovering process. Although, the stimulus is welcomed, it must be ensured that the cash-handouts were used to the best effect as said by Mr Turnbull (The Daily Telegraph 2009). It is now the responsibility of the recipients of those cash bonuses to stimulate the economy and to repay the country’s debts.


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