Analyses how microeconomic policies can be used to address the government's economic objectives. BY 234 Analyses how microeconomic policies can be used to address the government's economic objectives. Microeconomic reform has an important role to play alongside macroeconomic policy in achieving the government's economic objectives. Over the past two decades the government has introduced a variety of microeconomic reform policies to address the longer term, structural issues in the economy and to help achieve the government's primary objectives of sustainable growth, full employment, low inflation, external stability and income distribution.
Since the Howard government took over control of the senate, microeconomic reform has been taking center stage in the government's policy mix; this increase of activity has been speeding up the rate of structural change. Microeconomic reform involves actions to improve the efficiency, productivity and competitiveness of the individual industries. These policies create incentives for producers or increase the competitive pressure they face as a means to improve their allocation, technical and dynamic efficiency.
By increasing the overall efficiency and productivity of individual firms, the government aims to increase the overall level of aggregate supply, thereby increasing economic growth and international competitiveness without inflationary pressures emerging. As a result, they increase the sustainable level of economic growth. Microeconomic reforms are long term in nature and take longer to implement and to achieve the desired effect. Due to the long term nature of micro reform, the Australian economy is still reaping the benefits of micro reform policies implemented in the past two decades.
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While micro reform involves the implementation of a rang of policies specific to individual industries and firms, micro reform generally involves less regulation and a smaller role for government, greater competition from international markets, the use of new technologies and letting prices more accurately reflect costs. Microeconomic reform is used complementary to the government's macroeconomic strategy as it acts to achieve internal and external balance in the short to medium term.
Some of the more prominent areas to undergo microeconomic reform in recent years have been trade policy, labor market policy, competition policy and infrastructure policy. Economic growth is a key objective of economic management. Microeconomic reform aims to increase the sustainable growth rate. Because the increase in aggregate supply that accompanies MERE reduces inflationary pressure, the economy can grow rapidly without the need tort contraction monetary policy to reduce intentionally pressure. In this way microeconomic reform removes the "speed limit" on growth which can result from supply constraints. Insert AS DIAGRAM.
Micro reform is regarded as the major policy that has contributed to Australia's record productivity Roth and sustained strong economic growth since the early asses. A report by the productivity commission in 2002 concluded that micro reform added an extra 1 . 1% to annual productivity growth during the asses; which explains why Australia was able to sustain an average growth rate of 4% for most years since emerging from the sass's recession. Australia's economic performance over the past 1 5 years reflects the success of MERE, coupled with the use of pre-emotive monetary policy, in maintaining Australia's economic growth. He Australian economy has grown for 1 5 years with inflation averaging only 2. % over the past decade, within the Arab's target band. The most significant micro reform initiative in the asses was the implementation of the national competition policy reforms, following the 1993 Hillier report recommendations. These reforms were agreed upon by the Commonwealth and state government in April 1995. The Business Council of Australia reported in 2005, that these reforms have successfully resulted in an average annual rate of economic growth of 2. %, compared to 1. 9% in the absence of reform. Another key microeconomic reform comes under the governments competition policies in which forms increased national incomes through increases in net exports. Unilateral trade reform in the asses and bilateral and multilateral trade agreements in the asses led to across the board reductions in tariffs. Faced with an increase in competitive pressure, some firms lost market share to cheaper imports, but those which adopted more efficient production processes continued to prosper.
In addition Australia was able to achieve economies of scale through specialization. The lower export prices that resulted led to an expansion in demand for Australia's exports, adding to aggregate demand and economic growth. He government has in recent times, continued to further implement the phasing out of tariffs, with a reduction in average protection levels to 5% and further reduction of tariffs in the Personal Motor Vehicle industry to 10% and textiles clothing and footwear to 17. 5% on January 1st 2005.
Finally, through deregulation of the financial markets Australia has been able to achieve stellar economic growth. In the ass's the government floated the ADD and reduced its controls on how much money banks could lend. Consumers and businesses could access credit more easily from a greater variety of sources, including banks and non-banks, which has increase consumption and investment levels in recent years. Consumption and investment are key components of AD which have driven growth. A key focus of Microeconomic reform is external stability, a sector in which Australia is very poor.
Australia has a very poor net savings, consistent deficits on the Balance of goods and services which have all led to stellar Current Account Deficits, which is currently 5. 7% of GAP. Also adding to the problem of external stability is the emergence of supply side capacity constraints. Microeconomic reform actions wrought deregulation to individual industries will, in the long term, remove supply constraints; this will in turn increase the level of exports and reduce the deficit on the current account.
In the 06-07 federal budget, the government outlined a boost in road and rail infrastructure funding in rural and regional Australia, with the aim of increasing the competitiveness of freight train and improving the efficiency of Australia's national and local road networks; both are actions to help ease capacity constraints. Currently Australia business are witnessing booming profits from the Roth in the global demand of commodities, these profits are coming from the increase in prices rather than selling more goods, Australia businesses cannot sell more goods to take advantage of the demand due to capacity constraints.
These actions are used to improve international competitiveness. A major component of Australia's persistently high CADs are the poor savings ratio of Australians which is -2. 7% of GAP, this means Australians have a large reliance on foreign funds, which are adding to net foreign liabilities and worsening the CAD. In response to this a umber of reforms have been made, such as the induction of compulsory superannuation and the abolition of the superannuation exit tax in this year's budget. By removing the exit tax, the government is attempting to encourage more high income earners to save.
In this years budget the government also introduced the future fund' in which the government will pool surpluses and build a fund a superannuation fund for public sector workers, this will reduce Australia's reliance on foreign funds. Microeconomic reform also helps Australia achieve full employment without inflationary pressures. Employment is now down to 30 year lows of 4. 9%, this is due to a massive reduction in the level of cyclical unemployment, due to strong economic growth through the asses and asses, in part due to Seating's reforms to the labor market which has been furthered by the Howard government.
However, there has been an emerging trend of persisting high levels of structural unemployment which is approximately 5. 5% of the labor force. Australia's unemployment levels are suggesting that we have Just about reached the non accelerating inflation rate of unemployment, which can only be further reduced wrought the removal of capacity constraints as to not create inflationary pressures. This can only be achieved through microeconomic reform.
One of the most significant changes to the labor market was the implementation of the Workplace Relations act in 1996 and the recent Work Choices act, which attempt to boost productivity and encourage workforce participation. The WAR allowed for the simplification of awards as well as the introduction of Australian Workplace Agreements. These individual contracts decentralized the market and reduced the power of unions, under this act he IIRC was implemented to handle awards and disputes further decentralized industrial relations. The Work Choices Act of 2006 was implemented intending to increase flexibility in the labor market.
These labor market reforms aim to increase the role of enterprise bargaining, which will see a decrease in the relevance of unions and industrial relations tribunals in the wage negotiation process, which is positive as these groups are seen as impediments with the labor market that prevent the economy reaching full employment by artificially maintaining the wage level above the equilibrium wage level As such , the decentralized wage determination system will increase flexibility allowing the economy to easier reach the full employment equilibrium.
However, in the short term the economy will witness a short term rise in structural unemployment after the implementation of reforms, as there may be a mismatch of labor skills or UN-competitive businesses go out of business. The cornerstone of the Howard government's second term in office was the implementation of major tax reform, such as the introduction of the 10% SST along with others. The government has also made major reforms to income tax, in the 6-07 budget, the budget lowered the marginal rate of tax increasing the incentives to work, and increase labor productivity.
Other schemes to increase workforce participation are the implementation of policies such as Work for the dole and also the prevarication of the Job network, which both increase the chances for the unemployed to rejoin the workforce. Insert LIRA changing the NAIRA Lately we have been witnessing an increase in inflationary pressures, largely from growing capacity constraints. Cost-push inflation has been growing, which is widely impart to the slowing productivity growth. Multifarious productivity has fallen from 1. 8% per year in the mid to late ass, to Just 0. 4% in 2000. Labor productivity fell by 0. % in 2004, this combined with the effect of skill shortage and rising wages are adding to cost-push inflationary pressures. Also the emergence of supply constraints is a growing burden, as businesses are unable to expand production, which limits the supply of available goods and puts upward pressures on prices. Skill shortages have increased due to the increase wage bargaining power of employees, reflected by the wage price index at 4. 0%, up from a 3-3. % average in recent times. Micro reform is key in battling these problems, as they involve measures to improve efficiency, competitiveness and productivity.
As before mentioned, the government is spending on national road and rail networks, which should ease capacity constraints. Reform of the labor market, has pushed for strong productivity growth and moderate wage rises which has contained labor costs, thereby minimizing cost push inflationary pressures. The implementation of the National Competition policy, along with increased competitive pressures from further integration have made it increasingly official for businesses to increase prices, minimizing inflation.
The implementation of the ACE as the corporate watch dog is ensuring businesses are not engaging in ant-competitive behavior and adding to inflationary pressures. Also, under the national competition policy tariffs are being phased out, helping to reduce the prices of imported goods. The continued liberalizing of Australia's trade, through free trade agreements, will further see the decrease of prices. In 2005, the government established the Australian Energy Regulator, as part of the infrastructure reform agendas; this will act as a single and independent regulator of gas and electricity markets across the states.
This reform has the purpose of reducing the cost and complexity of regulation in the energy sector, encouraging greater competition. Microeconomic reform can worsen income disparity through creating structural unemployment. The tariff reform of the asses lead to industries closing in manufacturing sectors. Workers became structurally unemployed because their skills were no longer in demand. The structurally unemployed depend on transfer payments for income, which are set at a lower level than the minimum wages, rosining the distribution of income.
However, advocates of MERE claim this is a short term cost as labor can be redirected to industries with a greater capacity to pay. The shift to productivity based enterprise bargaining for wage determination has been a feature of the WAR and the Work Choices amendments of 2006. The legislation has also lessened the institutional role of unions through abolition of compulsory unionism. These changes benefit high skill workers who can independently negotiate wage increase but they disadvantage low-skill workers with little bargaining power and reduced union support.
The recent abolition of unfair dismissal laws may discourage wage rise claims as workers may fear their employment security if they pursue industrial action. These factors are likely to worsen inequality of income distribution. However, while micro reform can lead to income discrepancy, it can improve the purchasing power of wages so that low income earners nevertheless benefit. Under the Competition policy reforms, the ACE can fine companies for engaging in anti-competitive behavior such as price- fixing and monopolistic behavior.
Increase competitive pressure keep prices low, infecting low income earners the most because they consume a higher proportion of their income. Likewise, reductions in tariffs benefit low income earners because tariffs are a regressive tax, which consumes more of low income earners' disposable income. Whereas macro policies keep the economy growing at a sustainable pace, micro policies increase the rate of growth the economy can sustain without excessive inflationary pressure. The balanced use of macro and micro policies over the past 15 years has helped Australia achieve an unprecedented 15 years of consecutive growth.
Therefore when micro policies are used in conjunction with macro policies they can help the government achieve the goals of economic growth, external stability, price stability, full employment and income distribution. Although micro reform is regaining momentum in 2006, recent changes are unlikely to have an economic impact in the short term. Many economists argue that the Australia economy requires more comprehensive micro reforms, in order for the economy to continue its stellar growth performance. It is clear that micro reform has been a major part of the improved performance of the Australian economy in the last decade.
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