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Economic objectives in relation to:

• economic growth and quality of life

• full employment

• price stability

• external stability

• environmental sustainability

• distribution of incomeA major aim of the government is to stablise fluctuations in the business cycle. This is called the conduct of

counter cyclical or stablisation policy

The three main objectives of the government economic policy are:

Economic Growth: Which is sustainable in terms of delivering rising real incomes whilst minimising

inflationary pressures and the current account deficit as a percentage of GDP

Internal Balance: Which refers to the achievement of full employment of resources (including labour) and

price stability (inflation)

External Balance: Which involves financing import expenditure with export income, stability of the exchange

rate and the levels of net foreign debt and net foreign liabilities as a percentage of GDP

Economic Growth and Quality of Life:

Economic Growth: involves increasing the economy’s production of goods and services over time and is

measured by changes in real GDP (GDP adjusted for inflation)

Economic growth is important because:

Increase in rate of economic growth leads to rising real per capita incomes, employment

opportunities and rising standards of living

Economic growth leads to an expansion in an economy’s productive capacity and creates extra

employment, hence helps to reduce existing unemployment

Economic growth opens up more opportunities for investment In private intrastructure (more capital)

and public infrastructure (transport, health and education), these can increase the economy’s

productive capacity in the future

Economic growth leads to more opportunities from international trade and investment through

specialization of production due to comparative advantage. Higher growth rates can lead to increased

exports and employment in export industries

Fullemployment:

Full employment refers to the objective of full employment of the economy’s resources of land, labour,

capital and enterprise

Full employment occurs when the demand for labour equals the supply of labour. However it does not mean

that unemployment will be zero in the labour market as some unemployment will exist due to

fictional and structural unemployment. This is known as the natural rate f unemployment

The Non-Accelerating Rate of Unemployment (NAIRU): is the rate of unemployment that is consistent with

constant or non accelerating inflation

The NAIRU is estimated at 5-6% of the workforce, however this means that even if inflation is not increasing,

frictional factors would mean that unemployment would be around 5-6%

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The government attempts to keep unemployment at the NAIRU by containing inflation and using labour

market reforms to reduce the natural rate of unemployment by increasing productivity and efficiency of

labour

Okun’s Law:

Okun’s Law states that the rate of economic growth must exceed the sum of the productivity growth and thegrowth in workforce for unemployment to fall

Eg: Unemployment will fall if:

Economic Growth 4% > Productivity Growth (2%) + Labour Force Growth (1%)

Benefits of reducing the rate of unemployment:

Increasing productive capacity

Increasing living standards

Minimising social and economic costs of unemployment as evident in the GFC in 2008-09

Price Stability:

Price stability or low inflation is a major objective of the government because rising inflation reduces real

incomes and living standards

Rising inflation can cause misallocation of resources and loss in international competitiveness

Rising inflation can lead to inflationary expectations (wage and price demands) which can cause the wage

price spiral, leading to acceleration rate inflation

The target for inflation is 2-3% of CPI

External Stability:

External stability: Refers to Australia’s goal of meeting its short and long term financial obligations with the

rest of the word. It can be classified into three main dimensions:

1: Ensuring the current account in the balance of payments is in equilibrium. This means that income fromexports, Australia’s assets overseas and transfers finances expenditure on imports, external liabilities and

transfers

2: Maintaining the exchange rate in the current markets through international confidence in the Australian

Economy’s performance and conduct of government’s policies

3: Ensuring that the levels of net foreign liabilities and net debt are sustainable as percentages of GDP

The target band for external stability is -5% of GDP

Environmental Sustainability:

Environmental sustainability as a government policy means that the current levels of economic growth and

development should meet the needs of the present generation without compromising the ability of future

generations to meet their own needs

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Environmental sustainability can be achieved by:

Maintaining environmental quality such as clean air and water

Preserving both renewable and non renewable resources

Meeting the obligations to the Kyoto and Montreal Protocol

Reducing greenhouse gas emissions

Signing treaties such as World Heritage Site listings

Equitable Distribution of Income:

The objective of the government is to achieve a more equitable distribution of income and to reduce the

extent of relative poverty in Australia be redistributing income from the rich to the poor. The methods of

implementation include:

Proving transfer payments to disadvantaged social groups unable to earn market income

Making the taxation system progressive to redistribute income from high to low income earners

Using a proportion of taxation revenue to finance spending on elements of social wage such as public

education, health, transport, housing and community services

Reducing the incident of poverty traps through selective targeting of welfare assistance

Potential conflicts among objectives:

Achieving a simultaneous reduction in unemployment and inflation.

o stronger aggregate demand causes job growth

o weaker aggregate demand holds prices down

o refer to the Phillips curve, inverse relationship between inflation and unemployment

economic growth and external balanceo Increased economic growth --- leads to increased consumption and investment

o This can lead to a increase in the CAD as the demand for imports rises

o Note the definition for balance of payments constraint ie reflects the extent which a high current

account deficit limits the speed at which the economy can grow.

o Money that could be used to expand the economy are being used to service the debt that is owed

overseas

econ growth ---- environmental damage (increase economic growth by more mining, coal fired power

stations) and greater inequality in income distribution (trying to reduce carbon emissions may have

negative social side effects such as private companies putting up prices, macroeconomic policies creating

structural unemployment)

long term policies can have high short term costs, eg structural change can have increased unemployment

and substantial losses in the short term

political considerations often lead to short term decision making---long term decisions don’t show

benefits for a long time.

Goals in government policies 2011:

Economic Growth:

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The government economic policy shifted from stimulating the economy to avoid recession to maintaining a

stable rate of economic growth at around 3-4% (Economic Growth)

Announcement that the government well retain a budget surplus by 2012-13 (Economic Growth)

Inflation:

The RBA and the Government targets an average inflation rate of 2-3%

The government is driven by the pursuit of low inflation so that reduce interest rates, foster investment and

encourage a higher level of savings in the long term, hence sustain economic growth

The government shifted policy settings to mildly contractionary to contain inflationary pressures in the

economy

National Savings:

The government aims to increase both public and private savings, aims to create a budget surplus by 2012-13

By constraining the growth of government spending and allowing tax revenues to rise, the government

expects to achieve a surplus and then pay off its net debt

Encourages private sector savings, such as increasing superannuation contributions

Supporting a sustained reduction in unemployment:

The government aims to keep unemployment around 5-6% and aims at reducing cyclical unemployment and

addressing issues such as –relocating to areas of greater job availability and improving the labour force

participation rate

Boosting Australia’s productivity growth and international competitiveness:

-The government is committed to lifting productivity growth as a central priority by promoting competition in

markets, reducing government regulation, investing in education and infrastructure

-Increase in productivity would have higher international competitiveness in world markets, helping to lift

living standards in the long term

Increasing the sustainable rate of growth in the longer term:

-The government aims at lifting productivity growth to and labour force participation rate

-By lifting productivity it would maximise the rate of economic growth

Promoting environmental sustainability:

-The government introduced the Carbon Tax

- Policies to promote environmental sustainability include incentives to increase use of renewable energy

sources, investment in low carbon technologies, improved energy efficiency, reforming the management of

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water resources, minimising pollution and waste, preserving natural habitats and improving land-use

practices

Macroeconomic Policies and the Stabilisation of Aggregate Demand:

Macroeconomic policies are used to stablise the aggregate level of economic activity of aggregate demand

The two main macroeconomic management tools are fiscal and monetary policy

Fiscal Policy: Refers to the government’s use of federal budget to affect the level of economic activity, income

distribution and resource allocation in the economy. Fiscal objectives are achieved through taxation and

government spending

Monetary policy: Refers to the government’s ability, through monetary authority such as the RBA to affect

the level of interest rates in the economy. Interest rate changes directly affect the growth and cost of credit,

hence influences spending, output, prices and employment in the economy. Used for counter cyclical

stabalisation in the economy as it is quicker to implement than fiscal policy

Macroeconomic policies operate on the demand side of the economy. Change in aggregate demand impact

the growth of output (GDP), employment and prices

Changes in macroeconomic policies occur when the economies equilibrium level of income or output does not

coincide with full employment level of income

If aggregate demand is less than aggregate supply at the full employment level of income, a deflationary

gap may occur in the economy and result in a rise in the rate of unemployment

If aggregate demand exceeds aggregate supply at the full employment level of income, an inflationary gap

may emerge and leads to rising price

levels and inflation

The deflationary gap can be closed by:

Government can ease the stance of monetary policy through lower interest rates to encourage

consumption and investment spending and increase growth. Lower interest rates would encourage

more borrowing and spending

Government can adopt a more expansionary fiscal policy (through a large budget deficit or smaller

budget surplus) by cutting taxes or increasing government spending to stimulate aggregate demand

The inflationary gap can be closed by:

Government raising interest rates in the economy to discourage consumption and investment

spending and he growth in aggregate demand to close inflationary gap

Government could adopt more contractionary fiscal policy stance by raising taxes or cuttinggovernment spending to reduce the growth of aggregate demand. This can raise the budget surplus

or reduce budget deficit

Macroeconmic policy:

Impacts the overall economy

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Influences aggregate demand

Eg: Fiscal, Monetary

-Main aim is to smooth out fluctuations in the business cycle

-Low inflation unemployment and stable economic growth

To reduce economic activity

-Increase taxes

-Reduce government spending

-Interest rates

Stimulate Economic Growth:

-Reduce taxes

-Increase government spending

-Decrease interest rates

More suited to short term problems

Is a demand side policy, increases or decreases aggregate demand

These are counter cyclical, maintain sustainable economic growth

To reduce economic growth, you can tighten fiscal policy

To stimulate, they have a loosen macroeconomic policy

Macroeconomic policies are directed at stabilising aggregate demand for aggregate level of economic

activity. Macroeconomic policies operate on the demand side of the economy because changes in thestance of Monetary or Fiscal policy will impact aggregate demand. Changes in AD will impact output

(GDP), employment prices

Macroeconomic policies tend to be counter cyclically and are used to primarily address fluctuations in

economic growth, employment and inflation which would have negative effects on aspects of the

economy

Macroeconomic policies are efficient in stimulating or dampening the economy in the short term but

are limited in achieving long term economic goals. Effective use is when combined with economic

reforms to affect changes over the long term

Limitations on policy implementation:

Time Lag: Are the length of time elapses between a change of an economic policy and its effects on real

economic activity and economic behavior

1: Policy formation lag: This includes recognition lag (time taken for government to realise a macroeconomic

problem exists) and implementation lag (time taken to implement the policy)

2: Autonomous expenditure lag: Refers to the effect of changes in the stance of fiscal and monetary policies

on the AD which are independent of income, such as C, I + G and M. Fiscal policy is faster to implement than

monetary policy and is much quicker

3: Induced expenditure lag: Time taken for changes in monetary and fiscal policies to alter autonomous

spending and induce a multiplier effect on aggregate demand and national income

4: Price adjustment lag: Time taken for changes in monetary or fiscal policy to affect the price level

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Global Influences: Are changes in world and regional business cycles and their effects on international output

and trade, international investment and financial flows

Real shocks: Global Financial Crisis and Global Resource Boom, during the GFC the government had to stop

other policy implementation plans and ease the stance of both fiscal and monetary policies to prevent the

economy from going into a recession. During the Resource Boom the government had to use tightened

monetary and fiscal policy to cap economic growth and inflation

Financial Deregulation: Has led to mobile capital flows in world financial markets, short term fluctuations in

the exchange rates and causes imbalance in the CAD. The government is forced to implement microeconomic

policies and fiscal policy to counter cyclically balance changes in the business cycle and raise national savings

Trends in World Economic Policies: negotiation s to reduce protection in trade barriers has resulted in

implementation of microeconomic reform to increase the economy’s productivity and international

competitiveness

Political Constraints: Parliamentary democracy, if a party has the majority of seats in the lower house or

House of Representatives; it makes it easier for them to pass on new policy changes

Lack of seats in House of Representatives, Senate: Some independents, democrats, greens may not agree on

the government’s policy implementation plans as evident in the Carbon Pollution Reduction Scheme. Hence,

this can lag the implementation of the policy until enough votes are there to pass the legislation. However,

dissolution can be undertaken where the Lower and Upper Houses are reelected

Economic Policy Instruments And Objectives:

The macroeconomic theory suggest that a government should have at least as many policy instruments as the

number of objectives it is trying to achieve. This is known as the targets and instruments approach. Thegovernment has greater policy flexibility and does not need to achieve more policy objectives than it has

policy instruments

The government uses two macroeconomic policies (monetary and fiscal policies) in the medium term and

microeconomic policy instruments (long term) to achieve the three objectives of Internal Balance, External

Balance and Economic Growth

The government then assigns each policy instrument to an objective the government is trying to achieve, this

is known as policy assignment

Policy Assignments:

Monetary Policy: Has been assigned the role of counter cyclical stabalisation through the use of an inflation

target for the conduct of monetary policy by the RBA

Fiscal Policy: Has been assigned the role of achieving external balance by ensuring that the budget is kept in

balance over the medium term so that higher public saving can be used to reduce Australia’s need for foreign

savings

Also aimed at counter cyclical stabalisation of economic conditions, contractionary fiscal policy stance to

reduce inflationary pressures and expansionary fiscal policy stance to increase economic growth

Microeconomic Policies: Have a long term focus by changing the allocation of resources in the economy. They

promote structural change to make product and factor markets more competitive, efficient and productive.

Examples include: Labour market reform, financial deregulation (removal of tariffs and quotas) and national

competition policy

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Fiscal Policy:

Federal Government budgets and budget outcomes:

Fiscal Policy: Refers to the government’s use of federal budget to affect the level of economic activity, incomedistribution and resource allocation in the economy.

The main two instruments of fiscal policy are government spending (G) and taxation (T), these impact on the

following variables of:

Aggregate Demand

Pattern of Resource Allocation

Distribution of Income

Budget: The tool of the government for the exercise of fiscal policy, it shows the government’s planned

expenditure and revenue for the next financial year

Budget Outcomes:

There are three possible budget outcomes:

1: A balanced budget G= T (government revenue finances all of government spending and the budget balance

is zero)

2: A budget deficit G > T (government spending exceeds government revenue and budget balance is negative)

3: A budget surplus G < T (government spending is less than government revenue and the budget balance is

positive)

The budget would be in a surplus when:

Increases incomes = more tax revenue

Decrease in unemployment = more tax revenue

Increasing Economic Growth = less government spending

Increased consumption = more direct and indirect tax revenue

When the opposite occurs, the budget would be in deficit

Stances of Fiscal Policy:

Neutral Stance: implies balanced budget where G = T. Government spending is fully funded by taxation

revenue and the overall budget outcome has a neutral effect on the level of economic activity as the budget

balance is zero

Expansionary stance: involves an increase in government spending (G>T) through a rise in government

spending or a fall in taxation revenue or a combination of two. This will lead to a larger budget deficit or

smaller budget surplus than the government previously had. Expansionary fiscal policy will lead to an increase

in economic activity as the budget balance is negative

Contractionary fiscal stance: Occurs when (G<T) net government spending is reduced either through higher

taxation revenue or reduced government spending or a combination of both. This leads to a lower budget

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deficit or a larger budget surplus than the government previously lad. Contractionary fiscal policy is associated

with a budget surplus

Structural and Cyclical Components of the Budget Outcome:

Structural/Discretionary component: refers to deliberate changes in government spending and or taxation

policies that affect the budget outcome

Cyclical or non discretionary component: refers to changes in government spending and/or revenue which

are caused by changes in the level of economic activity or national income that affect the budget outcome

Automatic or inbuilt Stabalisers:

Automatic Stabalisers: Are non discretionary government policy instruments in the budget that

counterbalance economic activity. In a boom they decrease economic activity and in a recession they increase

economic activity. The most common examples are progressive tax systems and transfer payments

Counter-cyclical: Are economic policies designed to smooth fluctuations in the business cycle.Macroeconomic policies such as fiscal policy and monetary policy are usually used at counter-cyclical policies

Automatic Stabilisers:

Progressive Taxation: Tax payers pay an increase proportion of income as tax as income rise in a boom and a

lower proportion of their income in tax as incomes fall in a recession

Taxation revenue rises as economic activity expands in a boom helping to contain growth in aggregate

demand and possible inflation

Taxation revenue falls as economic activity contracts in a recession or downswing helping to maintainspending and aggregate demand, offsetting trend towards low economic activity

Expenditure on welfare payments: Unemployment benefits rises when the rate of unemployment increases

in a recession as eligible persons sign up for benefits. This increases government expenditure and helps to

raise aggregate demand

In a period of increasing economic activity, unemployment falls, hence government expenditure on

unemployment benefits falls, helping to contain aggregate demand and inflationary pressures

In addition to the automatic Stabalisers, the government may use discretionary fiscal policy to stablise the

economy in the medium term. Evident through the stimulus package during the GFC

Effects of budgetary changes on resource use, income distribution and economic activity:

Effect on Economic Activity:

Changes in the fiscal policy stance can affect the level of economic activity through changes in the

budget outcome

Fiscal policy stance is measured by changes in structural/discretionary changes in the budget outcome

Expansionary fiscal policy would create a larger budget deficit or a low budget surplus but increase

aggregate demand, hence economic growth

Contractionary fiscal policy stance can lead to a smaller budget deficit or larger budget surplus but

reduce the growth of aggregate demand and economic activity

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The 2008-09 GFC meant that the Rudd government had to use expansionary fiscal policy stance in the

2008-09 and 2009-10 budgets to support aggregate demand and employment

They also used a structural/discretionary policy stance through the stimulus package, examples:

National Building Package on education health and infrastructure in the 2008-09 and Nation Building

and Jobs Plan in 2009-10 to support infrastructure investment and employment

Allocation of resources:

The government can affect resource allocation directly by spending in a particular area, eg: a

underground tunnel across a city

The government can influence resource allocation indirectly by reducing taxes or increasing taxes, tax

cuts from ethanol production can make it suitable for farmers to use more of their wheat and sugar

cane to produce ethanol

Governments are more likely to use direct measures if they expect that markets will not provide theresources quickly enough without government intervention, eg: natural disaster

The government may also pay directly to provide public goods (goods that are not produced by the

private sector as they are unable to restrict usage and benefits to those willing to pay for the good).

These include: national deference and environmental protection

The government can use specific taxing and spending policies to meet certain objectives. Government

wants to discourage the consumption of products such as tobacco, hence increase the tax on them, in

the long term this reduces cancer and the health care cost of taking care of cancer patients

Impact on income distribution:

Increases in spending on community services such as health care and labour market programs or

increases in welfare payments such as age pension will reduce income inequality as they have a

greater proportional benefit for low income earners

Government spending cuts often increase income inequality as low income earns tend to rely on

more government services than higher income earners

Methods of financing deficits: If the government plants to record a budget deficit G > T, it has to finance the

revenue

Borrowing from private sector:

The government can borrow funds from the private sector by selling Commonwealth securities, this is called

deficit, bond or debt financing. It requires that the money is paid back with interest

The value of the bonds are sold according to size of the budget deficit

The government accepts lowest tenders first (offers to pay the lowest rate of interest) and then the higher

tenders (high rates of interest)

Advantages:

No change in money supply, as the money borrowed from private sector returns back to the private

sector as the government spends the money though its budget

There is no increase in net foreign debt as the government has not borrowed funds from overseas

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Disadvantages:

Debt financing may increase interest rates and hence increase the cost of borrowing for the private

sector undertaking investment and expansions

It can lead to the crowding out effect (where government spending is financed through borrowing

from the private sector, which puts upward pressure on interest rates and crowds out the privatesector investors who cannot borrow at higher rates of interest)

The crowing out effect means that the budget deficit will soak up funds in Australia’s savings pool,

reducing private sector spending and investment

Higher domestic interest rates would mean that it may increase capital inflow, raising the exchange

rate (appreciation) and reduces Australia’s export’s international competitiveness

This may increase the demand for imports whilst the exports suffer, increasing the net primary deficit

in the CAD

It also leads to an accumulation of national debt by the government

Borrowing from the RBA:

The government can instruct the RBA to print more money to cover the shortfall in budget deficit, this is

known as monetary financing

The government sells new government securities to the RBA, which the RBA is obliged to buy and then credits

the government’s account with cash

Advantages:

There is no change in interest rates or accumulation of public debt

Disadvantages:

Increase in money supply during full employment can cause a rise in inflation

If used frequently, the businesses and consumer confidence on the government’s economic

management can decrease

Borrowing from overseas:

The government can get the RBA to sell government securities for foreign currencies

The RBA credits the government’s account with the desired loaned amount of money

Advantages:

No increase in domestic interest rates

Disadvantages:

Accumulates net foreign debt

Increases the size of the CAD

Increases debt servicing costs through interest repayments

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The government can also sell Commonwealth assets such as land and ownership of businesses such as Telstra

to create extra revenue

Use of a surplus:

The government can use a budget surplus to reduce the debt owed to the private sector in a process

called "retiring debt". The government buys back the government securities from the private sector.Repaying this debt means that there are no interest servicing costs

The government can accumulate the surplus to finance future expenditures or fund tax cuts are

present. It can also increase spending on productive assets such as infrastructure and education such

as the "Education Revolution" in the Rudd Government

The government can use the budget surplus to repay the debt accumulated overseas. The advantage

of this is that it reduces Australia's net foreign debt and reduces the interest servicing costs under net

primary income account in the CAD

Monetary Policy:

Purpose of monetary policy:

Monetary policy: MP involves the actions of the Reserve Bank of Australia (RBA) on behalf of the government

to influence the cost and availability of money and credit in the economy

The Reserve Bank Act 1959 sets out the objectives for the RBA and Monetary Policy for the Australian

economy ie

Stability of currency ( maintaining low inflation and stable exchange rates)

Maintenance of full employment (decreasing unemployment)

Economic prosperity and welfare of the people of Australia (sustainable economic growth)

Policy Objective Intermediate Target Policy Instrument

Price Stability CPI inflation of 2% to 3% on

average over the economic cycle

Manipulation of the cash rate

through open market operations

Full Employment NAIRU of 5% to 6% of the labour

force

Changes in the cash rate

Economic Growth Sustainable Economic Growth of

3% to 4$ over the economic cycle

Changes in the cash rate

The RBA can implement two types of monetary policy, these are loosening and tightening monetary policy:

Loosening monetary policy (reducing interest rates): Lower interest rates would boost consumer and

business investment spending, resulting in a higher level of economic activity and a reduction in

unemployment. However, if growth rises too fast, inflationary pressures can increase and increase inflation

Tightening monetary policy (increasing interest rates): Would tend to reduce inflation but slow down the

rate of economic growth and increase unemployment in the economy

Neutral Stance: Where there is no change in the cash rate and the reserve bank does not tighten or loosenmonetary policy

Inflation Targeting: Inflation targeting is an economic policy in which a the RBA estimates and makes public a

projected, or "target", inflation rate and then attempts to steer actual inflation towards the target through

the use of interest rate changes and other monetary tools

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-Interest rates were distorted by political pressures in the past, especially during elections and governments

kept interest rates low during times of peaks in the business cycle to avoid getting kicked out of government,

however having an external controller such as RBA prevents such occurrences

-Adopting inflationary targeting framework helps to sustain low inflation and avoid higher interest rates,

having inflationary targets helps to reduce inflationary pressures and expectations of consumers and

businesses, hence reducing inflation itself

-The RBA aims to keep inflation at 2-3% at all times, excluding headline shocks/changes which are out of the

RBA’s control such as natural disasters putting up interest rates

-Inflation targeting allows the economy to achieve its objective of full employment and helps to reduce

unemployment and keep unemployment within the NAIRU 5-6% rate. Monetary policy can be used to cap

inflation to a needed amount

-A target makes the conduct of monetary policy credible if the target is achieved over time

Indicators considered by the RBA when setting monetary policy:

Inflation Rate

Inflationary Expectations

Wages Growth

Rate of Unemployment

Rate of Economic Growth

Interest Rates

Exchange Rates

Balance of Payments

Implementation of monetary policy by the Reserve Bank of Australia:

How Domestic Market Operations Work:

Domestic Market Operations: Are actions by the RBA in the short term money market to buy and sell second

hand Commonwealth Government Securities in order to influence the cash rate and the general level of

interest rates

Exchange Settlement Accounts: Are funds held by banks with the Reserve Bank of Australia in order to settle

payments with other banks and the RBA

Cash rate: Is the interest rate paid on the overnight loans in the short term money market

Government Securities: Bonds or other certificates issued by the government

Repurchase Agreements: A contract in which the vendor of a security agrees to repurchase it from the buyer

at an agreed price

Money supply including a definition of M3: Sum of currency and different types of deposits at banks

Transmission Mechanism: Explains how changes in the stance of monetary policy pass through the economy

to influence economic objectives such as inflation and economic growth

Banks need to hold a certain proportion of their funds with the Reserve Bank in ES accounts in order to settle

payments with other banks and the RBA

Eg: When a customer of the ANZ bank uses a cheque to buy goods or services from a business that has an

account at Westpac Bank, funds will flow from ANZ Bank’s ES accounts to Westpac Bank’s ES account

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At the end of every trading day, the settlements between banks will cancel each other out (for every bank

that gains funds, another will lose funds)

Hence, the net supply of funds circulating in the accounts is the same

Some banks will have to borrow funds to settle their accounts whilst other will have surplus funds and could

lend and earn interest

Increasing Cash Rate:

Decreasing Cash Rate:

Impact of changes in interest rates on economic activity and the exchange rate:

Transmission Mechanism: Explains how changes in the stance of monetary policy pass through the economy

to influence economic objectives such as inflation and economic growth

Effect on consumption, investment and savings decision:

Higher interest rates will discourage borrowing and spending on consumption and investment but

encourage saving

Lower interest rates would encourage borrowing and spending on consumption and investment but

discourage saving

RBA board meets on first tuesday of the month and announces the inention to increaseinterest rates (contractionary monetary policy)

RBA Sells Government Securities and buys Australian Dollars, decreasing supply of$A in circulation

Decreasing supply puts upward pressure on cash rate and raises the cost ofborrowing

An increase in the cash rate would cause an increase in the interest rates by banksand financial institutions

RBA board meets on first tuesday of the month and announces the inention todecrease interest rates (expansionary monetary policy)

RBA buys Government Securities and sells Australian Dollars, increasing supply of$A in circulation

Increase in supply puts doward pressure on cash rate and decreases the cost ofborrowing

An decrease in the cash rate would cause an decrease in the interest rates bybanks and financial institutions

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Altercations in the cash flows between borrowers and lenders:

Higher interest rates will reduce cash flows for households, business and governments as more cash

has to be paid to service existing debt

Lower interest rates will increase cash flows as less money has to be paid to service existing debt

Effects on asset prices such as homes, cars, shares and bonds:

Higher interest rates would discourage borrowing and spending on the acquisition of financial assets

and lead to a fall in asset prices such as house and share prices

Lower interest rates would encourage borrowing to purchase financial assets, and lead to higher asset

prices

Effects on the exchange rate and relative prices on exports and imports:

Higher interest rates will encourage capital inflow, increasing the demand for Australian dollars, and

lead to exchange rate appreciation

An appreciation will reduce the cost of imports but raise the cost of exports, hence would have a

contractionary affect on the economy

Lower interest rates would lead to capital outflow, increasing the supply of $A and lead to exchange

rate depreciation

Depreciation would increase the cost of imports but reduce the cost f imports

Lower interest rates have an expansionary affect on the economy

Effect on Inflationary expectations:

Higher interest rates will reduce inflationary expectations by reducing wage and price demand

Lower interest rates will increase inflationary expectations by increasing wage and price demands

Transmission Mechanism:

Higher Interest rates:

Contains inflations and reduces consumption, investment, government and import expenditure

Lower domestic spending will reduce output and economic growth

If output growth slows, employment and inflationary expectations will also slow

Exchange rate will appreciate and have a contractionary affect on the economy and helps to reduce

inflation and achieve price stability

Lower Interest Rates:

Stimulate economic growth by increasing consumption, investment, government and import

expenditure

Higher domestic spending will increase output and economic growth

Changes in the

cash rate

Changes in other

interest rates (banks)

Changes in Domestic

Spending

Changes in Output, Employment

Prices, the Exchange Rate and

Expectations

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If output rises, employment growth rises and so do inflationary expectations

Exchange rate depreciates, having an expansionary effect and causing an increase in export

competitiveness

Lower interest rates have an expansionary effect on the economy, allowing the RBA to reduce

unemployment

Macroeconomic policies

Rationale for macroeconomic policies – stabilisation and shifts in aggregate demand:

Rationale for microeconomic policies including shifts in aggregate supply, efficiency, these policies

increase the productive capacity of an economy

Microeconomic Policy: The actions taken by Governments to improve resource allocation between

firms and industries leading to improved efficiency, productivity and international competitiveness.

Productivity: refers to output per unit of input over time

Microeconomic policies are supply side policies used to increase the economy’s long run aggregate

supply curve or productive capacity (maximum level of output in an economy)

Insert Aggregate Supply and Discuss

Microeconomic can operate simultaneously with macroeconomic policies to improve the efficiency of

resource allocation in the economy in the long term

Measures of Productivity:

Labour Productivity =

Capital Productivity =

Multifactor Productivity (a greater productivity than just capital and labour productivity)=

Effects of microeconomic policies on individual product and factor markets, individual industries and the

economy

The three main types of efficiency gains from Microeconomic policies are:

Technical or productive efficiency: Firms producing output using the least cost combination of

resources. This means producing the maximum output at the minimum average cost. This is

producing at the technical optimum

Allocative efficiency: Involves firms charging prices which reflect the marginal cost of production so

that resources are allocated in such a way to reflect consumer preferences for goods and services

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Dynamic efficiency: Firms adapting to changing economic circumstances by using the latest cost

reducing technology to meet changing consumer preferences. This is also known as inter-temporal

efficiency

The strong growth in Australian labour productivity in the 1990's and 2000's reflected:

-Increases in capital per works, which is known as capital deepening

-Improvements in the quality of labour though education and training

-Improvements in efficiency to which labour and capital are used in production

Microeconomic policies are characterised by:-

-A change in the pattern of production in an economy over time

-It results in changes to products and the processes of production as well as the elimination of some

industries and the emergence of other industries.

-Directed at aggregate supply or output side of the economy

-They attempt to improve the economy's allocation of resources in long run

-They are directed at product/consumer markets where final goods and services are sold, and factor markets

where productive inputs such as land, labour and capital and enterprise are bought and sold

-They impact on both tradable goods sector (export and import competing firms) and the non-tradable goods

sector (mainly domestic public sector) of the economy

-They target both government owned and operated businesses as well as privately owned and operated

enterprises

What has happened to Australian industries over the past century?

Microeconomic policies have lead to structural changes in the Australian Economy to make it more

productive, efficient and competitive. Structural change was induced from both changes in markets and

technology as well as government policy. Opened Australia into the effects of Globalisation, has to compete just not domestic producers but foreign competitions. Production methods, technology has changed and

consumer tastes and preferences. Had to have structural change to survive in the global economy

Causes of structural change:

Market Based Structural Changes:

-Increasing importance of the services sector as a contributor to GDP and employment

-The impact of technological change and use of ICT goods in reducing production costs and prices

-The increasing integration of the Australian economy into the global economy, with exports and imports

rising from 12% of GDP in 1990 to account for more than 20% of GDP by 2010

-The growth of the East Asian market, especially China in influencing the Australian trade patterns

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-The changing composition and distribution of the Australian workforce

-Changes in Australian consumption patterns with the greater expenditure (as a proportion of household

disposable income) on services relative to goods

Government Microeconomic Reform Policies:

-The application of national competition policy in 1995 to strengthen competitive pressures in markets in order

to raise technical efficiency and allocative efficiency and lower consumer prices

-Reductions in the levels of industry assistance in 1988, 1991, 2005 and 2010, though tariff reform to increase

the competitiveness of Australian industry and the volume of exports

-Increases in the efficiency of public trading enterprises (PTE's) which provide infrastructure, though the

policies of privatisation, deregulation, commercial and corporatisation

-Increases in the productivity of labour and capital through reforms to capital and labour markets such as

financial deregulation and the productivity based system of enterprise bargaining

-Improvements in the tax system such as broadening of the tax base (introduction of fringe benefits and

capital gains taxes) and reducing the tax burden through cuts to marginal tax rates and raising the income tax

thresholds in federal budgets

Constraints on structural change.

-Structural unemployment

- Increases in current account deficit

-Low levels of productivity

-High inflation

-Low Savings

Why is structural change important?

Structural change is important because it can lead to:

-Lower inflation outcomes through a system of competitive domestic markets

-Lower rates of unemployment though reforms in the labour market, including more efficient work and

management practices and greater flexibility in the allocation and mobility of labour

-Higher levels of national savings though the introduction of compulsory superannuation and New Tax System

in 2000, which includes stronger incentives for private saving as well as Commonwealth state financial

relations to raise public saving

-A reduction in the Current Account Deficit (though measures such as tariff reform) to raise export

competitiveness and improve Australia's terms of trade performance by increasing exports

-Increased level of productivity (though labour market reforms) which help to support a rise in Australia's long

term sustainable rate of economic growth)

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Ross Gittens Productivity Article:

List some economic terms: Productivity, Economic Reform, Micro Reforms, Market Failure,

Counterproductive, Balanced Budget, Service- Delivery Sectors

List reasons for a decline in productivity in Australia:

Aiming for a balanced budget and reducing government spending

Reduction or lack in spending on human capital such as programs to increase education

Income inequality, the poor are reluctant to work harder if they won’t get higher incomes

Limited spending on infrastructure

Wanting a budget surplus rather than a deficit and economic growth

Laying off workers as soon as the business turns down, results in lower productivity as people are put off by

this concept of being laid off due to a downturn in the business, bad morale

Company restructures

By increasing competition we might be reducing efficiency, guarding and beating the competition, rivalry

between companies

YouTube “Alan Coole” = Productivity Video

Sol Eastlake: Productivity in Australia

-We should be concerned in the long run as we need productivity to increase standard of livings

-Less productivity can lead to increase in interest rates

-Affects both macro and micro economic reform

Improving:

Happens as a result of businesses of working or organinsing work more efficiently, bringin in new

technologies new production methods

Cutting Down:

-Removing ordit trails, money reports

Workplace Reforms:

-Depends on wage increases, mining and engineering increases???, no evidence of wage increases in mining

spilling over in manufacturing or interstate spillover effect

-Increases in enterprise bargaining

Trends: 3% during 1990s, declined to 1% government wants back at 2%

Summarise how the following policies have affected the product and factor markets

Product markets

1. National competition policy :

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Is an agreement between Australia’s Commonwealth and State governments signed in 1996 to encourage

microeconomic reform throughout the Australian Economy

This affects businesses in many different sectors of the economy

The competition policy is aimed at higher productivity, few distortions to resource allocation and lower costs

for business and consumers

Government aims to increase competition in sectors where they operate monopolies such as electricity, gas,

water and rail The government has also agreed to remove special provisions that have public enterprises an

advantage over the private enterprises

Establishment of the national regime to regulate the cost of access to infrastructure, meaning businesses that

own a monopoly have to give access to that network at a reasonable price

Main Elements:

1: Limiting the anti competitive conduct of firms in the product and factor markets

2: Reforming regulation which unjustifiable restricts competition

3: Reforming the structure of public monopolies to facilitate competition

4: Providing third party access to certain facilities that are essential for competition

5: Restraining monopoly pricing behaviour

6: Fostering “competitive neutrality” between private and government business when they compete in

markets

ACC looks after this

2. Trade and industry policy:

Trade Policy:

The major policy initiative to promote exports and trade intensity was the reform of industry assistance in the

1988 Industry Statement and 1991 Industry Statement

The reduction of the majority of tariffs for manufacturing to 5% by 1996

The abolition of quotas and the reduction of tariffs for the PMV industry to 15% by 2000

Abolition of quotas for TCF in 1993 and a reduction in tariffs to a maximum of 25% by 2000

The effect of reduced protection were that an increase in $4billion in GDP though additional export volumes

and a higher rate of economic growth

Some policies include: AUSTRADE, Export Market Development Grants Scheme (EMDGS)

International Policies/ Agreements: Uruguay Round of the GATT, Doha UTO, APEC, ANCERTA and AUSTFA

Industry Policy:

Investing for Growth in December 1997, resulted in:

-Increased support for business research and development

-Emphasis on commercialisation of R&D such as the innovation fund

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-Measures to increase the attractiveness of Australia’s position on a regional financial centre

Other policies such as Innovation Statement in 2001

3. Taxation reform to increase incentives

Tax reforms is important for increasing the incentives to work through higher productivity, save andinvest

Higher levels of productivity, saving and investment can be achieved if the taxation system is made

more efficient, equitable and compliance costs are reduced

The NEW TAX SYSTEM commenced on July 1st 2000, changed included:

Indirect taxes and some state taxes were abolished but were replaced by GST (Goods and Services

Tax) of 10%

Abolition of inefficient indirect taxes such as sales taxes led to cost reductions for many producersand exports of goods and services were given zero rating under the GST system, increased

competitive of exports

Cuts in marginal tax rates

Lowering of company tax

Factor market

4.

Labour market and industrial relations reforms

Labour market reform occurred since 1985 when productivity based bargaining stream was

introduced under Prices and Incomes Accord

Industrial Relations Reform Act in 1993 encouraged greater labour market flexibility by promoting

more enterprise level wage bargaining

The Workplace Relations Act in 1996 continued the process of wage decentralisation

Key reforms in Workplace Relations Act in 1996:

Provision of greater choice on how enterprise agreements are reached through Australian Workplace

Agreements (AWA)

Limiting the award system to the role of a social safety net administered by AIRC

Ending compulsory unionism

Placing restrictions on unions negotiation in Certified Agreements such as limitations on the use of

industrial action

Relaxing the Unfair Dismissal Rules to encourage employer flexibility

Workplace Relations Ammendment (Work Choices), Australian Fair Pay Comission (AFPC) to review minimum

wages, Workplace Relations Ammendment Act 2007 introduced a Fairness Test to apply to all agreemtns as a

safety net and replaced the Office of Employment Advocate with the Workplace Authority to administer

AWA’s

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Fair Work 2009:

Ten National employment Standards to provide a safety net for working conditions to all employees in

the national system

Fair Work Australia and Fair Work Ombudsman established to regulate and enforce the national

workplace relations system

Modern Awards were introduced to rationalise over 4,000 federal awards to 120 Modern Awards Renewed emphasis on collective enterprise bargaining based on good faith bargaining and application

of a Better Off Overall Test to single enterprise, multi enterprise and Greenfields agreements

Labour Market reforms were linked to reforms of the social security and welfare system though:

Establishment of Centrelink to improve efficiency, equity and targeting of social security payments

and “Job Search Allowances” and “Family Payments”

Introduction of “Work For Dole”

Introduction of “Welfare to Work” to encourage people receiving welfare support to increase their

workforce participation by securing part time paid employment

5. Financial deregulation

Involves the removal of direct controls over interest rates and lending policies in the banking system to

improve efficiency and competition in the allocation of funds between banks and non bank financial

intermediaries such as building and credit unions

Main Financial Deregulation in 1983 are:

Abolition if all direct Reserve Bank controls over interest rates and the volume and direction of bank

lending

The use of open market operations by the Reserve Bank to conduct monetary policy

The floating of the exchange rate and the abandonment of the crawling peg system

The entry of 16 new foreign banks, which were granted banking licenses, and allowed to compete

with other financial institutions in domestic financial markets

Financial Market Deregulation has resulted in more efficient allocation of capital resources, increased

competition levels, increased integration with overseas capital markets and more effective conduct ofmonetary policy by RBA

Regulation and deregulation- Competition Policy:

The regulation of economic activity in Australia begun in early 1990’s with the establishment of a centralized

system of wage determination and the protection of domestic manufacturing through tariffs and quotas

In the 1950’s public trading enterprises such as TAA were established to compete with private sector

enterprises such as Ansett and public monopolies such as Telecom

The high levels of government regulation were a response to market failure, justified by the government on

economic, political and social grounds, these included:

-The regulation of wages and imports were seen as necessary to guarantee living standards though income

and employment protection for workers and their families

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-Public monopolies were seen as preferable to private monopolies as they could be operated in the national

interest to achieve board economic, social and strategic goals

-Regulation of key markets would prevent high levels of foreign ownership and control

Deregulation: Refers to the removal of government restrictions on the operation of markets such as tariffs,

quotas and subsidies to promote competition and efficiency

The industries deregulated in the Australian Economy:

1. The financial system was deregulated in 1983, with controls on interest rates, bank lending and

deposits lifted, 16 new foreign banks were granted licenses to operate in Australia and the

currency was floated instead of being fixed

2. Domestic airline industry was deregulated in 1991, the two airline policy was removed, and

Qantas and Australian Airlines merged

3. Telecommunications were deregulated in 1992 with the entry of Optus to compete with Telecom.

Telecom was merged with OTC to become Telstra. Other major carriers such as AAPT, Orange,

Primus and Dodo entered the market in 1997 after full deregulation of telecommunications,

prices fell

4. Federal government lifted import embargo on sugar, tobacco, dried and citrus fruits in 1995.

Wheat, milk and egg markets were all deregulated soon after

Reform of Public Trading Enterprises (PTE’s):

Public Trading Enterprises such as GIO, state bank NSW and QLD, Telstra and Qantas as well as

Commonwealth Bank have been completely privatized

Privatisation: Driven by the view that greater economic efficiency can be achieved by privately own

enterprises which are subject to capital and product market discipline in competitive markets

Commercialisation: Policy of getting PET’s to pay dividends to their government owners

Privatisation: Sale of public assets or service provision rights to the private sector

Main reforms in the PTE’s recently are:

1. Privatisation of Commonwealth Bank, Telstra and Sydney Airport Corporation

2. Coorporitisation of state and federal PTE’s though creation of more efficient management structures

such as setting out clear managerial objectives and performance

3. Commercialisation of PTE’s such as Energy Australia to improve efficiency through payment of

dividends to government owners

4. Principles of competitive neutrality applies to PTEs such as payment of taxes, charges and interest on

loans to they operate in equivalent competitive private sector environment

Competition Policy:

The ACCC (Australian Competition and Consumer Commission) is an independent statutory authority which

administers the Trade Practices Act 1974

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It also aims are regulating national industries so that individuals and business comply with the

Commonwealth competition policy

Trade Practices Act’s purpose is to enhance the welfare of Australian through the promotion of competition

and fair trading

It covers product safety, unfair market prices, price monitoring, quality and labeling, warranties, misleadingadvertising and fair trading of goods

Costs and Benefits of Microeconomic Reform:

Advantages in the microeconomic level:

1. Increases in technical, allocative and dynamic efficiency gains

2. Increases in levels of productivity in the economy as well as higher international competitiveness

Advantages include in the macroeconomic level:

1. Rising national productivity by improving productivity and efficiency of labour and capital

2. Lowing inflation and inflationary expectations through

3. Helping to reduce the current account deficit by increasing exports and competitiveness

4. Achieving a higher sustainable rate of economic growth through rising productivity

5. Helping to reduce unemployment though jobs creation in expanding industries

6. Helping to overcome structural problems such as low national saving

7. Achieving higher living standards though increasing real incomes

However, there are also several disadvantages of Microeconomic reforms, these include:

1. Structural changes resulting in structural unemployment in the economy

2. Increase costs of retaining and the relocation of displaced workers due to structural change by

microeconomic reform policies must be paid for by governments from the expected dividends , this

can increase the taxes from income earners to fund these expenditures

3. Increases in worker intensity, people working longer hours without extra pay

4. Closure of inefficient businesses

5. Less equal income distribution

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Labour Market Policy:

Role of the National and State Industrial Relations Systems:

Industrial relations or workplace relations: refers to the system used to determine wages and working

conditions between employers and employees

Award: A legally binding agreement covering wages and conditions of employment for particular occupations

or industries

Through labour market policies, the government aims to:

1. Control the wage demands and expectations of trade unions in hope of achieving low inflation

outcomes

2. Promoting comparative advantage to protect incomes and working conditions of all employees in

Australia

3. Acting as a mechanism for solving industrial disputes though conciliation and arbitration powers of

Fair Work Australia

4. Promoting reform of labour market though the use of collective enterprise agreements and Modern

awards

The National Industrial Relations System:

From January 2010 under the Fair Work Act 2009 the power to set wages and conditions for many Australian

workers previously under state conditions moved to Federal system

This system includes:

1. A set of Ten National Employment Standards (NES)

2. Modern awards that apply nationally to specific industries and occupations

3. A National Minimum wage administered by Fair Work Australia

4. Enterprise bargaining arrangements

5. Protection from unfair dismissal

The State Industrial Relations:

This system contains the state industrial commissions and tribunals that administer state awards. It covers

workers who are not covered by the national system, mainly state and local government employees.

Evolution of National Industrial Relations System:

As of Aug 2008 wages for employees were set under the following structures:

Collective enterprise agreements (39.2%)

Unregistered individual arrangement (36.5%)

Award or pay scale only (16.5%).

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Registered individual agreement (2.2%)

Unregistered collective agreement (0.6%)

The current system of industrial relations in Australia is based on five pieces of legislation:

1. The Workplace Relations Act (1996)

2. The Workplace Relations Amendment Act 2006 (Workchoices)3. The Workplace Relations Amendment Act 2007 (A Stronger Safety Net)

4. The Workplace Relations Amendment Act 2008 (Transition to Fairness)

5. The Fair Work Act 2009

-------> Fair Work Australia (FWA): Responsibilities and functions

The safety net of minimum wages and employment conditions

1. Enterprise bargaining

2. Industrial action

3. Dispute revolution

4. Termination of employment

5. Other workplace matters

-------> Fair Work Ombudsman (FWO): Responsibilities and functions

Advice to employees and employers

1. Ensuring compliance with Fair Work Act 2009

2. Prosecution of breaches of the Fair Work Act 2009

3. Auditing workplaces for compliance with FWA

4. Use of Fair Work Inspectors to monitor and investigate complaints in workplaces

5. Publication of information and best practice guides on workplace relations and workplace

practices

The Workplace Relations Act (1996)

1. Simplified the award system to a safety net of only 20 matters

2. Introduced Australian Workplace Agreements (AWA)

3. Created the Office of the Employment Advocate (OEA)

4. Prohibited “closed shops” and “preference for unionist” clauses in employment contracts.

5. Restricted the role of the Australian Industrial Relations Commission (AIRC) to the certification of

union Certified Agreements and the administration of the award safety net system

6. Simplified unfair dismissal provisions

The WRA divided workers into three streams:

The industrial award system or Award Safety Net:

1. Covered workers unable to negotiate under individual or collective enterprise agreement

2. Covered around a third of all workers

Certified Agreements:

1. Usually in force for three years

2. Represented workers represented by unions in pay negotiations

3. Also covered a third of workers

Australian Workplace Agreements (AWA’s):

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1. Covered wage increased negotiated by individuals, without trade union involvement

The Workplace Relations Amendment Act 2006 (WorkChoices)

-Created a national industrial relations system

-Changes included

A reduction to five minimum conditions

annual leave

personal/carer’s leave

compassionate leave

parental leave, and

maximum ordinary hours of work.

-The Howard government predicted by giving more flexibility in “hiring and firing” that higher employment

growth and labour productivity would occur

-The Australian Fair Pay Commission(AFPC) replaced the AIRC in setting minimum wage and working

conditions and setting the minimum wage for low paid workers

-Unfair dismissal provisions were not applicable to businesses with up to 100 workers

The Workplace Relations Amendment ( A stronger Safety Net) Act 2007:

The Fairness Test:

-Introduced to ensure workers were fairly compensated for lost or modified conditions when moving to an

AWA

-Only applied to workers earning less than $75,000 per year

-Only applied to agreement to lodged after the May 2007

The Workplace Authority:

-To administer workplace agreements

-To apply the fairness test to the main types of agreements

Workplace Ombudsman:

-To enforce compliance relating to minim pay rates and conditions

Prohibited new AWA’s

Introduced the No Disadvantage Test which applies to all workplace agreement made after the

introduction the Transition Act.

Reinstated unfair dismissal laws from the commencement of the new legislation in 2010.

1. Prohibited new AWA's

2. Introduced the NO disadvantage test which applies to all workplace agreement mas after the

introduction of transition act

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3. Reinstated unfair dismissal laws from the commencement of the new legislation in 2010

Workplace Relations Amendment ( Transition to Fairness) Act 2008:

The “Forward with Fairness” policy in this amendment was aimed to remove the unpopular features of the

Work Choices legislation

Five major changes included:

1. Prevention of the making of new Australian Workplace Agreements from commencement of the

Transition Act

2. Prevention of changes in AWA’s unless the Workplace Authority deemed that the agreement did not

pass fairness test

3. Creation of a new workplace agreement called “Individual Transitional Employment Agreements”

4. Introduction of a new No Disadvantage Test

5. Unfair dismissal always were reinstated with the new system

The Fair Work Act 2009:

Contained five major elements:

1. Replaced the AFPCS with ten National Employment Standards

2. New Modern Awards which contain the NES to simplify the previous award system

3. Revised enterprise bargaining arrangements must be approved by Fair Work Australia and must pass

a No Disadvantage Test.

4. Streamlined protections dealing with workplace and industrial rights

5. Fair Work Australia and the Fair Work Ombudsman replaced the AIRA, AFPA, Workplace Authority

and the Workplace Ombudsman.

The NES:

1: Maximum weekly hours of work

2: Request for flexible working hours

3: Parental leave and related entitlements

4: Annual leave

5: Personal/carer’s and compassionate leave

6: Community service leave

7: Long service leave

8: Public holidays

9: Notice of termination and redundancy pay

10: Fair work information statement

The National Employment Standards (NES):

The safety net under the Fair Work Act 2009 is made up of:

1: The National Employment Standards (NES)

2: Annual adjustments to the National Minimum Wage

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3: The system of Modern Awards

The Safety Net protects employees from the loss of minimum pay and conditions. The ten National

Standards replaced the five protected under Workchoices.

The ten NES of the Safety Net:

1. Maximum weekly hours of work for fulltime employers is 38 hours plus reasonable additional

overtime

2. Ability to request for flexible working arrengements

3. Parental leave and relted entitplements, 12 months unpaid parental leave

4. Annual leave, 4 weeks of holidays for fulltime workers

5. Personal/Carer's compassionate leave, up to 10 days paid personal leave and 2 days unpaid

6. Community service leave, unpaid leave including jury duty

7. Long service leave, given in relevance to the award covering the employee

8. Public holidays: provides pay for public holidays

9. Notice of termination and redundancy pay, employees given written notice of their termination

10. Fair work information statement

The National Minimum Wage:

The National minimum wage provides a safety net for anyone not covered by an award. It is determined by

Fair Work Australia. The Minimum Wage Panel, part of Fair Work Australia, is required to consider both

economic and social objectives when determining the minimum wage. It considers performance and

competitiveness of the national economy.

-In July 1st 2010, an increase of $26.12 per week for all employees on Modern Award minimum wages

-The National Minimum Wage was increased from $543.78 per week or ($14.31 per hour) to $569.90 per

week or ($15 per hour)

Modern Awards:

Modern awards provide a set of minimum wages and working conditions for employees specific to their

industry job classification and occupation

Main contents of Modern Awards:

1. Minimum wages

2. Types of employment such as full time or part time

3. Arrangements for when work is performed

4. Overtime rates of pay

5. Penalty rates of pay

6. Annual wage or salary arrangements

7. Allowances and leave related matters

8. Superannuation provisions

9. Procedures for consultation, representation and dispute settlement

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Enterprise Bargaining under the Fair Work Act 2009:

Enterprise Agreement: Workplace agreement that is made between one or more employers and a group of

employees or a trade union representing a group of employees

Enterprise agreements can include:

1. Rates of pay for employees

2. Employment condition such as hours of work

3. Consultative mechanism

4. Dispute resolution procedures

5. Dedication from wages for any purpose authrised by the employee eg: superannuation

Good Faith Bargaining: Good faith bargaining means when employers and employees attempt to reach and

agreements in “good faith”

Elements of good faith bargaining includes:

-Attend and participate in meetings

-Must respond to proposals made by other party

-Must give genuine consideration tp proposal

-Refrain from unfair conduct

Single Enterprise Agreements: Involves a group of employees and a single employer or two or more

employers (joint venture) in a single enterprise

-Single interest employers can make a single enterprise agreement with the employees employed at the time

the agreement is made

-The single enterprise agreement is made when a majority of the employees of the employer or each

employer vote to endorse the agreement

-Agreement may run up to four years and has to be submitted to Fair Work Australia for approval

Multi- Enterprise Agreements:

-Two or more employers that are not all single interest employers may make an enterprise agreement known

as a multi-enterprise agreement with a group of emploees or trade unions

-The multi-enterprise agreement is when a majority of the employees of at least one of the employers votes

to endorse the agreements

-May not run no longer than four years and must be submitted to Fair Work Australia for approval

Greenfields Agreements:

-Involves genuinely new enterprise that one or more employers are establishing or propose to establish and

who have not yet employed persons necessary for the normal conduct of the enterprise

-These agreements can be either a single or enterprise agreement or a multi-enterprise agreements

-It is made when the agreement is signed by each employer and each relevant employee organisation or trade

union that the agreement covers

-This also has to be submitted to the Fair Work Australia to be approved

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The NO Disadvantage Test (NDT) and the Better Off Overall Test (BOOT):

NDT ensures that the agreements does not or would not, on balance, result in a reduction in the overall

terms and conditions of employment of employees covered by the agreement

BOOT involves a comparison between the agreement and a relevant Modern Award to determine whether an

employee would be better off under the agreement

Individual Agreements:

From January 1st 2010 there is no legislative provision for making individual workplace agreements

Employment Contracts for High Income Earners:

High income earners use common law contracts and may include annual salary, bonuses or profit

entitlements, fringe benefits and salary packaging arrangements

The reason for common law contracts is to exclude income earners from modern awards which are aimed at

providing a safety net for low income earners as high income earners do not need a safety net

Individual contractors such as in building and constructions as well as information technology are covered by

“Independent Contractors Act 2006” and some general protection though “Fair Work Act 2009”

The key difference between common law contracts and enterprise agreements are that common law

contracts are made individually and they cannot remove or trade off minimum award conditions such as

penalty rates

Unfair Dismissal:

The Fair Work Act 2009 reinstated unfair dismissal provisions for small businesses with over 15 employees

However in such events, claims could not be made unless they had not completed 6 months of work

For small businesses with less than 15 employees, at least 12 month experience is needed before they can

make an application for unfair dismissal

Dispute Resolution Procedures:

The traditional mechanism for solving trade disputes between employees and employers is though the system

of federal and state industrial tribunals. These produce conciliation and arbitration services if collectivebargaining fails to resolve an industrial dispute between an employers and employees

Collective Bargaining:

1. Involves conflicting parties attempting to reach an agreement through direct negotiation by their

representatives

2. No third party or “umpire” in this situation

3. If no agreement is reached, a conciliator may be used

4. Disadvantage is more protracted industrial disputes if an agreement cannot be reached

Conciliation:

1. A third party or a conciliator or mediator tries to get the conflicting parties to agree to a settlement

2. If a settlement is achieved, the agreement becomes legally binding on both parties and becomes

written into the enterprise agreement for Modern Award

Arbitration:

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1. Is where a third party or arbitrator makes a binding decision on the parties to a dispute

2. The arbitrated settlement alters the Modern Award or enterprise agreement and is legally binding on

both parties (employer and employee)

Arguments For and Against Centralised Wage Determination:

Arguments for:

Comparative wage justice: Is the belief that workers who have similar skills and jobs in different industries

should receive the same award wages

-This helps to keep the real wages of low income earners and workers with minimum bargaining power

-Certainty for wage earners because wages are adjusted regularly, without workers resorting to industrial

actions

-Eg of centralised wage determination = Prices and Incomes Accord in 1983

-Led to wage indexation which is adjusting wages to changes in the cost of living

-Equity

-Allows for setting of minimum standards

Arguments against:

Comparative wage justice and wage indexation institutionalised inflation by largely ignoring importance of

productivity as a wage fixing principle

Wage indexation can contribute to higher inflation outcomes because of rising wage costs

Wage increases unrelated to productivity improvements tended to “flow on” from one occupation or industry

to another, and leads to permanent “real wage overhang” where wages growth outstripped productivity

growth in the Australian economy

-No real flexibility

Arguments For and Against Decentralised Wage Determination:

Decentralised Wage determination is highlighted by direct negotiations of employment contracts between

employees and employers at enterprise of industry level, this may involve collective bargaining or individual

bargaining

Arguments For:

1. It is more flexible in operation and likely to lead to more efficient allocation of labour in the labour

market

2. Wage increases usually reflect improvements in productivity

3. Increased incentive for employees to undertake skills and training and education to gain higher wages

and less likelihood of cost inflation

4. Employers have a greater incentive to demand and hire labour, hence unemployment would fall

Arguments Against:

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1. The market determines wage outcomes based on worker’s productivity and skills, leading to widening

of wage and income inequality in labour market due to a strong system of minimum wages and

working conditions

2. Eg: Employees with greater bargaining power, skill and productivity may achieve higher wages then

employees with less bargaining power

3. Leads to greater labour market segmentation

4. Industrial dispute maybe protracted during period of wage negotiations if an agreement cannot be

reached between the conflicting parties

5. The federal government does not have a formal prices and income policy to control wage outcomes

and muse use monetary policy and higher interest rates to control wages growth

Arguments For and Against individual Wage Determination:

Arguments For:

Flexibility for employers and employees and the opportunity for highly skilled and qualified workers to earn

higher incomes

Arguments Against:

Low skilled workers with low bargaining power there is a risk of receivable below minimum wages and

working conditions for employers if a safety net of legally enforceable minimum standards is weak or absent

Education, Training and Employment Programs:

The federal government was expected to provide $32.9 billion in 2010-11 in recurrent and capital funding for

programmes provided by the Department of Education

Included expenditure on government and non government schools ($16.3 billion), tertiary education ($8.1

billion), Vocational education and training ($2 billion) and student assistance ($5.1 billion)

Additional allocation of $930 million on specific funding for school education in the form of school

infrastructure as part of the Nation Building and Jobs Plan

Expenditure in vocational and training area was forecast to remain stable in 2010-11

Increased government spending on higher education in the 2009-10 Budget reflected the response to the

“Review of Australian Higher Education”

Expenditure on labour market assistance to job seekers and industry in the 2010-11 budget estimated at $2.5

billion over five years though “Jobs and Training Compact”

In 2010-11 budget $661.2 million was allocated to the “Skills for a Sustainable Growth” strategy based on

education and training places

National and global context for environmental management

regulations

market-based policies

targets

international agreements

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Environmental management policies are desigend to adress environmental sustainableit issues such as

preservation of natural environments adressing pollution, and climcate change, and managing the use of

renewable and non-renewable resources

ES is included under microeconomic policies because these policies are igned to influence the behavior of

individual household, businesses and industries

The main policies to influence are regulations and market based pricing polciies designed to influence

behavior and usage

Regulations:

The traditional policy for achieving environmental goals

-Laws or rules they may prohibit actions that could cause environmental damage eg: littering

-May specify how something is produced or consumed eg: mining techniques

-May impose requirements on the quality of goods eg: the Fuel Quality Standards Act 2000

-Can require firms and individuals to follow certain environmental procedures eg: The protection of World and

National Heritage Sites

Market-based policies

-Are policies that involve finale incentives or disincentives (such as subsides and txxes) to influence the

behavior of business and individuals

-Environmental problems arise because of market failure ie where environmental costs and benefits

(externalities) are borne by society but not taken into account by consumers and businesses in the market

-A market based response is to levy tax or fee on production that is approximately the same as the

environmental cost associated with the economic activity. This would move the supply curve to the left,

increasing market price and decreasing the amount consumed

-Internalising the externality where consumers pay for environmental costs

-Taxes tend to be preferred by governments to influence behaviors because they raise government revenue

which can then be used to fund environmental programs

-Subsidies are grants given by the government to procedures which aim to reduce production costs and

encourage environmentally beneficial activities

Targets

-The aim of targets is to provide an understandable and tangible foal for environmental sustainability. Targets

will be decided based on what is desirable for the environment and what is achievable and will be influenced

by the factors that contain in the government in other decision making situations such as economic factors

and political influences

The Australian government uses a variety of targets to guide the environmental polices including:

-Mandatory Renewable Energy Target (MRET) of sourcing 20% of Australia’s energy from renewable sources

eg: Solar by 2020. This target is enforced by legislation with responsibility given to the electricity generators

-Water for future, with plans to address urban and rural water challenges

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-Under the Kyoto Protocol binding target have been set for 37 industrialised countries and the European

Union to reduce their greenhouse gas emissions. These amounts to an average of 5% against 1990 levels over

the five year period 2008 to 2012

International Agreements:

Australia is involved in the environmental conventions of:

-UN Montreal Protocol to limit CFC emissions to protect the ozone layer

-UN Word Heritage Convention to protect World Heritage Areas

-UN Framework Convention on Climate Change (UNFCCC)

-UN Ozone Layer and Biological Diversity Conventions

-UN Antarctic Treaty and UN Law of Sea Treaty

Kyoto Protocol:

UN Kyoto Protocol to limit carbon emissions into the atmosphere

The government ratified the Kyoto Protocol to limit CO2 emissions at the UN Framework Convention on

Climate Change in Bali 2007

This agreement attempts to adopt wide targets for reducing greenhouse gas emissions

The Australian government has committed to reducing Australia’s carbon pollution to 25% below 2000 levels

of 2020

However such an agreements was not reached during the Copenhagen Conference in 2009 due to widespread

disagreement between advanced, emerging and developing countries

The major difference between Kyoto Protocol and the UNFCCC is that Kyoto Protocol commits signatories to

reducing their emissions, whilst UNFCCC encourages industrialised countries to reduce their emissions

The UNFCC argues that industrailised countries are principally responsible for the current high levels of

greenhouse gas emissions in the atmosphere as a result of more than 150 years of industrial development

The Kyoto Protocol places a heavier burden on advanced countries to reduce their emissions under the

principle of “common but differentiated responsibilities”

Through the Kyoto Protocol and other agreements with USA, EU, Japan and Australia, they promote

developing nations such as China and India to be involved

The Kyoto Protocol offers additional market based mechanism for reducing carbon emissions:

-A system of emissions trading known as Carbon Market

-The clean development mechanism for development alternatives sources of energy

-Programmed for the joint implementation of measure to reduce carbon emissions

Australia’s Environmental Performance:

Australia has had a high per capita CO2 emission in 2005 than Major OECD countries other than USA

Australia also has had more endangered species than all other seven OECD countries

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Australia has also experienced prolonged periods of drought than the other seven OECD nations but has

attempted to implement systems to reduce irrigation and restore the health of major river systems

Australia being a net exporters and producer of energy sources such as coal and oil has committed to reduce

greenhouse gas emissions by ratifying the Kyoto Protocol and the Carbon Emissions Trading Scheme

The Clean Energy Initiative was also introduced to develop low emissions and renewable technologies tocreate a “low carbon economy”

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