Economic policy is about making us better off

Australia’s economy is intact; better than we thought. Growth, employment and low inflation show that smart policies still matter. Stephen Koukoulas reports.

It’s an even more important topic today, as the debate about taxation, interest rates, housing, government spending, pensions, productivity reforms and everything else connected with ‘the economy’ continues to rage.

Issues relating to the management of the economy by the government of the day are important to all Australians. Mismanagement can have disastrous consequences, as we have seen. fraser Government, some parts Howard government and recently Abbott And morrison Governments.

Some problems can last for years or even decades. Consider the Abbott Government’s repeal of carbon price and mining tax; Howard Government’s decisions on pension freezes contribution and then spend the windfall from the terms of trade bonanza in the period up to 2007.

Then the Fraser Government had an incredible record. John Howard He was Minister of Finance and became the only Australian Government on record to deliver double-digit unemployment, inflation and interest rates simultaneously.

To name a few.

What should economic policy aim for?

Below is a list of some important topics in economic management. When you examine the list, it becomes clear that economic conditions remain good, despite pressure from many established groups and contemporary fear mongers.

They are far from perfect, of course, but there are few countries in the world that come close to matching Australia’s scorecard.

Policies that will grow the economy are of critical importance. As the economy grows, the population benefits from increasing living standards; the basic needs in life are improved and there is more money to spend on optional or nice-to-do things. These benefits either come naturally as personal income and wealth increase, or are the domain of progressive government policies financed by rising incomes. revenues as the economy expands. Medicare, elderly care, pharmaceuticals, roads, infrastructure and education are just a few.

A growing economy also creates employment. As businesses grow in line with the overall growth of the economy, more workers will be needed and as a result, the unemployment rate will be low. Indeed, full employment, which is the ultimate goal of the labor market, society where those in the workforce can find suitable employment relatively quickly and relatively easily.

It almost goes without saying that paid employment improves living standards and this is the reason for the recent renovations. RBA It made “full employment” one of its core missions.

Low inflation has been a mainstay of policy for 35 years. It helps workers with living costs as wage increases exceed price increases, effectively forcing businesses to become entrepreneurial to grow and turn a profit, which is an important part of the productivity equation.

Consider the harmful effects of high inflation a year or two ago. The post-COVID rise in inflation to 8 percent has thankfully created a temporary jolt to living standards and created a major impediment to business investment; It still takes some time to realize these investments. to get better.

Now the good news is that inflation is low, on target and will remain at that level aim Because as far as the eye can see.

A budget is the tool governments use to tax, spend, and balance the economy. It is paramount that at the headline level the approximate aim is to achieve an overall balanced outcome over the course of one or two economic cycles.

This means that deficits are important economic policy tools and are actually necessary in times when the private sector is weak and/or when essential spending is needed for infrastructure or national security. A good general rule of thumb is: “The weaker the economy, the larger the budget deficit.”

The opposite is also important. When the economy is strong, overheated, and there are upward pressures on inflation, economic policy should aim for a surplus. The last three years have been excellent examples of good budget management. During the period from late 2002 to mid-2024, the government ran two budget surpluses during the rise in inflation caused by excessive private sector demand. No one expected this, and it was a critical factor behind the RBA raising interest rates less than most other central banks.

While the private sector has floundered since mid-2024, the budget has slipped back into a (small) deficit.

There have been textbook examples of both aspects of prudent and proactive financial management in recent years.

During the global financial crisis of 2008-2010, the government ran a massive deficit to support the economy and limit the rise in unemployment. It worked. A similar approach existed during the COVID pandemic; but the problem with economic policy at the time was that the Morrison government maintained loose budget settings in 2022 even as the economy and inflation rose.

Another aspect of the goals of good economic policy is to care for the needy, or those who “fall through the cracks” of society due to unemployment, health problems, or other circumstances.

Here, in a good modern economy, policies that distort the tax take of those who can afford to pay a little more tax to pay for these basic services are part of the skill of good policymakers.

These policies are not only good for society, they also help growth. Low-income earners, the main beneficiaries of such policies, tend to spend more of their income than high-income earners, resulting in a stronger economy.

Ultimately, a good economic manager grows the economy fairly and sustainably, with moderate inflation and full employment.

As 2025 approaches, Australia is getting closer to these goals.

Stephen Koukoulas is one of Australia’s most respected economists, the former chief economist of Citibank and senior economic advisor to the Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.

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