A little history

I don't usually post opinion pieces, but this one caught my eye as providing useful background to the next Federal Budget and the importance of understanding the policy mix.

The article points out the legacy of the Howard government's economic policy. They made Australians believe that a Budget surplus was 'good economic management' rather than achieving the economic goals we usually point to (inflation, unemployment, growth, external balance and income distribution).

The article suggests that giving Australians large tax cuts (especially to the better off) and making even less well off Australians believe Budget surpluses are always good has made the effective economic management of the Australian economy all but impossible.Monet

This is an opinion piece, however from my point of view I can't fault the analysis. I'd particularly like you to notice how the mismanagement of the mining resources boom has put monetary and budgetary/fiscal policy in almost perpetual conflict. It is also clear that the author sees Australia's deficit problem as one of too little revenue, not too much government spending.

The Canberra Times article is here

This article is most appropriate for VCE students who must understand the context and detail of Budgetary policy over the last four years. This provides context for current events. IB and VCE students will be able to see how different policy measures are interdependent and can be mutually supportive or cancelling. IB students should note - this is not suitable for an IA being an opinion piece.

Which economic goal is most important?

One thing that you should learn from economics is that it's about choice. No matter what you look at there is a need to trade-off one goal for another.

This is true of macroeconomic goals. It isn't possible to have inflation, unemployment, economic growth, the Current Account and income distribution all exactly as you want. To improve one another inevitably gets worse.

In the 1940's it was decided that unemployment had to be the number one priority of government macroeconomic policy. Hardly surprising given the experience of the Great Depression (1930 - 33) which saw unemployment reach 25% or even more.

By the 1980's it was generally agreed that inflation needed to be the main priority. This change was, again, brought about through bitter experience. It was argued that if you got the price level stable then it was easier to achieve the other economic goals.

Below is an excellent article from The Guardian that explains why low inflation is beneficial and credits Australia's economic success over the last thirty years to a low inflation environment.

The Guardian article is here

 

The chart shows how inflation in Australia since the 1980's has been lower and less volatile than in the period immediately before 

This article is directly relevant to VCE students who must understand the goals of macroeconomic policy and the policy mix needed to achieve them. For IB students it is an excellent explanation of why achieveing price stability is important.