Why are Australia’s macroeconomic policies fighting?

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At 2:30pm today, the Reserve Bank of Australia kept the cash rate on hold at 1.5 per cent. Economists weren’t sure what the RBA would do: would it cut rates further? Would it keep them steady? . So the decision surprised some. But this isn’t the most interesting thing.

What I find most interesting is the conflict between Australia’s macroeconomic policies.

[See my instant reaction video about the RBA’s decision.]

As a quick refresher, macroeconomic policies are policies that affect the whole economy, not just one sector. The major macro policies are monetary policy (the RBA’s influencing the general level of interest rates in the economy) and fiscal policy (the use of the Federal Budget).

These macro policies can be used to speed up or slow down the economy. In terms of achieving goals, it’s helpful if they’re working in the same direction and not against each other.

But check this out. Monetary policy is wildly expansionary. It is at historic lows, in an attempt to increase Australia’s pretty average economic growth rates. At the same time, fiscal policy is contractionary. That is, the government is trying to create a budget surplus (a situation where government revenue, a leakage, exceeds government spending, an injection).

Put simply: monetary policy is trying to expand the economy, fiscal policy is actually working to slow it down.

Why are they working in opposite directions? Part of it is the federal government’s attempts to quickly return the nation’s budget back to surplus. The RBA is independent of government, so it’s pursuing a different plan.

It gets even more complicated, though. The federal government is planning to run a budget surplus...but it is planning to implement major tax cuts (an injection) if it wins the upcoming election. So, even within fiscal policy, the government is trying to achieve competing goals.

AS A STUDENT, HOW CAN I USE THIS INFORMATION?

  • When you’re writing about Australia’s use of macroeconomic policies, discuss the conflicts between the policies themselves

  • You can also discuss conflicts WITHIN fiscal policy, where different measures are working to slow and expand the economy simultaneously

  • Make sure to mention that fiscal policy is controlled by the federal government, while the independent RBA handles monetary policy