HSC ECO TOPIC 4

Economic policies and management intro

• Intro

  • Governments pursue a range of policy goals, which often change over time

  • Economists generally agree on three overarching objectives:

    • Economic growth: an increase in the level of goods and services produced in an economy, which raises living standards

    • Internal balance: maintaining price stability (low inflation) and full employment (low unemployment)

    • External balance: keeping the CAD, foreign liabilities and exchange rate at stable and sustainable levels

Economic objectives in relation to: Economic growth and quality of life

• Economic growth

  • Involves an increase in the volume of goods and services that an economy produces and is measured by the annual rate of change in real GDP

  
  

  

  • Economic growth offers substantial benefits to a nation, including:

    • An increased standard of living for the population

    • Improved job prospects for the labour force

    • Opportunity for increased public investment in infrastructure and services such as education funded through higher government tax revenues

• Quality of life

  • Refers to the overall wellbeing of individuals within a country taking into account material living standards as well as other indicators, such as education levels, environmental quality and health standards

  • It means there are more resources available for important contributors to quality of life, such as health care, education and programs to support the natural environment

Budget 26-27

• economic growth is forecasted to slow from 2.25% to 1.75%

• Due to conflicts in the Middle East, bring significant disruption for global oil supply, causing subsequent disruptions to supply chains

• To support growth, over 50bn additional spending on defence, 8bn on roads and rail projects

• However, the fiscal deficit spending mainly cushions supply shock rather than stimulating AD

Economic objectives in relation to: full employment

• Full employment

  • Does not mean that there is no unemployment

  • It means the economy is at its non-accelerating inflation rate of unemployment (NAIRU), or natural rate of unemployment

  • NAIRU refers to the level of unemployment at which there is no cyclical unemployment, that is, where the economy is at full employment

  
  

  

  • Benefits

    • Maximising the economy’s capacity to produce, which increases living standards

    • Minimising the adverse economic and social problems associated with unemployment (e.g. personal and family hardship, loss of workforce skills and greater inequality)

  • Policies

    • Reduce unemployment to its non-accelerating inflation rate through macroeconomic policies

    • Microeconomic policies to reduce the NAIRU over the longer term

  • Budget 26-27

    • Annual wage review increase minimum wage

    • Phrase out junior award rate, adult age, adult wage

    • Expected to increased from 4.25 to 4.5 as economic growth slows

Economic objectives in relation to: price stability and external stability

• Price stability

  • Refers to keeping inflation, or the sustained increase in the general price level, at an acceptable level

  • This doe not mean that the government aims to eliminate inflation but rather to sustain inflation at a level (2-3%) that will cause minimal distortion to the economy

  
  

  

  • Benefits

    • Maintaining the real value of income and wealth

    • Improved international competitiveness, due to stable costs of production

    • Exchange rate stability

    • Future price stability, giving more clarity for economic decision making

• Reduced distortions leading to a more efficient allocation of resources to more productive activities

  budget 26-27

• Inflation is forecasted to hit 5%

• Attributed to surges in oil prices

• Take pressure off inflation

• Halve fuel excise for three month + heavy vehicle road users charge cut to zero + PBS cut to the lowest level

• However tax cuts are expansion, tension

• External stability

  • Achieving external stability involves a country meeting its long-term financial obligations to the rest of the world

  • So that its external accounts do not hinder internal economic goals such as higher growth and lower inflation

  • External stability includes ensuring that the BOP and the level of foreign liabilities are sustainable over the longer term

  • E.g. maintaining the level of confidence of overseas investors and avoiding volatility in the exchange rate

  
  

  

budget 26 -27

• ToT forecasted to deteriorate significantly to -7% in 2027-28 (due to falling commodity prices i.e iron ore, elevated oil prices)

• CA is expected to move further into the deficit

• Response: fuel resilience package - 50 days of diesel/jet fuel reserves, 20% domestic gas reverses

• Limits of fiscal policy in managing external stability during a global supply shock (as oil and commodity prices are largely outside control)

Economic objectives in relation to: distribution of income, environmental sustainability

• An equitable distribution of income and wealth

  • An overall objective of government policy is to create a fairer distribution of income and wealth in the economy

  • While governments do not aim to remove all of the inequalities between individuals, it is widely agreed that societies should make provision for the needs of people who are not able to provide for themselves e.g. pension, welfare

  • Redistribution policies e.g. tax, welfare payments

  • Buget 26-27

    • Aim to achieve greater equity

    • Do

      • $250 working australians tax offset (increasing taxfree threshold by ‘nearly 18,000 to 19,900)

      • Negative gearing limited to new builds (supporting first time home buyers)

    • However, NDIS cust $38bn over 4 years by tightening eligibility

• Environmental sustainability

  • In the process of achieving a society’s economic objectives, economic activity may create side effects such as pollution and the depletion of natural resources

  • Environmental objectives are part of the government’s overall framework of economic management, and a substantial amount of money is spent by Commonwealth and State
    governments on environmental programs

  • Ecologically sustainable development has become an increasingly important economic objective, foster intergenerational equity

Potential conflicts among objectives

• There are three major conflicts between the government’s economic objectives:

  • Achieving a simultaneous reduction in unemployment and inflation

    • Trade off in the short to medium term, Phillips curve

    
    

    

    • In 2023, unemployment rate would need to rise from 3.6% to 4.5% to help bring inflation from close to 6% down to the RBA’s target range of 2 to 3%

  • Achieving economic growth and environmental sustainability

    • The pursuit of faster economic growth can sometimes come at the cost of environmental policy goal

    • Acting on climate change early has the potential to lift GDP growth and create new jobs in clean energy industries

  • Achieving economic growth and external balance

    • Higher rates of economic growth often result in a deterioration in the current account on the balance of payments, M

    • Balance of payments constraint - limitation on the rate of growth because of the impact of high growth on the current account deficit

• Other conflicts in objectives

  • Economic growth and greater inequality in income distribution

    • Inclusive growth

    • E.g. giving disadvantaged children greater educational opportunities has positive social outcomes and improves the labour market in the future

  • Time frames

    • Long term goals involve significant structural changes and costs in the short term

Macroeconomic policies - Rationale for macroeconomic policies - stabilisation and shifts in aggregate demand

• Intro

  • Instruments of economic policies

    • Macroeconomic policies - AD

    • Microeconomic policies - AS

  • Governments usually use a combination of micro and macro policies in order to best achieve their goals, called economic policy mix

• Macroeconomic management

  • Use of government policies to influence the economy with the aims of reducing large fluctuations in the level of economic activity and achieving certain economic goals

  • Tend to influence the level of AD

  • Sometimes referred to as counter-cyclical policies - help smoothen peaks and troughs of economic cycle to stabilise the level of economic growth

  
  

  

  • Work effectively in either stimulating or dampening the economy in the short term, but less effective in dealing with longer term problems such as low productivity

  • 2 key macro policies are fiscal and monetary

Fiscal policy intro

• Intro

  • A macroeconomic policy that can influence resource allocation, redistribute income and reduce the fluctuations of the business cycle

  • Its instruments include government spending and taxation and the budget outcome

  • The Budget is the annual statement from the Australian Government of its income and expenditure plans for the next financial year, and is normally released in May

  • The Budget includes all forms of revenue received by the government, including direct tax (e.g. personal income), indirect tax (e.g. GST) and other revenues (e.g. dividends from public trading enterprises)

  • The major items of expenditure in the Budget are social welfare, health, education, general public services and defence

  • Expansionary stance - increase spending decreasing tax

  
  

  

  • MYEFO

    • Mid-Year Economic and Fiscal Outlook statement

    • When governments make smaller changes to fiscal policy throughout the course of the year, the full costings of these decisions are set out afterwards, either in the next Budget, or in a statement released around December each year

    • Provides updates to the Treasury’s forecasts for the Budget and future economic conditions

Federal government budgets and budget outcomes

• Budget outcomes

  • The budget outcome is itself an important feature of fiscal policy

  • There are three possible outcomes - surplus, deficit or balanced

    • Budget surplus - positive balance, T > G

    • Budget deficit - negative balance, G > T

    • Balanced budget - zero balance, G = T

  • The government’s main fiscal policy aim is to achieve budget surpluses, on average, over the course of the economic cycle

  • 4 main measures of budget outcomes

  
  

  

  • Underlying cash balance

    • Cash deficit or surplus

    • Government’s preferred measure, gives an indication of short to medium term impact of fiscal policy

    • Calculated using cash accounting method (records revenues and expenditures when the money is collected or spent)

    • Does not distinguish between the type of spending (for capital or recurrent purposes) and does not reflect international standards of accrual accounting

    • Excludes Future Fund transactions and other financial asset transactions

  • Headline cash balance

    • Reflects the underlying cash balance plus the government’s purchase or sale of assets

    • Includes all cash transactions

    • Gives misleading picture of the budget outcome as improvement comes from a one-off asset sale

  • Fiscal balance

    • Fiscal deficit or surplus

    • Calculates revenue minus expenses minus net capital investment, based on accrual accounting (measures expenditures and revenues when they are incurred or earned, not when it is actually paid or received)

    • Regarded as more accurate than cash accounting

    • Does not distinguish between spending for capital or recurrent purposes

  • Net operating balance

    • Operating deficit or surplus

    • Regarded as the best measure of the sustainability of the Budget because it shows whether a government is meeting its recurrent (day-to-day) obligations from existing revenue (short-term)

    • Distinguishes between spending for capital or recurrent purposes, and it removes spending on capital from the balance

    • The rationale for separating the two types of expenses is that capital spending is different from other spending because it add to productive capacity and to the government’s assets (for long-term)

    • Accrual accounting

Discretionary and non-discretionary

• Intro

  • Each year, the levels of government spending and revenue collection, and thus the budget outcome, change

• Discretionary and non-discretionary

  • This reflects the impact of two key factors: changing economic conditions (cyclical or non-discretionary changes) and changes in government policy (structural or discretionary changes)

  • Discretionary changes in fiscal policy

    • Involves deliberate changes to fiscal policy

    • E.g. reduced spending, changing tax rates

    • Influence structural component of the budget outcome

  • Non-discretionary changes in fiscal policy

    • Influenced by factors other than planned

    • Caused by changes in the level of economic activity

    • Influence cyclical component of the budget outcome

Automatic stabiliser

• Automatic stabilisers

  • Budgetary changes that are influenced by the level of economic growth are also known as automatic stabilisers

  • Defined as those changes in the level of government revenue and expenditure that occur as a result of changes in the level of economic activity

  • Automatic - because they are built into the Budget, and they are activated by a change in the level of economic activity, not by a deliberate change in government policy relating to either revenue or expenditure

  • The two main automatic stabilisers are unemployment benefits and the progressive income tax system

    • Unemployment benefits

      • When the economy moves into recession, the level of economic activity falls, causing a rise in unemployment

      • An increase in unemployment leads to greater government expenditure on unemployment benefits

      • Thus, a decline in the level of economic activity automatically leads to an increase in government expenditure

      • Vise versa

    • Progressive income tax system

      • People on higher incomes pay proportionately more tax than those on lower incomes

      • During an economic boom, employment opportunities are increasing and incomes are rising

      • Rising incomes move workers into higher income tax brackets, and previously unemployed persons start paying income tax

      • Both situations lead to an increase in government taxation revenue

      • On the other hand, a decrease in the level of economic activity would lead to a decrease in taxation revenue

  • Built into the Budget with a counter-cyclical role

  • On their own, are rarely strong enough to counter the effects of the economic cycle (government still rely upon discretionary policy)

  • But help to moderate both downswings and upswings in growth

Effects of budgetary changes on economic activity, resource use, income distribution and the size of the CAD and foreign debt

• Effects of budgetary changes

  • Fiscal policy changes affect economic activity, resource use, income distribution and the size of the CAD and foreign debt

  • Impact on economic activity

    • Short term impact

    • Budget stance

      • Expansionary - increase economic activity, reduce T and/or increase G, smaller surplus or larger deficit (budget outcome), leads to a multiplied increase in C and I, stimulates AD

      • Contractionary - decrease economic activity, increase T and/or reduce G, smaller deficit or larger surplus, leads to a multiplied decrease in C and I, dampening AD

      • Neutral - maintain the same level as the previous year

  • Impact on resource use

    • Directly - G e.g. transport infrastructure, public goods, emergency goods

    • Indirect - T and spending decisions e.g. reducing royalties (payments made by mining companies to the government for the right to extract publicly owned natural resources) or providing subsidies for lithium mining might encourage more investment in that part of the mining sector, high tax on tobacco products

  • Impact in income distribution

    • Most important role

    • Progressive income tax system

    • Reduce tax at upper end of income scale - less progressive, less equal distribution

    • Reduce tax concessions affect distribution without changing tax rates

    • Goods and Services Tax regressive tax increased, less equal as lower income earners pay relatively higher proportion of their Y

    • G - increase welfare, low income earners more reliant on income support payments

  • Impact on savings and external balance

    • Long term relationship between budget outcome and CAD and foreign debt

    • Budget deficit - negative saving, dissaving by borrowing from private sector saving, reduce national saving (public + private)

    • Crowding out effect - with a depleted national savings pool, the competition for a limited amount of savings to finance domestic consumption and investment will make it more difficult to access funds and place upward pressure on interest rates, making private sector investment more expensive

    • Inflow on the capital and financial account and will increase the size of Australia’s foreign debt

    • If the government borrows from overseas, the inflow of funds will directly lead to an increase in Australia’s foreign liabilities (raise net primary income deficit through servicing costs in the form of interest repayments)

    • When the government consistently runs large fiscal deficits over several years, the current account deficit will tend to be higher

    • Australia’s history of current account deficits has mostly reflected imbalances between private savings and private investment, rather than public sector borrowing

Main method of financing a deficit

• Financing a deficit

  • When the government budgets for a deficit, it is planning to spend more than it receives in revenue over the current financial year

  • This deficit can be financed through borrowing from the domestic private sector, from overseas investors or from the RBA. The government can also sell government assets

  • In recent time, when it has run a deficit, the Australian Government has relied almost exclusively on borrowing from the domestic private sector

• Borrowing from the private sector

  • By selling Treasury bonds domestically under a tender system

  • The main form

  • Under this system, the government sets the value of bonds to be sold (determined by the size of the deficit to be financed), and the prospective purchasers tender (bidding) to buy a certain quantity at a particular rate of interest

  • The government then accepts the tenders, starting with those offering to buy at the lowest rate of interest, through to the highest, until all bonds are sold

  • Advantages

    • The government can always be certain that it will fully finance its deficit

    • The market will set the interest rate on these newly issued bonds

  • Disadvantages

    • Crowding out effect

      • Budget deficit will soak up funds in Australia’s domestic savings pool, putting upward pressure on interest rates and leading to a reduction in private sector spending and investment

      • Under these circumstances, the private sector would have less access to domestic savings and may be forced to borrow overseas instead

      • In an era of globalised financial markets, the crowding out effect is now much weaker since many of the financial institutions that buy bonds on domestic financial markets are from overseas

Other methods of financing a deficit

• Borrowing from overseas

  • In order to minimise the crowding out effect

  • Distinctions between domestic and overseas borrowing are now less relevant, as there are now many overseas institutions that participate in Australia’s domestic financial markets

  • When the government borrows from overseas it directly adds to Australia’s foreign debt

• Borrowing from the RBA

  • Referred to as monetary financing

  • In effect, this amounts to the government printing money in order to finance its expenditures

  • The government has avoided monetary financing to ensure that it does not increase the money supply and add to inflation

• Selling assets

  • Does not reduce the level of underlying cash deficit or the net operating deficit because these are adjusted to reflect one-off transactions like asset sales

  • Selling assets, such as land that is owned by the government or the Commonwealth’s share in businesses such as Medibank Private or Australia Post

  • In cash terms, from year to year, a government can create a headline budget surplus by selling assets

  • Forgoes any dividends it may have earned on the assets

Use of a surplus

• Surplus

  • When the government budgets for a surplus, it is planning to receive more revenue than it spends in the current financial year

  • The government can use the surplus in 3 ways

    • Deposit it with the RBA

    • Use it to pay off public sector debt

      • Late 1990s and early 2000s

      • Increase in funds may lead to economic activity that offset the contractionary effect of the fiscal surplus

    • Place the money in a specially established, government-owned investment fund

      • Future Fund for superannuation liabilities

• Public sector borrowing and debt

  • The overall impact of the public sector on the economy is reflected on the public sector cash outcome

  • Was in surplus from late 1990s until 2008-09 but had been in deficit since, driven by Commonwealth deficit

  
  

  

  • Public sector debt results in accumulation of public sector debt

  
  

  

Monetary policy - intro

• Intro

  • Refers to actions by the RBA, Australia’s central bank, to influence the cost and availability of credit in the Australian economy

  • A macro policy that can smooth fluctuations in the business cycle and influence the level of economic activity, employment and prices

  • Generally the primary macro policy used for this purpose over the short to medium term in Australia and other advanced economies

  • One of the RBA’s key roles is to hold and manage deposits owned by commercial banks in Australia, which they use to settle transactions between each other

  • This gives the RBA the ability to influence the supply of money in the economy and therefore interest rates

  • The RBA sets a desired target for the cash rate (which is the interest rate on loans in the overnight money market)

  • The RBA largely controls the cash rate by paying a certain interest rate to commercial banks for their deposits and charging a certain interest rate to banks that want
    to borrow extra funds (this is called a corridor system)

  • It also can use domestic market operations (DMOs) to influence the cash rate and help achieve the target

  • Monetary policy settings can be contractionary, expansionary or neutral

    • Contractionary - increase interest rate, reduces the amount that households with mortgages have available for consumption and make business investment more expensive, slows economic activity (reduce employment and inflation)

    • Expansionary - lowers interest rate, higher consumption and investment, economic activity, employment growth and increased inflationary pressures

    • Neutral - interest rates are at a level that is neither expansionary nor contractionary

Purpose of monetary policy

• The objectives of monetary policy are laid out formally in the Reserve Bank Act (1959), which states that in its implementation of monetary policy the RBA should aim for:

  • Stability of Australia’s currency (which now means maintaining low and stable inflation and preserving the purchasing power of the Australian dollar)

  • Maintenance of full employment in Australia (which means sustaining a low level of unemployment)

  • Promotion of the economic prosperity and welfare of the people of Australia (which primarily means maintaining a stable and sustainable economic and financial environment)

• 2023 review of RBA

  • Clearly defining the objectives for monetary policy as a dual mandate to contribute to price stability and full employment, with an overarching purpose to promote economic
    prosperity

  • Prior to the end of 2023, the RBA met 11 times per year to set a target for the cash rate. Following recommendations of the RBA review, this was changed to 8 meetings per year

• Conflicts in objectives

  • Can achieve both but difficult

  • Since the early 1990s, the RBA has generally prioritised the first objective of low and stable inflation via its inflation-targeting regime

  • Very low levels of unemployment can sometimes be achieved at the cost of higher inflation (but out of control inflation does not lead to full employment as it attracts contractionary policy resulting in increased unemployment)

  • The challenge is to balance both goals - which is the dual mandate

• Inflation targeting

  • In Australia, the central bank operates independently of the government (helps to reduce the risk of political factors distorting interest rate decisions)

  • Try to keep inflation within a predetermined target range (2-3%), although target for midpoint

  • In doing so, the RBA prioritises maintaining low and stable inflation

  • The timeframe for returning inflation to the target band is also somewhat flexible

  • Inflation targeting has generally been successful at keeping inflation low and stable without central banks having to resort to high interest rates, which lower growth and increase unemployment

  • Since the regime was introduced, inflation has averaged around 2.6%

  • To sustain low and stable inflation, inflation targets need to entrench expectations in the economy that inflation will be low and stable over time (expectations are a significant factor influencing the level of inflation)

  • The RBA assesses a wide variety of economic and financial indicators when making monetary policy decisions (factors that affect demand and supply in the economy can
    influence inflation outcomes in Australia)

  • Critics said the RBA had been too slow to react and kept monetary policy too expansionary for too long (impetus for an independent review 2023)

Implementation of monetary policy by the RBA - cash rate

• The cash rate

  • The main tool that the RBA uses to implement monetary policy (MP)

  • The interest rate that banks pay to borrow funds from other banks in the money market overnight

  • In technical terms, it is the interest rate on unsecured overnight loans between banks (loans banks use to manage their liquidity)

  • It influences all other interest rates, including mortgage and deposit rates, and the general level of interest rates influences inflation and the overall level of economic activity

  • The RBA can therefore achieve its economic objectives through its capacity to change the cash rate

Exchange settlement accounts

• Exchange settlement accounts

  • Commercial banks need to hold a certain proportion of their funds with the RBA in exchange settlement accounts (ES accounts) to settle payments with other banks and the RBA

  • Millions of interbank payments happen every day, and these payments are made by transferring funds between bank’ ES accounts

  • At the end of every trading day, some banks may not have enough funds in their ES accounts to satisfy all of their interbank payment obligations for that day, while other banks may have a surplus of ES funds

  • The overnight money market (also known as the short-term money market) is the market where banks that have a shortage of ES funds can borrow money from banks that have an excess of ES funds beyond what they need in their accounts

  • RBA can influence the overnight money market to ensure that the actual cash rate lines up with the target that the RBA board sets for it

The policy rate corridor

• Policy rate corridor

  • RBA does not directly set the actual cash rate at the target that it announces, rather it ensures that the actual cash rate never strays far from the target because of how it deals with the funds in commercial banks’ ES accounts

  • The policy rate corridor is a tool used by the RBA to manage the policy interest rate

  • It defines a range within which the central bank wants the overnight interest rate to fluctuate, typically by setting a lending rate (ceiling) and a deposit rate (floor) around the target policy rate

  • This framework helps ensure the policy rate stays close to the target and influences other interest rates in the economy

  • The corridor represents a range within which banks have an incentive to trade ES balances among themselves

  • RBA lending rate (+0.25 percentage points)

    • Banks can borrow directly from the RBA at 0.25% above the cash rate target

    • This acts as the ceiling because banks will not pay another bank more than they could borrow from the RBA

  • RBA deposit rate (–0.10* percentage points)

    • Banks can deposit excess funds with the RBA at 0.10% below the cash rate target

    • This acts as the floor because banks will not lend to another bank for less than they can earn from depositing with the RBA

  
  

  

  • The deposit and lending rates form the lower and upper bounds of the policy interest rate corridor

  • Banks have no incentive to borrow or lend ES balances outside this corridor

  • If interest rates in the market were lower than the deposit rate paid by the RBA, banks would choose to hold more ES balances

  • Similarly, if market interest rates for cash balances were above the top of the corridor, banks would choose to borrow more cheaply from the RBA

  • The floor created by the RBA’s deposit rate and the ceiling created by the RBA’s lending rate together form the policy rate corridor for the cash rate

  
  

  

  • No banks, whether they have a surplus or a shortage of ES funds, have an incentive to complete transactions in the overnight money market outside of this corridor

  • The RBA’s policy target for the cash rate is normally exactly in the middle of the corridor

  • If the RBA were to decrease the target, the floor and ceiling of the corridor would shift downwards immediately, and banks would be incentivised to borrow and lend from each other within a new range that is consistent with the new cash rate target

  
  

  

DMOs

• Domestic market operations DMOs

  • Demand (from commercial banks) or ES balances by banks fluctuate on a daily basis

  • The actual cash rate is the price at which demand intersects with the supply of ES funds that are available

  • The RBA can manage the supply of ES funds so that it meets demand at a price closer to the RBA’s cash rate target

  • The RBA manages the supply of ES funds by conducting domestic market operations (DMO)

  • DMO refers to the purchase (buy) and sale (sell) of financial securities (Commonwealth Government securities) by the RBA in exchange for ES balances

  • These purchases affect the supply of ES funds because ES funds are used to complete these transactions

  • If the demand for ES funds increases, the RBA would need to increase the supply of ES funds to keep the cash rate stable (all else being equal)

  • To do this, the RBA would buy financial securities held by banks, and pay for this by depositing funds in their ES accounts

  • If the RBA needed to decrease the supply of ES funds to keep the cash rate at target (because of a decrease in demand), the RBA would sell financial securities to banks, and withdraw funds that were sitting in their ES accounts

    • Purchase - RBA buys securities from banks using ES balances - increase S of ES balance (as RBA gives money to banks), decrease bank’s holding of securities → decrease cash rate (expansionary MP)

    • Sale - RBA sells securities to banks gaining ES balances - decrease S of ES balance (as banks need to pay RBA), increase bank’s holding of securities → increase cash rate (contractionary MP)

    
    

    

  • DMO usually involves the use of repurchase agreements (repos)

    • The seller of a bond or other financial security effectively agrees to buy the bond or security back from the buyer at a later date

    • The RBA prefers using repos to conduct DMO because they are highly flexible instruments and can be used to manage ES supply much more precisely than outright purchases or sales of financial securities

    • Repos allow RBA to temporarily inject or withdraw liquidity for a specific amount of time, enabling day to day management of money supply

  • The RBA uses the cash rate policy corridor to implement changes to the cash rate target, and can use DMOs to ensure that the cash rate stays consistent with the target every day when the demand for ES funds changes

The transmission of the cash rate to other interest rates

• The transmission of the cash rate to other interest rates

  • The cash rate is often called the foundation or the anchor of the interest rate structure in the Australia economy

    • This simply means that the cash rate has a major influence on many other interest rates in Australia

    • An increase in the cash rate means that it becomes more expensive for financial institutions to obtain funds in the short-term money market (and generally other funding markets too)

    • To maintain their profit margins financial institutions generally respond by increasing the interest rates that they charge to borrowers, such as on household mortgages used to buy houses

    • Similarly, a reduction in the cash rate lowers the funding costs for banks and other financial institutions, and competition between financial institutions causes them to pass this cost saving on to their customers in the form of lower lending interest rates

  • However, factors other than the cash rate also influence the main interest rates in the economy (e.g. home loans, credit cards, personal loans, commercial loans)

  • These include competition in the banking sector, regulations, conditions in the global and domestic financial markets and risk assessments relating to economic conditions

  • This means that the margin of difference between the cash rate and those other interest rates can change over time in response to those factors

  • The RBA can either tighten or loosen monetary policy

  • Markets can price in a future interest rate increase or decrease even before it has happened. This can result in interest rates in financial markets changing before the RBA changes the cash rate target

  Monetary stance	Cash rate target	Policy rate corridor	DMOs
  Tightening (contractionary)	Increase	Shifts upward	Sell, decrease S
  Loosening (expansionary)	Decrease	Shifts downwards	Buy, increase S

Unconventional monetary policy

• Unconventional monetary policy

  • Central banks have sometimes gone beyond the traditional usage of interest rates to implement monetary policy, and have experimented with additional measures

  • The use of tools other than a central bank’s main policy interest rate (the cash rate in Australia) is often called unconventional monetary policy

  • In recent years, this was necessary because, with interest rates close to zero, further stimulus to the economy was harder to provide by lowering interest rates further

  • Measures

    • Asset purchases: purchasing government securities in the secondary market from
      financial institutions and paying for them by depositing newly created ES balances
      in their accounts

    • Forward guidance: using official communications about the future stance of monetary policy to influence current interest rates on longer-term assets

    • Additional provision of liquidity: the RBA increased the size of its DMO compared to normal, and created the Term Funding Facility, which provided cheap additional loans to commercial banks to support them lending more to households and
      businesses

    • Changing the size of the corridor: by setting the corridor floor to 0.1 percentage points below the cash rate target (instead of 0.25 percentage points), the RBA was able to lower the cash rate to 0.1 per cent without the risks of negative interest rates

  • Negative interest rates are another form of unconventional monetary policy (cheaper borrowing)

  • One way to think about the influence of unconventional monetary policy is through the yield curve

    • This curve shows how, in general, loans of longer maturity tend to have higher interest rates because lenders expect higher returns to compensate for the greater risks involved with lending out money for a longer period of time

    • Unconventional monetary policy measures generally work by reducing interest rates specifically on longer-term loans

    • While conventional monetary policy usually lowers the entire yield curve

    
    

    

Impact of changes in interest rates - transmission mechanism

• Impact of changes in interest rates

  • Economists often describe the process through which MP affects the economy as the transmission mechanism of MP

  • 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

  • The transmission mechanism works through a number of different channels:

    • Downward pressure on interest rates through expansionary MP makes borrowing cheaper for consumers and businesses. In addition, the interest rate they can obtain by investing in financial assets represents an opportunity cost. Thus, a fall in interest rates should encourage borrowing by both businesses and consumers, leading to rising consumption and investment demand in the economy. This raises the overall level of economic activity

    • Reduced interest rates also have an effect on businesses and consumers that already have loans since the cost of servicing existing loans becomes cheaper. This means that existing borrowers can use more of their income on additional spending rather than servicing their loans and is often called the cash flow channel of MP

    • A fall in the level of interest rates also discourages financial flows into Australia which leads to a depreciation of the currency. This makes Australian goods relatively more competitive in both domestic markets (since imports are more expensive) and overseas markets. This stimulates aggregate demand and could add to inflation

    • Lower interest rates can also cause asset prices to increase for a range of assets including houses and shares in public companies. Higher asset prices provide asset holders more wealth, which they often use to consume and invest more than they otherwise would (called the wealth channel of the transmission mechanism)

  • The transmission mechanism would work in the opposite direction if the RBA put upward pressure on interest rates through contractionary MP

Stance of MP

• The stance of MP in Australia

  • In line with the recommendations from the 2023 review, the RBA Board communicates the stance of MP by making the cash rate target announcement after each meeting of the MP Board

  • MP was made very expansionary in response to COVID-19 (cash rate down to 0.1%)

  • Even before the onset of the pandemic, the cash rate target had reached historically low levels in response to a period of weak growth and low inflation

  
  

  

  
  

  

  • In addition, the RBA introduced several unconventional monetary policy measures that further eased the stance of monetary policy

  • The RBA responded to rising inflation with a series of steep rate increases from 2022 to 2023, lifting the cash rate above 4%

  
  

  

  • There are 5 main factors that help to explain the stance of MP

    • The low inflation objective

      • Both the government and the Reserve Bank are committed to maintaining the RBA’s inflation target of 2 to 3%

      • Monetary policy is the major tool used to achieve this outcome

    • Inflation expectations

      • A key element in the government’s strategy of achieving low inflation is reinforcing expectations of sustained low inflation

      • If inflation expectations remain low, businesses will plan lower price increases and unions will seek lower wage rises

      • The RBA will raise and maintain high interest rates if necessary to reduce inflation expectation

    • Labour costs

      • Future interest rate movements are dependent upon movements in the level of inflation

      • One of the most significant determinants of inflation is the cost of labour trends in productivity growth

    • Unemployment

      • The RBA remains committed to achieving low unemployment as part of its dual mandate

      • The level of growth and unemployment are also important indicators of whether the economy is close to its supply constraint

    • External factors

      • Australia’s integration with the global economy means that international conditions consistently influence RBA monetary policy settings

      • If global conditions deteriorate, Australia is more likely to face slower economic growth and higher unemployment, and the RBA may move to reduce interest rates to prevent a downturn

      • Monitors conditions in global financial markets for economic volatility or any early warning signs of changes to growth or inflation overseas that could affect Australia

      • The RBA also assesses external factors because the exchange rate channel is an important component of the transmission mechanism of monetary policy

Rationale for microeconomic policies including shifts in aggregate supply, efficiency

• Rationale

  • Governments use microeconomic policies to improve the efficiency (productivity, competitiveness) of firms and industries in order to maximise the amount of output from the scarce resources available in an economy

  • Microeconomic policies influence supply (supply-side economics)

  • The goal is to increase aggregate supply, which shifts the aggregate supply curve to the right, the result is that more goods and services are provided at lower prices

  
  

  

• Microeconomic policies

  • Policies (such as tax reform, investment in infrastructure and improving the education system) that focus on increasing the level of aggregate supply do so by improving the competitiveness, productivity and efficiency of Australian industries

  • In the long run, micro policies help to increase Australia’s sustainable rate of economic growth

  • Micro policies are important because many of Australia’s economic problems (such as labour market skills shortages) are caused by structural factors which are best addressed through structural change

  • Structural change refers to shifts in the pattern of production that reflect changes in technology, consumer preferences, policy, global competitiveness and various other factors

  • Structural change results in the decline of some inefficient industries, while enabling more efficient industries to emerge and grow

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

• Product and factor markets

  • Micro policies promote structural changes by making product and factor markets work more efficiently, which helps the economy to adapt to changing economic conditions

    • Goods are produced at the lowest price

    • Resources flow to where they have the highest value

  • Product markets are markets for the output of production, including consumer goods and services

  • Factor markets are markets for the inputs to production, such as the labour markets and financial markets

• Micro theory

  • Microeconomic theory says that product and factor markets will be more efficient if there is greater competition between businesses, and the market forces of supply and demand are able to operate with fewer distortions (either from government policies or anti-competitive market conduct)

  
  

  

Key dimensions to improving the efficiency of markets

• Dimensions

  • There are three key dimensions to improving the efficiency of markets

    • Allocative efficiency

    • Technical efficiency

    • Dynamic efficiency

  • Allocative efficiency

    • Refers to the economy’s ability to shift resources to where they are most valued and can be used most efficiently

    • By minimising distortions to the market economy (such as the impact of government regulations, tax loopholes, subsidies and anti-competitive behaviour), market forces should bring about a more efficient allocation of resources

    • E.g. removal of tariffs shifts resources from inefficient producers to efficient producers who are competitive without protection

    
    

    

  • Technical efficiency

    • Refers to the economy’s ability to produce the maximum level of output from a given quantity of inputs

    • Measured by productivity (how many outputs per inputs)

    • Greater productivity means more output at a cheaper price → competitive

    • More inclined to adopt the latest production technologies

  • Dynamic efficiency

    • Refers to the economy’s ability to shift resources between industries in response
      to changing patterns of consumer preferences

    • Means producers are able to respond quickly to changing demands e.g. petrol cars to electric cars

    • More competition will tend to force producers to be more responsive

  • Microeconomic policies can sometimes improve all three dimensions simultaneously e.g. past reforms to open up Australia’s telecommunications industry have increased competition, forcing companies to become more technically efficient to maintain and improve market share

  • This greater competition encouraged innovation and dynamic efficiency, attracting more investment to the telecommunications industry (a sign of allocative efficiency)

Deregulation and industries

• Deregulation

  • Deregulation involves the simplification or removal of rules that constrain the operation of market forces, and it aims to improve the efficiency of industries

  • The process of deregulation has driven extensive structural change in many industries, however regulatory frameworks in those industries remain important to encourage competition, protect consumers, prevent the abuse of market power and foster innovation

  • Micro policies have been applied to the financial sector, agricultural, aviation and telecommunications industries

  • Financial sector

    • Floating AUD in 1983, removed fixed exchange rate system

    • Removing RBA controls, banks gained autonomy to set their own interest rates on deposits and loans based on market conditions

    • Removal of barriers to foreign banks entering the Australian market

    • Privatisation of state-owned financial institutions, such as the Commonwealth Bank in 1991

    • This has enabled competition to increase with smaller banks, such as the Bendigo and Adelaide Bank, growing to compete with the big four banks

    • Australia learnt from GFC, increasing the amount of money banks must hold without investing (known as minimum capital requirements) which helped Australia’s financial system withstand the COVID-19 recession

    • This highlights the need for a balance between the goals of efficiency and competition (which generally favour deregulation) and the goals of consumer protection and financial system stability (which generally favour regulation)

  • Agricultural industries

    • End monopolies of single government-owned businesses or industry cooperatives on buying farmers’ produce in areas such as dairy, wheat and wool

    • Tariff reductions since the 1980s

    • This has strengthened Australia’s international competitiveness with 70% of agricultural output now exported

    • However, productivity slowed due to increased climate variability, changing policy environments and global market conditions

  • Aviation industry (transport)

    • In the early era of commercial aviation, Australia had an official Two Airline Policy, which was abolished in 1990 to increase competition

    • However, the industry remains a duopoly, dominated by Qantas (owner of Jetstar) and Virgin Australia

    • Koala Airlines, a new industry entrant, announced plans in 2025 to launch operations that would compete with Qantas, Jetstar and Virgin Australia

    • Two smaller airlines, Rex and Bonza (which began operations in 2023), mainly compete on regional routes

    • Many aspects of aviation remain regulated in Australia as well as in other countries, including safety regulations, landing slots at airports, and competitive behaviour

  • Telecommunications industry

    • Contributes around 2% of economic output

    • Telstra (until 1997 a government-owned monopoly called Telecom Australia) remains the largest company (accounting for 44% the mobile service market and 40% for fixed broadband)

    • But competition has transformed the industry since it was deregulated in the 1990s

    • A combination of new technologies and competition lowered telecommunications costs dramatically

    • Government-owned National Broadband Network (NBN) was rolled out in the 2010s, separating the wholesale business of providing access to the infrastructure from the retail businesses that offer telecommunications services to households and businesses (technical efficiency)

    • Foreign-owned telecommunication companies have been allowed to invest in the Australian market, ensure the existing domestic suppliers have been exposed to greater competitive practices (improvement in allocative efficiencies)

    • The goal of these changes was to increase competition among retailers while making high-speed internet more widely accessible

    • In 2024, in a bid to crack down on SMS scams ACMA was given powers to establish an SMS Sender ID Register, so telecommunications companies can
      check whether messages sent under a brand name match a legitimate sender

Regulations

• Effective regulation

  • Intro

    • Effective regulation involves striking a balance between competing policy goals

    • Excessive regulation can increase costs, reduce investment, discourage new market entrants and ultimately lower economic growth

    • On the other hand, excessive deregulation (or inadequate regulation) can lead to market failure (such as a lack of competition) and economic instability

  • Australia is less regulated than most other advanced economies, yet many aspects of business activity are regulated e.g.

    • Environmental regulation plays a significant role in the agricultural and mining industries

    • Construction, energy and transport have comprehensive safety regimes

    • Pricing and investment decisions are overseen by regulators in industries such as electricity, gas, water, postal services and telecommunications

  • Although Australia has undergone extensive deregulation, changes in technology and business models requires ongoing changes to industry regulation e.g. cryptocurrencies and AI products

Reforms of PTEs

• Reforms to PTEs

  • Micro policies have promoted efficiency in public trading enterprises (PTE’s) through two main approaches: corporatisation and privatisation

  • Corporatisation

    • Corporatisation aims to encourage PTEs to operate independently from the government, as if they are private business enterprises

    • This involves eliminating political and bureaucratic supervision and making public enterprise managers accountable for enterprise performance

    • E.g. Australia Post, Energy Australia and the Sydney Water Corporation

  • Privatisation

    • Selling off PTEs so that they do in fact become private enterprises, either in whole or in part

    • E.g. Medibank Private, electricity poles and wires (sale helped Sydney Metro Northwest and City lines)

    • Raising one-off revenues, increasing competition, encouraging more rational management and pricing behaviour, and forcing businesses to become more efficient

    • However, new PTEs NBN and Snowy Hydro Limited highlight how governments use these companies to invest in important infrastructure that may not otherwise be built due to large upfront costs

Competition policies

• Competition policy

  • Competition policy aims to promote competition in markets so that firms increase efficiency and lower prices for consumers

  • The Commonwealth and state government of Australia agreed to implement the National Competition Policy in 1995

  • This policy was designed to encourage microeconomic reform in sectors of the economy where they operated monopolies, such as electricity, gas, water and rail and road transport

  • Governments also agreed to remove special provisions that gave publicly owned enterprises an advantage over private sector competitors (competitive neutrality principle)

  • The national competition watchdog, the Australian Competition and Consumer Commission (ACCC) was also established (the ACCC enforces Australia’s competition laws)

  • An important aspect of these reforms was the establishment of a national regime to regulate the cost of access to infrastructure

    • Where businesses own a monopoly infrastructure asset

    • E.g. an airport, rail line or telecommunications network)

    • Required to give competitors access to that network at a reasonable price

  • Workable competition

    • Mean that in order to achieve international competitiveness, it may be necessary to
      reduce the number of firms in an industry e.g. acquisitions and merges

    • Those remaining firms can then operate on a larger scale and achieve the lowest possible long-run average costs of production

    
    

    

  • Business practices outlawed by the Competition and Consumer Act

    • Predatory pricing

      • When a firm uses its dominant market position to eliminate competition

      • Reducing its prices to such a low level that other firms cannot compete

    • Restricting access to an essential input

      • When a firm refuses another firm access to an input that cannot be substituted for something else

      • For the purposes of preventing or eliminating competition

    • Exclusive dealing

      • When a firm sets conditions for supply that exclude retailers from dealing with other competitors

    • Collusion and market sharing

      • When firms get together to fix prices or agree on a market sharing arrangement

      • Reduces effective competition between firms

Future and overall impacts of microeconomic reforms

• Future of microeconomic reform

  • From the mid-1980s to the early 2000s extensive microeconomic reforms dramatically changed industries in Australia

  • Fewer reforms have been achieved in the past two decades, as the policy focus has shifted more towards macroeconomic concerns

  • A key focus of the reform agenda in more recent years has been better coordination between the Commonwealth and state governments

  • In 2024, the Albanese Government tasked the Productivity Commission with five new inquiries focused on identifying ways to boost Australia’s productivity growth e.g. prior learning recognition, pharmacists deliver broader care

• Overall impacts

  • Micro reform has always been associated with shorter-term costs and long-term benefits

  
  

  

  • Higher productivity growth from microeconomic policies has contributed to an increase in economic output and lower unemployment (higher living standards)

  • Australia’s productivity growth over the past decade has been weak, particularly since the COVID-19 pandemic

  • Improvements in Australia’s living standards are expected to slow in coming decades because of lower productivity growth

    • Annual growth in real gross national income (GNI) per person is forecast to fall

    • Levies create a leaky tax system where businesses can order their affairs to avoid paying them (more resources to avoid levies not for output)

  • A major benefit of microeconomic reform is lower inflation

    • From greater competitive pressures and increased supply (both of which lower cost-push inflation)

  • Critics

    • Privatisation severely damaging - selling vital assets such as ports and airports to private-sector monopolies, large increases in prices to consumers

    • Often benefited wealthy investors while costs have been borne unevenly by lower-income earner

    • Many workers are experiencing an increase in work intensity (longer hours without extra pay)

National and global context for environmental management

• Intro

  • Environmental management policies are designed to address issues of environmental sustainability, including the preservation of natural environments, pollution and climate change, and managing the use of renewable and non-renewable resources

  • Like micro policies, environmental policies aim to influence the long-term behaviour of households, businesses and industries

  • The two main policy tools for environmental management are regulations and market-based policies to influence behaviour and reduce environmental impacts

  • Environmental management is guided by research bodies and by targets set by governments, and is influenced by international agreements between governments

Regulations

• Intro

  • Environmental regulations are the traditional policy tool for achieving environmental sustainability goals

  • They may prohibit a person or business from doing something that causes environmental damage, such as illegally dumping waste or producing polluting chemicals

  • They may also specify how a good or service is produced or consumed, as with rules relating to agricultural or mining techniques

  • Environmental regulations can be made by local, state or federal governments, or by their agencies

• Examples

  • New Vehicle Efficiency Standard

    • From 2025, incentivises car companies to supply new cars that use less fuel per kilometre

    • Each vehicle manufacturer has a national average CO2 target they must meet for all vehicles produced, which will gradually reduce over time to encourage fuel-efficient and low-emissions vehicles

  • Environment Protection and Biodiversity Conservation (EPBC) Act

    • Provides a framework for the protection and management of matters of national environmental significance

    • Criticised by economists as inefficient and ineffective

  • Environmental Protection Australia (EPA)

    • In 2025 the Albanese Government announced plans to change EPBC and establish EPA

    • An independent, transparent federal entity to manage compliance with environmental protection laws

  • Container deposit scheme

Market-based policies

• Market-based policies

  • Market-based policies involve financial incentives and disincentives (such as subsidies and taxes) to influence the behaviour of households and businesses

  • Permit - a maximum amount of pollution that firms are allowed to produce

  • Aim to provide an incentive to protect environment by changing relative prices

  • They have been increasingly used in Australia and other economies during recent decades

  • Many environmental problems arise because of market failure – private producers and consumers fail to take into account the environmental costs borne by all of society

  • In the case of negative externalities, this results in the equilibrium price being too low and production being too high

  
  

  

  • A market-based response to this scenario would be to levy a tax or fee on production that is approximately the same as the environmental costs associated with this economic activity – moving the supply curve to the left, increasing the market price and reducing the amount consumed in the economy

  • Internalising the externality - make consumers and producers pay for environmental costs

  • Governments generally prefer taxes over subsidies

    • Discourage environmentally damaging activities

    • Raise government revenue that can be used for other environmental programs

  • Subsidies

    • Grants provided by the government to producers with the aim of reducing costs of production and promoting environmentally beneficial activities

    • Generate economic activity which otherwise would not have occurred

    • E.g. Australian Renewable Energy Agency (ARENA)

      • Provides funding for research and development

      • Large-scale renewable energy projects

      • Solar Sunshot program 2024

Targets

• Targets

  • Australia’s most important long-term policy target relates to the reduction of Australia’s carbon emissions

  • In 2022, the Albanese Government legislated two emissions targets: a 43% reduction on 2005 levels by 2030, and a reduction to net zero emissions by 2050

  • Another target (not formally legislated) is an 82% renewable energy in the electricity grid by 2030

International agreements

• International agreements

  • For environmental management policies to be effective, collective action in the form of international cooperation is often required, as individual nations cannot successfully address global environmental problems on their own

  • Individual nations are also often reluctant to impose strict environmental management policies on their own economy if other nations are not willing to do the same (costs, internationally competitiveness)

  • Depletion of ozone layer

    • Emission of chlorofluorocarbons into the atmosphere from industry refrigeration units and aerosols

    • Montreal Protocol committed members to phasing out the production of ozone-depleting products by 2000

    • The ozone layer should recover to pre-1980 levels between 2050 and 2065

  • Tragedy of the commons - overuse of common international resources

    • United Nations Fish Stocks Agreement

      • Australia is a signatory

      • Ensure the long-term conservation and sustainable use of highly migratory fish stocks

    • Protect the seas and oceans outside country boundaries

      • Supported by Australia alongside 90 other countries

      • Will establish Marine Protected Areas (MPAs)

  
  

  

Example - climate change - international agreement, targets, market-based policies, regulations

• Climate change

  • Intro

    • Decarbonising economies (reduce carbon emissions) regarded as the greatest economic reform challenge in 2020s

    • Disrupts economic output e.g. extreme weather, higher insurance costs, property damage

    • Despite widespread agreement on the seriousness of the threats from climate change, it has been very difficult for governments around the world to agree on how to respond and who should bear the costs of structural changes

  • International agreements

    • The Kyoto Protocol

      • 1997, 160 nations

      • Required industrialised countries to set internationally binding emission reduction targets to limit carbon dioxide and other greenhouse gases

      • Reflected the difficulty in climate change negotiations of achieving a compromise between the interests of high-income and developing countries (economic growth comes with emissions)

    • The Paris Agreement

      • 2020, included developing nation e.g. China and India

      • Mechanisms for transparency and monitoring progress

      • Its weakness is that individual countries set their own targets for emissions reduction, known as Nationally Determined Contributions (NDCs)

      • Under the agreement, countries update their NDCs every 5 years

  • Targets

    • 2020 target

      • Reducing carbon emissions by 5% on 2000 levels

      • Criticised for being too low

      • While Australia met the target, it was only made possible due to a number of technical and temporary factors e.g. slower rate of growth

    • 2030 target

      • 43%

      • The Albanese Government committed in 2025 to the goal of 82% of Australia’s energy being generated by renewables by 2030

    • 2050 target

      • Net zero

      • Net Zero Economy Authority

  • Market-based policies

    • Carbon pricing scheme 2012

      • Put a price on each tonne of CO2 emitted

      • Gives financial incentives to switch to cheaper, lower-emission processes

      • Abolished in 2014

    • Emissions trading scheme ETS

      • Issued permits or buy permits

      • Trading permits puts a price on the emission of greenhouse gases, incorporates social costs into price mechanism

    • Baseline and credit scheme

      • Safeguard mechanism - a baseline level of emissions top polluters cannot exceed

  • Regulations

    • In 2007 Australia banned older-style incandescent light bulbs, replacing them with more energy-efficient options such as fluorescent and LED bulbs

    • In 2010, planning laws in several states were changed to require newly constructed
      homes to comply with six-star energy ratings involving improved insulation, water recycling and other features

    • Reporting requirements from 2024–25 for large businesses and financial institutions to disclose their carbon emissions and information related to
      climate-related risks, including risk management strategies and targets

    • From 2024, the installation of natural gas connections was banned for new residential dwellings

Labour market policies

• Intro

  • Involves governments influencing the process or outcomes of wage determination

  • Governments intervene in labour markets for several reasons, including:

    • Achieving macroeconomic objectives such as low inflation and macroeconomic stability (since wage growth is a major influence on inflation)

    • Achieving microeconomic objectives such as increasing productivity, expanding workforce participation, improving competitiveness for Australian businesses and resolving workplace disputes

    • Achieving objectives relating to the distribution of income and wealth, such as ensuring that fair minimum standards apply to all employees (since wages are the main source of income for most households)

  • In Australia, the government has historically played an important role in wage determination, either directly or through independent industrial courts and tribunals

Role of national and state systems

• Traditionally

  • Australia has traditionally regulated its labour market through a mix of federal and state laws, with significant overlaps between the different systems

  • This is because the Australian Constitution does not give the Commonwealth Government the power to directly legislate over the labour market

  • Instead, it only gives them the power to resolves industrial disputes that cross state boundaries

  • Called industrial relations, workplace relations

• Industrial relations systems (6 state + 1 federal)

  • Industrial awards

  • In the past, very inefficient as employers whose workforces spanned multiple states needed to comply with different state systems as well as the federal system

• Workplace relations system

  • A national workplace relations system

  • Adopted through the Fair Work Act (2009) to replace the inefficiency of six different state systems plus the federal system

  • The national system is overseen by the Fair Work Commission (FWC)

The national system for determining

• Intro

  • Australia’s national wage determination system is set out in the Fair Work Act (2009) and covers around 70% of working Australians

  • There are four means of determining pay and conditions for employees within this national system

    • Awards and collective agreements (enterprise agreement) - formal system

    • Individual contracts (common law contracts) and working business owners - informal system

  
  

  

  • Around 30% of Australian workers are outside the national wage determination system, in two main groups

    • Individuals whose conditions are unregulated (17 per cent of Australian workers),
      divided evenly between independent contractors and other business operators

    • Individuals regulated by a state workplace relations system (12 per cent), almost all of whom are state public sector employees

Minimum employment standards

• Minimum employment standards

  • Australian employees are protected by a set of legally guaranteed employment conditions, known as the National Employment Standards NES

  • Provisions

    • Maximum weekly hours of work - FT 38 ordinary hours per week plus reasonable additional hours of work

    • Right to request flexible working arrangements e.g. parents or carers, over 55 years, disability, domestic violence, and pregnant women (employers can only refuse on reasonable business grounds)

    • Leave - paid annual, sick and compassionate and family and domestic violence leave, public holidays, unpaid parental, community service and long service leave

    • Casual conversion - excluding small business, for more than 12 months must be offered the option to convert to full-time or part-time permanent employment

  • Changes from 2023 to 2025

    • Expanded to include provisions relating to Super, up to 10 days paid leave for DM victims

    • Minimum employment standards include gig economy workers

    • Right to disconnect - giving employees the right to refuse to respond to contact from their employer outside of their working hours

Minimum wage

• Minimum wage

  • The national minimum wage provides a safety net for any employee not covered by an award

  • The Fair Work Commission conducts an Annual Wage Review to set minimum wages

  • Take effect from 1 July each year

  • As of 1 July 2026, the National Minimum Wage is $26.44 per hour or $1004.90 per week

  • While the 2025 decision increased real wages, the Commission kept the rise modest given low productivity growth and employers’ capacity to pay