Role of Government in Mixed Economies Such As Australia

What role do governments have in modern mixed economies such as Australia? Using
appropriate indicators (macro economic aggregates) outline the present state of
the economy. In what ways is the Commonwealth government using fiscal and
monetary policies to influence the Australian economy? What are the main
features of the government\'s micro economic policy? Why is the government
concerned about microeconomic reform?

Synopsis:

The role of government in Australia today has less influence on the market than
they did a decade ago. It function now is to provide a stable internal and
external balance under which the market can function. This is achieved through
the use of fiscal, monetary and microeconomic reform.

Australia currently operates under a mixed economic system. This means that the
government has partial control over the economy and has the ability to influence
the markets. Recent moves by the government that shows the government\'s role in
the economy to be shrinking includes the privatisation of government business
enterprises (GBE) and deregulation of the financial market. The main roles that
the Australian government plays today are to ensure:

1) The efficient and even distribution of income (though CSSB, tax)
2) Provide a limited range of goods and services (Aust post)
3) General economic management through macro and micro economic
policies.

In 96/97 the CAD fell to $20.9bn from the $27bn blowout during 95/96. This was
largely due to a fall in domestic spending which lead to a slight rise in
national savings. Inflation remained low and fell between the RBA\'s 2-3% target.
This gave way to the RBA\'s 3 consecutive drops in interest rates to stimulate
the economy. Economic growth has stabilised between 3-4%. Although this is a
reasonable figure, a higher growth rate is required if unemployment is to fall
from the 8.6% is has averaged for the past year. Overall economic performance
has been reasonable but current figures show the problems with our external
balance and unemployment will not be solved any time soon.

Fiscal policy is the government\'s use of the Budget to achieve its economic
management goals. This is done through revenue collection and government
spending. In recent years there has been a shift away from the Keynesian view
that fiscal policy is used to stabilise short-term fluctuations in demand. This
refers to a contractionary stance during a boom period to dampen economy and an
expansionary stance during a bust period to stimulate the economy. Current
fiscal policies are aimed at the medium and long-term goals of resource
allocation, income distribution and external balance. This is because fiscal
policy is relatively inflexible and is adjusted on an annual basis.

One of the government\'s objectives in using fiscal policy is to reduce the
Public Sector Borrowing Requirement (PSBR). To do this the government has had a
$3.9bn cut in discretionary spending during the 96/97 budget. This cut may be
the first of several in a bid to achieve a budget surplus. One reason behind
this goal is to maintain external stability. For the past decade (except for the
late 80\'s boom) the public debt has been on a continual rise. This was largely
due to a succession of budget deficits. The result of this was a large increase
in net income as a component of the current account, which in turn became a
burden on the next budget. A surplus budget can be used to pay of the public
debt thereby easing interest obligations.

At the same time a reduction in the deficit will increase national savings. By
reducing the deficit, the government does not need as much national savings in
order to finance the budget. This will leave a larger pool of savings to fund
investment. Although a contractionary fiscal stance will increase public saving,
they may decrease private savings. Cuts in government spending to programs aimed
at increasing private savings (such as Austudy) have meant that the private
sector must cover the costs, forgoing saving opportunities. This will mean a
lower level of private savings but not enough to offset the increase in public
saving. On the whole national saving increases.

Due to the multiplier effect, a reduction in government spending will impact the
level of economic activity. The recent cut in government spending has dampened
aggregate demand. This in turn produced low levels of inflation and economic
growth.

By reducing the amount of government participation in the market, it hopes to
achieve the \'crowding in\' effect. This means that the private sector will invest
in functions that the government once provided (CES facilities).
Monetary policy is the raising or lowering of interest rates to dampen or
stimulate the economy.