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Unit 4 AOS 2 - Aggregate supply policies (Aggregate supply policies (AD vs…
Unit 4 AOS 2 - Aggregate supply policies
Aggregate supply policies
Government policies that are designed to increase AS by either increasing resources or making firms more efficient
Most are microeconomic reform policies that are designed to improve the structure and operation of particular markets in order to increase efficiency e.g. privatisation of government businesses, deregulation of the labour market
Shift the PPF out
Shift the AS curve to the right, decreasing inflation and increasing real GDP
Help to combat stagflation (high inflation, low growth), capacity constraints and supply shocks
AD vs AS policies
AD focus on consumers (through influencing consumption and investment levels) while AS focus on businesses (influencing productivity and resources)
AD policies are about smoothing out the businesses cycle while AS policies are about increasing efficiency and building the foundations for long term growth
ASP and efficiencies
Technical efficiency
- help to increase the amount of outputs that can be produced per unit of input e.g. spending on infrastructure, trade liberalisation can also increase competition for domestic firms e.g. CPTPP
Allocative efficiency
- help to allocate resources more efficiently to meet the demand of consumers e.g. deregulation of the tax industry
Dynamic efficiency
- making it easier to switch resources to means of production with a higher price or efficiency e.g. reduced labour regulation
Inter-temporal efficiency
- can help to improve living standards for future generations e.g. carbon tax
ASP and macroeconomic goals
Low inflation
- helps to reduce cost inflation through increased efficiency and makes it harder for AD to outstrip AS
SSEG
- can increase growth particular sustainable growth as it is based on growth in efficiency rather than demand or CAD
Full employment
- helps to incentivise people to enter or renter the workforce (immigration, pension reform), helps to improve skills of workers and thus their productivity and reduce SUE, may increase unemployment in the short term (trade liberalisation)
International competitiveness
- increase efficiency and thus help to reduce prices and improve quality
Living standards
- increase growth in real GDP and thus MLS, increases in MLS often also increase NMLS, however may also increase stress and pollution
AS Budgetary policies
Spending on training and education
- productivity of labour is increased also helps to train workers in occupations where there are skill shortages e.g. Delivering Skills for Today and Tomorrow Package 2019/20 budget
Research and development
- innovation allows for greater productive capacity, creates positive externalities as innovation benefits future employers and employees e.g. $19.5 million Space Infrastructure fund including a mission control centre in SA 2019/20 budget
Investment in infrastructure
- reduces congestion and idle resources and thus increases productivity, decreases costs of production e.g. $2bn contribution to the Melb-Geelong fast rail from the 2019/20 budget
Subsidies
- allows firms to overcome temporary supply shocks and quickly return to full production and use resources to their full potential which may not have been if not subsidised, but there is an opportunity cost and they decrease incentives for efficiency e.g. $10bn drought and flood relief for farmers
Link to goals
Low inflation
- lead to lower average costs for businesses reducing CI and reduce risk of AD outstripping AS
SSEG
- lower average costs increases international competitiveness which raises AD and thus growth rates
Full employment
- increased IC and growth leads to more demand for labour, education and training also make labour more productive and can reduce long term/structural unemployment
Tax reforms
Income tax - 46%, company tax - 20% and sales tax - 14%
Purposes
- to raise money for government spending, to be efficient and thus cost efficient, to promote equity, to deal with market failures
Reasons to reform
- increase incentives, increase equity, reduce compliance costs, increase international competitiveness, deal with externalities
Reform - income tax changes 2019/20 budget
- immediate tax relief for low and middle income earners of $1080 for those earning up to $126000, workers retain more of their income and thus worker harder and longer = increased productivity of labour = increased AS BUT does not affect higher income earners
Reform - extending GST
- offshore sellers of hotel rooms in Australia must now pay GST, markets of these g/s will become more efficiency as suppliers must compete on price and quality rather than tax based advantage, increases international competitiveness
Reform - company tax reductions
- reduction in company tax for small businesses from 27.5% to 25% being brought forward to 2021/22, increases profitability of firms meaning they have more funds for investment in capital and labour productivity = increased capacity BUT does affect large businesses
Welfare reforms
Makes up 35% if budgetary outlays
Purpose
- increase equity
Reasons to reform the welfare system
- to decrease disincentives to work (especially if welfare is immediately lost upon beginning work or if the person is better off on welfare than when earning an income)
Reform - changes to aged pension
- increasing the age at which the pension can be claimed from 65 to 67 and allowing pensioners to earn $300 up from $250 per fortnight without it affecting their pension payments, increases incentives to work = increases participation rate = downward pressure on real wages
Reform - child care subsidy 2018/19 budget
- introduction of a new child care subsidy which provides more targeted funding to lower income families to help them afford child care for pre school aged children, decreases disincentive for parents to work = increased supply of labour = downward pressure on wages
Immigration
Current policy
- 160,000 new migrants from 2019/20 and for the next 4 years, 2/3rds of migrants will be skills based, temporary skill shortage visa program allows people who have occupations on the occupations list to stay for up to 4 years
3 Ps
Productivity
- Australia primarily targets migrants who are educated trained and thus have a higher level of productivity, current policy means that people are chosen based on if they can fill jobs where there are skill shortages
Participation
- Australia primarily targets migrants of early working age who will join the labour force and stay in it for years, increases the participation rate, slows down the ageing population (which means more government spending must be devoted to health/aged care/pensions), more income tax helps to fund these services
Population
- net migration increases the population of Australia, adds to labour resources and increases the domestic market for consumers allowing firms to operate on larger, more efficient scales
Labour market
- increases the labour force and puts a downward pressure on wages, helps to deal with capacity constraints in terms of the availability of labour, can be targeted to particular areas/occupations
Aggregate supply
- increases the supply of labour and thus the participation rate, alleviates capacity constraints, increases labour productivity, allows for the creation of economies of scale, increased connection with overseas markets
The goals
SSEG
- increases for the same reasons as AS but note that can increase congestion and housing prices and without adequate investment may not be environmentally sustainable
Inflation
- supply side benefits outweigh increases in demand = reduced demand inflation and also reduces cost inflation by restraining real wage growth
Full employment
- tends to reduce unemployment in the long run as it boosts growth in AS and thus derived demand for labour, focussed on areas of skill shortages, migrants also add to demand
Strengths and weaknesses
Budgetary Strengths
- can be targeted to particular industries, sectors and geographic areas, they are generally politically popular, can be used to capture positive externalities
Budegtary Weaknesses
- they must be funded through taxes (which decreases AD and incentives) and may result in deficits (which could crowd out the domestic borrowing market and cause increases in future taxes) which can reduce AS, there is an opportunity cost, there can be time lags in implementation and impact on economy
Tax and welfare strengths
- tax cuts for individuals increases their disposable income without increasing real wage costs for businesses, can work together to increases incentives by reducing EMTR
Tax and welfare weaknesses
- they can be politically controversial and are often subject to implementation lags, add pressure to the budget outcome
Immigration strengths
- they can target industries or geographic areas where there are skill shortages, skilled migrants arrive pre-trained thus reducing the cost opportunity of increasing skills
Immigration weaknesses
- can be subject to political bias and pressures, too much immigration without investment in infrastructure may lead to overcrowding in cities, it may reduce incentives to retrain Australia as sill shortages become apparent