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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Budgetary policy and living standards

Remember that the ultimate goal of all policies is to improve the efficiency in the allocation of resources so that living standards or welfare are maximised.  In this respect, initiatives designed to lift economic growth, reduce unemployment, control inflation, improve equity and achieve external stability are all intermediate goals that are necessary if Australia is to experience an increase in general living standards.  Arguably, every single measure announced in the budget is unlikely to exist if the government did not believe it would result in our resources being shifted around in such a way that our collective welfare or living standards is improved.  

Clearly, the government will occasionally get it wrong and their policies will actually do more damage than good.  Recent examples include the problems experienced in 2009-10 due to the 'Building the Education Revolution' (with inappropriate development, rorting by some builders and overall inefficiency in the delivery of the program) and the insulation program (where the speed of program delivery resulted in shoddy installation and ultimate loss of lives).  

Despite the problems that do exist with the design or implementation of some government programs, it is important to understand the logic or rationale behind the implementation of the policies.  One should work from the premise that all policies are designed to improve living standards, and then be prepared to demonstrate how this might occur.  For example, the 'Building the Education Revolution' was designed to accelerate plans to improve infrastructure for primary schools.  The speedy delivery was designed to support the economy in terms of growth, employment and incomes.  The ultimate goal was to improve educational outcomes by updating or improving primary school infrastructure.  In both cases, the goal was to improve national living standards.

An alternative way to think about how the budget impacts on living standards is to tap into your knowledge of material covered earlier, in particular, market failures.  In this context, budgetary policy initiatives are continually implemented to improve the allocation of resources across the economy.  These include:

Indeed, many of the initiatives that are announced and delivered through government (Federal and State) budgets occur in an effort to address market failures and improve our living standards.  For example, a handful of recent initiatives that attempt to address failures and improve our collective welfare include:

Any supply side budgetary policies that are designed to improve productivity or reduce costs of the private sector (such R&D tax concessions, spending on national infrastructure, 'Gonski' education reforms, as well other microeconomic reforms implemented through the budget) will assist in lifting technical and dynamic efficiency. An improvement in these types of efficiency will necessarily result in more efficient allocation of resources and improved living standards.

Budgetary policy measures involving major shifts in the savings and spending patterns of the public and private sectors (e.g. superannuation incentives and the establishment of the Future Fund) should also improve intertemporal efficiency and, by extension, result in a more efficient allocation of resources and improved living standards in the long run.  This also applies to those policies that are designed to achieve more sustainable development over time, such as measures to address climate change which result in slower growth today in exchange for stronger growth in the long term.

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