Economic Division

Contemplating the pitfalls of Australia’s divided system

J. A. McCreery

AS AUSTRALIA STRUGGLES to grapple with the increasing cost of living and rising inflation, incoherent policy making becomes ever more prominent. Although these failings stem from extraneous factors, such as the war in Ukraine and existing supply chain pressures,  Australia’s divided economic control and an inability for policy makers to coordinate their efforts magnifies the issue. 

Monetary and fiscal policy are the two main forms of economic intervention utilized by regulating authorities to combat inflation, promote sustainable growth and reach full employment.

• Monetary policy: the control of the quantity of money available in an economy and the channels by which new money is supplied.

• Fiscal policy: the use of government spending and taxation to influence the economy.

In the Australian system, the Reserve Bank of Australia (RBA) is responsible for monetary policy. The RBA is an independent central bank, headed by an appointed Governor, and has the freedom to make unfettered decisions. This system was created through the Reserve Bank Act of 1959 in order to maintain public confidence in the nation’s central bank and promote a non-political managing body. In contrast, fiscal policy is directly controlled by the government and, as such, can be swayed by political allegiances.

The prime example of this divided system is the contradicting response to recent economic strains. 

The RBA, in an effort to reduce inflation, increased interest rates (4/4), for the first time in more than 11 years, moving rates from 0.1% to 0.35% and later to 1.35% (5/7) with even more rate hikes expected. These higher interest rates lower spending in the economy as businesses and individuals are less willing or able to access funds at the increased price. Consequently, consumer spending decreases, money supply tightens and demand for good drops. Less demand equates to lower prices, thus, inflation rates fall. The level of business investment, a significant contributor to growth, also falls and places downward pressure on inflation. 

In spite of such efforts, the newly installed Labor government plans to enact a 45 billion dollar fiscal package, to be invested in technology, manufacturing, power infrastructure and home building. Such spending decidedly works against RBA initiatives, demand for goods will inevitably rise as money floods the system thus promoting an inflationary environment. Shadow treasurer Angus Tayor outlined its effect, claiming Labor’s spending would “fuel higher inflation and higher interest rates.” 

Such a split in policy inevitably reduces the efficacy of either side’s decision, as monetary and fiscal policy are most effective when used in tandem. If macroeconomic goals were to harmonize, stability could be reached with far lesser fluctuation throughout the economy. 

Clearly, there is a lot to consider about the benefits and failures of the Australian economic managerial process. Is there value in independent RBA control? Would holistic government authority better reflect the will of the people? Is the existing division beneficial for achieving primary economic goals?

Such questions are often avoided as governments work to justify existing systems, but politicians and economists must confront them to ensure the enduring wellbeing of the Australian economy and, in turn, its people.