ACBUS108A Impact Of Coronavirus On Australian Economy: Case Study Assessment Answer
1. What economic measures (in general summary form) has the Government undertaken?
The Australian Government has taken the following measures to overcome the impact of coronavirus on the economy of the country and keep the aggregate demand up. The total package of the COVID-19 response by the government has totaled upto $198 billion till date (https://budget.gov.au/2020-21/content/covid-19.htm). The economic measures taken up by the government are:
- Job keeper Payment – The measures help the business affected economically by the coronavirus to keep up the jobs and hence prevent unemployment. The scheme is available till 28 march 2021. The employers will have to shows the decrease in the GST turnover as compared to the similar period in earlier year.
- Supporting the households and individuals - The eligible income support recipients have been allowed an additional amount in name of coronavirus supplement. The support is of temporary nature. The support payments are of t$750 each and $250 each.
- Home builder- this measures provides the eligible owners of the house with the support of $25,000 to build the new home or renovate the existing home.
- Some other measures are the support to businesses and employers. The cash flow payments of up to $100,000 are available for the small and medium sized business to pay the staff and retain the staff. , supporting the credit flow in the market, etc.
2. Why do you believe the Government has had to action, compile and enact such large fiscal stimulus packages?
The Government had to taken action and provide so huge fiscal stimulus to avoid the decline in the economy of the country. It has been observed that due to coronavirus the global trade has come to halt. Lots of business are suffering losses duetolackofbusiness.as the result there is decrease in income of people leading to decrease in demand and the decrease in production. The economic cycle has reduced significantly. The risk and uncertainly has led to other less affected people to save and spend less. The cash flow in the market has reduced. There is the risk of small business and traders who do not have deep pockets, closing down and going bankrupt.
The government packages aim at providing the support to the affected business and workers so that the market demand does not fall to an alarming level. The people would keep working and spending and so the business will keep running. This will help the economy to remain strong in the pandemic and bounce back faster after it.
3. What has the RBA done in regards of monetary policy? What effect do you believe this will have on the overall economy, given recent interest rate moves?
- The RBI has reduced the Cash Rate to 0.25%. This will increase the cash flow in the economy of the country. The low rate will negatively affect the people relying on the interest income but will benefit the economy as a whole. The 3-year Australian Government Bond yield is of around 0.25% now. This will reduce the cost of funding in the country. The banks are ordered to be prepared to purchase the bonds in the secondary market. This ensures risk free interest rate for the credits. The business and individuals can borrow money from the banks at a very lower rate of interest and invest in their business or economic activity to keep the business going (RBA, 2020).
- The RBA has provided the TTF (Term Funding Facility) to lower the cost of funding for the banking sector. The banks can provide credit to households and business at low rate.
Yes these measures are expected to support the economy by providing funds to the affected business and increase the spending power of the individual. But since economy is globally twined, the lack of business activity globally will also affect the economy of the country.
4. Has the Government targeted certain groups or “demographics” in these fiscal stimulus package measures? If so, who? Why do you believe the Government has targeted these particular groups? What other key macro-economic (theory) factors is the Government aiming to utilise in these packages?
Yes, the government has targeted mainly small business which do not have very deep pockets for the packages. Also the business who are more affected by the pandemic are targeted. The individuals and people who rely on the income from their affected business are targeted. Macro economy is concerned with the economy as a whole. This means that every part of the economy should operate in order to keep the strong and sustainable economic growth. The creation of jobs, wealth and standard of living depends upon the overall economic growth. If some sections of the economy are affected, the affect will transfer to other parts in no time. Thus the RBA has targeted to support that’s section of the economy which is more affected by the pandemic. The individual households and small investors are a big boost to the economy, they are supported so that the spending and demand in the market can be maintained.
5. Why is the fiscal package strategy (Keynesian policy) likely to have a greater positive effect, than a strategy that relies more heavily on monetary policy (Classical policy)?
The fiscal policies affect the composition of government spending, the nature and rate of taxes and the level and form of government borrowings. The monetary policies are on the other hand activities of the Central bank of the country which affect the flow of money and credit in the market through changes in the interest rates.
The government can influence the economy directly and quickly through the fiscal policies. The capital expenditure by the government will affect the economy immediately by affecting the spending of people, increasing the consumption, boosting the investment and promoting exports. Fiscal policies are under direct control of the governments as compared to monetary policies which are dependent upon the investors and individuals. Through fiscal measures the government can support the aggregate demand in the economy but increasing public spending and cutting their taxes (Jahan, Mahmud & Papageorgiou, 2014). The automatic stabilizers form some types of government spending which are sensitive to economic activity and stabile the aggregate demand in the economy (Dalamore, 2020)
6. What are the consequences of such a large fiscal stimulus packages? Are they short-lived and easily corrected; or are they more likely to have long-term effects?
In the past it has been observed that when the whole world was crippled by the international crisis in 2009, the European countries implemented austerity measures which worsened the economic conditions in the country. While the Australian government was able to limit the negative effect of the depression and speed up the economic recovery process (Martorano, 2013).
Similarly the stimulus packages offered by Australian government in the pandemic are pretty aggressive. The impact of the stimulus offered by the government of the country is expected to have the following impact:
- The tax revenue of the government will fall by AU$25.8 million in 20-21
- The cash balance would fall from a projected AU$6.1 billion surplus to a deficit of A$24.8 billion
Since the impact on Australian economy is expected to be less than that in other world economies is expected that the impact will not last long. Further there is still lots of uncertainty around the pandemic due to lack of any vaccine availability. The impact will also depend upon the recovery of the global economy.