Economic growth refers to an increase in an economy’s productive capacity, as measured by changes in its real GDP (adjusted for inflation), over a period of time. Growth may be measured quarterly, annually, or year on year (changes from one quarter to the corresponding quarter the following year). Annual growth is used to identify trends in the business cycle, while quarterly growth provides an indication of the economy’s short-term direction, and year on year growth to show annual progress.
These measures are necessary so that policy decisions can be implemented accordingly. Fiscal policy may only be implemented once per year in the annual budget while monetary policy may be conducted 12 times per year (RBA meetings occurring once per month). Therefore, fiscal policy is used to influence annual growth/the business cycle while monetary policy is used to influence quarterly growth.
Australia has experienced stable, sustained growth compared to both other advanced economies and previous levels of growth in Australia. This is highlighted by the 17 year of consecutive annual growth from 1991 to 2008, averaging approximately 3.6% over this period. There were several reasons for this sustained boom period in Australia’s business cycle, including strong conditions in the global business cycle, a vast improvement in Australia’s terms of trade (driven by the global resources boom and China’s demand), successful government economic management through wise macroeconomic policy decisions, productivity growth, increases in asset prices and innovation and technological advancements.
However, the end of this annual growth streak can be seen in the lead up to GFC where quarterly GDP growth decreased:
• Dec 07 = 1.0%
• Mar 08 = 0.6%
• Jun 08 = 0.1%
• Sep 08 = 0.1%
• Dec 08 = -0.5%
Following the GFC, Australia experienced a decline in economic growth. In the Government’s Budget Speech in May 2009, Treasurer Wayne Swan stated that annual growth was expected to bottom out at a level of -0.5% in 2009-10, followed by economic recovery in the years to come with 2010-11 predicted to record 2.25% annual growth and 4.5% for 2011-12.
Justification of Government Policy
The reason for the government’ decision of expansionary fiscal policy to stimulate economic growth is evident with an understanding of Keynesian economic theory and the Keynesian Transmission Effect. This is a theory of macroeconomics, developed by John Maynard Keynes , based on the principle of aggregate demand being the major determinant of economic growth.
1) Equilibrium level of National Income:
Keynes’ theory suggests that individuals will not necessarily demand what is produced, therefore firms must produce what consumers demand rather than simply expanding production (increasing supply, which previously was assumed to increase aggregate demand). Thus, the level of economic activity, or total output (O)...