Expert reviewed • 22 November 2024 • 9 minute read
In the pursuit of obtaining economic policy, governments often face the challenge of balancing multiple objectives. While these objectives are essential for a well-functioning economy, they can sometimes conflict with each other, making it challenging for policymakers to achieve all goals simultaneously.
Before delving into conflicts, let's recap the main economic objectives:
While economic growth frequently depends on the exploitation of natural resources and industrial activities, these practices can have detrimental effects on the environment. Australia's mining sector exemplifies this dilemma, contributing 10.4% to the country's GDP in 2022 but also accounting for 20% of its greenhouse gas emissions. This conflict is further illustrated by Australia's economic and environmental statistics from 2022: the nation experienced a 3.6% GDP growth, but simultaneously saw its CO2 emissions rise to 487 million tonnes, marking a 1.3% increase from the previous year. Addressing this issue requires the implementation of policies that promote green growth and sustainable practices. For example, the transition to renewable energy sources in Australia such as solar power, has started to promote sustainable growth.
The objective of full employment aims to maximise the employment rate without triggering inflation, but this balance is delicate and complex. When unemployment dips below its natural rate, it can spark cost-push inflation, as increased labour demand drives up wages and, subsequently, prices. This relationship is illustrated by the Phillips Curve, which depicts the inverse correlation between unemployment and inflation rates. To see more about this correlation read the chapter on analysing the Phillips Curve. Australia's economic situation in 2022 exemplified this phenomenon: as the unemployment rate dropped to 3.5%, inflation surged to 7.8% by year's end. This situation underscores the inherent conflict in economic policy, where efforts to reduce unemployment can inadvertently fuel inflationary pressures.
While rapid economic expansion can drive overall prosperity, it may simultaneously worsen income inequality if the benefits are not evenly distributed across the economy. This inequality is highlighted by the wealth distribution landscape in Australia: the top 20% of households own 63% of the total wealth, while the bottom 20% possess just 1%. These figures display the complex task policymakers face in ensuring that economic growth is inclusive and benefits all segments of society equally, rather than concentrating wealth among a select few.
The pursuit of external stability, encompassing a stable exchange rate and manageable current account balance, can sometimes clash with domestic economic objectives such as full employment and sustained growth. This is exemplified in Australia's economy, where the floating exchange rate system, while promoting external stability, can present challenges for export-oriented industries when the Australian dollar appreciates. The conflict between external and internal economic goals is further illustrated by the potential impact of measures aimed at improving the current account balance, which might hinder domestic growth. As of 2023, Australia maintained a current account surplus of 2.2% of GDP, while the AUD/USD exchange rate stood at 0.65 in November.
While economic growth signifies an increase in the production of goods and services over time, maintaining price stability requires keeping inflation low and steady. Rapid economic expansion often triggers demand-pull inflation when the demand for goods and services outpaces supply, pushing prices upward. For example, in recent times, the Reserve Bank of Australia (RBA) has raised the cash rate from 0.1% in 2020 to 4.35% in 2024, to combat inflation. This action underscores the conflict between tight monetary policy aimed at controlling inflation and its potential to curb investment and consumer spending, therefore impacting economic growth. As of November 2023, the RBA's cash rate stood at 4.35%, while the GDP growth forecast for 2023-24 was projected at 1.5%, down from 3.6% in 2022. These figures highlight the delicate balance policymakers must strike between fostering economic growth and maintaining price stability.