The Australian economy has experienced significant changes in recent years, driven by both

global events and domestic policies. One of the most notable events was the Covid-19 pan-
demic, which led to a recession in 2020 and sparked government intervention through mon-
etary and fiscal policies. While these policies have helped to stimulate economic growth and
support workers, they have also contributed to the current state of inflation and economic
instability in the country. Additionally, long-term challenges such as weak productivity
growth and disappointing wage outcomes remain, highlighting the need for continued at-
tention and reforms in the Australian economy. Australia is a mixed market economy, allow-
ing free trade in the country along with government intervention. Australia unlike other
world economies has an extensive amount of government intervention through the form of
subsidies, minimum wage legislations, price controls, taxes, government bailouts and more.
The country’s national economy is focused on economic growth and has constant interven-
tion to flatten out the recessionary periods and booms of the economic cycle and addresses
issue like price stability and quality of life through monetary and fiscal policies. Australia’s
progressive tax system is another key policy that evens out the distribution of income.

One of the most significant events that impacted the Australian economy in recent years
was the Covid-19 pandemic. This global crisis led to a massive economic downturn, with
consumer spending, job security, economic growth, and quality of life all declining. As a re-
sult, Australia experienced its first recession in three decades during the June quarter of
2020, with GDP decreasing by 7%. In response, the Reserve Bank of Australia implemented
expansionary monetary policy, which involved of lowering the cash rate to a record low of
0.1%. While this policy has proven to be successfully executed in the short term, as seen in
an increase of the national GDP by 4.3% in the fourth quarter of 2020, contributing to 75%
of the GDP growth in that quarter, it has also driven Australia into its current inflammatory
economy caused by a surge in demand after the pandemic’s decline.

Low interest rates were an obvious consequence of this policy and had pumped money into
savings of the household sector, as there was a lack of opportunities for consumers to spend
their money. After the easing of covid-19 restrictions, consumer demand had peaked while
productions units were not at full capacity. This has created strong consumer demand re-
sulting increased prices in dwellings, up 17.8%; do-
mestic holidays, travel, and accommodation, up
by19.8% and fuel costs up 13.2%, also known as de-
mand-pull inflation as demonstrated in Figure 1.
Inflation has put pressure on consumers due to the
instable and peaking prices resulting in strict and
managed consumer expenditure which lowered the
quality of life for many. The RBA in response to the
inflation has raised their cash rate to 3.60% on the
8th of March 2023. This spike in cash rates has pres-
surized consumers to stick to a tight budget resulted
Figure 1 due to the high interest rates.

Low levels of unemployment rates have also contributed towards inflation as proved by the
Phillips curve (Figure 2). The RBA’s recent increase in cash rate to tackle inflation also had a
slight increase in unemployment rate as inflation and unemployment are inversely related.
 The covid-19 pandemic had broken Australia’s 28-year
streak of economic growth in the latter quarters of
2019. While the recovery was underway ignited by the
low interest rates and increased household savings,
Australia’s future wasn't at its brightest in terms of
long-term living standards, as a continuity in weaker
productivity growth that had led workers to disappoint-
ing wage outcomes. In times when worker’s demand
and income rates were at their lowest, government in
the form of subsidies has implemented expansionary
fiscal policy, which played an important role in provid-
ing workers a sustainable disposable income and keep-
Figure 2
ing companies running. In the implementation of fiscal
policy, the Australian government’s expenditure was expanded to influence employment
and expenditure of consumers in 2020 and 2021 financial years.

The two main subsidies were Job Seeker and Job Keeper, ran by the Australian Taxation Of-
fice and Centrelink respectively. The 2021-22 budget assigned $41 billion towards direct
economic support for workers and companies across the country, bringing up the total gov-
ernment expenditure to a massive $291 billion, as of May 21’st - 2022. These subsidies have
helped balance income distribution by providing stimulus packages to the unemployed in
the form of job seeker payments, and job keeper payments that covered part time, full time,
stood down employees and long-term casual workers in businesses which also boosted em-
ployment and spending to rejuvenate the economy and its GDP as proved in Figure 1.

While these subsidies have been successful in lifting living standards and the increase in gov-
ernment spending has boosted economic activity, the reliability of the household sector on
these sorts of subsidies has later created a gap between costs of goods and consumer capa-
bility of buying these goods. As the economic assistance payments had to be temporary, the
removal of Job Keeper payments on the 28th of March 2021 and the reduced intensity of
Job Seeker since the easing of the pandemic, has resulted in price instability, ultimately con-
tributing to the current inflation in the economy.

In Conclusion, Australia’s response to economic problems like economic growth, quality of

life, the distribution of income and price stability was using expansionary monetary policy
and expansionary fiscal policy. The RBA’s response of decreasing its cash rate has aided the
national economic growth in the short term, however has become one of the main reasons
for inflation in later quarters. Fiscal policy was implemented in the form of subsidies, mainly
job keeper and jobseeker payment, meaning an increase in the government’s budget in the
2021-2022 financial year. Overall Australia’s response to the four economic problems has
been instant and effective to pull the national economy and can be seen effective as Aus-
tralia had experienced recession in only one quarter compared to other international econo-
mies. The two policies have worked as a balancing act to resolve economic growth, quality
of life, the distribution of income and price stability in the past five years.

By Advaith Ilavajhala