how much can a government really do to control the economy?

[Duffman]

having only got a very basic understanding of economics, i thought that aslong as the government didnt do anything completely stupid like give all our money away, our economy would do about the same thing, regardless of who was in power.

our economy is fairly small and follows what the world economy does.
interest rates are controlled by the reserve bank, who operate independent of the government

so am i miles off?

cheers

[thro]

They can control it with tax, tariffs on imports/exports, and public infrastructure (or lack thereof)...

[Aphex]

Do what the chinese govt has done and impose mandatory charges on steel etc and see what sort of an impact that has on things. Their reasoning behind it is to maintain absolute control so that companies dont become too profitable with the possibility of gaining power against the govt. Their economy is much larger than ours of course but its all relative.

[Semi]

fiscal policy ie budget surplus/defacit. Basically if a government is in defacit it encourages more growth, being in surplus restricts it (taking money out of the economy). Thats why governments are currently running surpluses, to stop the economy from overheating

[leeham]

as long as the government didnt do anything completely stupid like give all our money away,
cheers

vote labor, watch them give money to free loading bludgers

lol flame suit on

fiscal policy ie budget surplus/defacit. Basically if a government is in defacit it encourages more growth, being in surplus restricts it (taking money out of the economy). Thats why governments are currently running surpluses, to stop the economy from overheating

wouldnt a defacit make a slower economy ? as the Gov would not be able to assist in building shite, like roads etc? or help with ports etc? (not that they do )

a surplus allows things like TAX CUTS FTW!!!, and large cash injections into new projects etc.

i think a defacit would be worse for the ecnomomy IMO

bu tmaybe i am wrong ?

[shmoo]

True the Gooberment do not directly set interest rates. BUT the Reserve Bank sets the rates in response to what the economy is doing. The Gooberment (through endless other policies that i wont go into) can either speed up or slow down the economy as they see fit. In simple terms, if the economy is screaming along and people are spending huge amounts of money too quickly then the reserve bank will raise rates to slow it down again. This obviously works in the reverse too.

The short story is simply that the Gooberment wants to keep the economy ticking over in a good amount of growth BUT without booming so fast that inflation is pushed up to unacceptable levels because that causes rates to go up - and if rates go up, people dislike the Gooberment.

[shmoo]

wouldnt a defacit make a slower economy ? as the Gov would not be able to assist in building shite, like roads etc? or help with ports etc? (not that they do )

a surplus allows things like TAX CUTS FTW!!!, and large cash injections into new projects etc.

i think a defacit would be worse for the ecnomomy IMO

bu tmaybe i am wrong ?

A surplus or deficit really is not important. Its the simple thing that there is "good debt" and "bad debt" so as long as the governments debt is not all on a giant AMEX bill, its no problem.

The main reason for running budget surpluses is that it makes the average shmuck think that the country is better off because the average shmuck thinks that if the country has any debt it must mean we dont have enough money.

[Taylor]

Does purchasing an appreciating asset effect inflation as much as buying a depreciating car or something?

If everyone used the money we spent on toys, which drives up inflation, on foreign assets, would this effect our current economy the same?

In summary, could the government encourage Australians to invest in international markets to keep inflation low in Australia?

[Jonchilds]

Wouldn't it depend how the defecit came about?
Through government spending = good
Through lack of economic activity (thus lower tax revenue) = bad.

I think that the economy these days is reasonably self-sufficient - the government may only have influence on 30-50% of the economic direction. That said, I don't think anyone could stuff up this boom unless they actually tried. Can't turn around export demand without shutting down exports.

[Jonchilds]

Taylor: People wouldn't invest in international markets if investment fund performance is anything to go by. Global funds appear to be returning 5-15% (excluding resource sectors) whilst the Australian equities are in the order of 22-35% (eg, double).

Also, if you're investing hard earned or shareholders money, why take the greater risk and go global when you can get better returns locally unless you're a mutinational and already exposed to the market?

The government needs to get people to stop spending and start saving, or atleast stop living off credit. And always invest local if you can, it gives opportunities to Australians rather than the chinese (what's $1 divided by 1,000,000,000?).

[19andrew59]

That said, I don't think anyone could stuff up this boom unless they actually tried.

This has happened in the past, when the government of the day has caved in to minority tree hugging groups and made expansion / exploration just about impossible.

[Taylor]

So an orchestrated boost of say $10 billion dollars into the local economy wouldn't adversely effect our economy and force and interest rate rise? Assuming that market prices were paid.

[leeham]

ANY government needs to encourage people with smart tax advantageous policy methods to get people to stop spending and start saving and invetsing, or atleast stop living off credit.

And always invest local if you can, it gives opportunities to Australians rather than the chinese (what's $1 divided by 1,000,000,000?).

fixed that with green

but a great point JC

[Jonchilds]

So an orchestrated boost of say $10 billion dollars into the local economy wouldn't adversely effect our economy and force and interest rate rise? Assuming that market prices were paid.

In excess of $20billion is injected into the economy every year through compulsary superannuation. A large portion of that (30%+ depending on fund and personal preferences) is directed to share holdings.

$1.6 billion was traded on the 5 most active ASX listings yesterday.

I doubt a once-off $10billion investment would produce a lasting change in the current climate.

[Drach]

Having done Year 12 econs (not that high level), but doing a commerce degree based on finance, i have a fair idea of whats happening.

Diversifying is always good, because it ensures stability of money coming in and out. So if some country dies, it won't effect other income that much. People invest mostly in Australia though because of 1) The boom, giving very good returns and 2) people invest in places they feel they know best, being australia. If you knew little of the US share market, you feel unsafe investing there. Technically speaking, it's best to invest 60% of money int he US, 15% in Japan, and 15% in Europe, and the other 10% around the world to diversify as much as possible.

Australia is a mostly deregulated country. Taxes are set, but the dollar isn't controlled except when it has drastic changes, like the stock market as well. Therefore, the government has less control. however, the government spends a few hundred billion a year on infrastructure and so on. Think of the gov't as a massive bank investing everywhere. A deficit in the surplus means we have to pay interest, and eventually pay back the loan, as well as putting more money into the economy, which means that because there is higher demand, people charge higher prices, so inflation increases.

Thats why a lot of people are afraid of union control, because historically (being 1950's, not sure about now though) what happens is unions jack up the min wage, and people buy stuff with the extra money, and inflation increases. So the unions make another wage rise to offset this, which makes things worse. Now that only about 1/5 people are unions, it happens, but to a much less degree.

$1.6 billion was traded on the 5 most active ASX listings yesterday.

I doubt a once-off $10billion investment would produce a lasting change in the current climate.

$1.6 billion is traded yes, but thats a liquidity issue. Companies trade $50 million of assets for $60 million of a different asset. There's not much new money going into the economy. maybe $200 million. A once off investment of $10 billion makes a decent impact because it's new money thats come from somewhere else.

So in answer to the original question, governments can effectively control the interest rates, but they have to do so indirectly. However, due to the complexities, so many variables must be managed it becomes a complex job to deal with. So although the Howard government did promise to keep rates low, it is hard to do so by itself, especially in the current climate of people want to spend stuff on the now, resources boom, oil prices and so on.

yeah..... sorry, was at home and got bored