Consequences of Not Achieving Strong and Sustainable Economic Growth

Introduction

Achieving strong and sustainable economic growth is a primary domestic macroeconomic goal in Australia. Failure to achieve this goal, whether growth is too high or too low, can have significant consequences on living standards. Strong and sustainable economic growth is defined as “the fastest rate of increase in GDP (around 3%) that doesn’t accelerate inflation or undermine the achievement of other economic and environmental goals”.

KEY TAKEAWAY: Strong and sustainable economic growth aims for a GDP increase of around 3% without causing inflation or environmental damage.

Consequences of Growth Being Too High

Higher Inflation Rates

When economic growth exceeds sustainable levels (e.g., 5-6% annually), the economy may overheat due to spending exceeding productive capacity. This leads to:
* Demand-pull inflation: Increased demand pulls prices upwards.
* Cost-push inflation: Increased demand for resources increases their costs.
* Reduced purchasing power for consumers.
* Erosion of international competitiveness.

External Pressures

Unsustainably high growth can lead to external imbalances:
* Increased imports: Higher incomes lead to increased demand for imported goods and services.
* Decreased exports: Resources are diverted to domestic production, potentially reducing exports.
* Trade deficit: Imports exceed exports, putting downward pressure on the exchange rate.
* Current Account Deficit (CAD): A trade deficit contributes to a CAD, which can lead to foreign debt.

Environmental Degradation

Rapid economic growth can strain environmental resources:
* Increased pollution: Higher production levels often result in more pollution and greenhouse gas emissions.
* Resource depletion: Faster resource consumption depletes natural resources at an unsustainable rate.
* Habitat destruction: Development for economic activity can destroy natural habitats.
* Climate Change: Increased emissions contribute to global warming and climate change.

APPLICATION: The COVID-19 pandemic lockdowns demonstrated that reduced economic activity can lead to significant improvements in environmental indicators such as CO2 emissions and air quality.

Consequences of Growth Being Too Low

Higher Unemployment

Slow or negative economic growth (recession) leads to:
* Decreased demand for labor: Businesses reduce hiring or lay off workers due to decreased demand.
* Increased unemployment rate: More people are actively seeking work but unable to find it.
* Cyclical unemployment: Unemployment caused by fluctuations in the business cycle.

Lower Incomes and Depressed Living Standards

High unemployment leads to:
* Reduced average incomes: More people rely on lower levels of government welfare benefits.
* Decreased consumer spending: Lower incomes reduce consumption, leading to lower aggregate demand.
* Reduced business investment: Lower demand discourages businesses from investing in new capital.
* Decreased material living standards: Reduced access to goods and services.
* Decreased non-material living standards: Increased stress, poor health outcomes, and reduced social cohesion.

Weaker Government Finances

Slow economic growth reduces government revenue:
* Decreased tax revenue: Lower incomes and profits reduce income and company tax revenue.
* Increased government spending: Higher unemployment increases government spending on welfare benefits.
* Budget deficit: Government spending exceeds revenue, leading to increased government debt.
* Reduced ability to provide services: Government may have to cut back on essential services such as healthcare and education.

EXAM TIP: When discussing the consequences of low growth, be sure to distinguish between cyclical, structural, and frictional unemployment.

Summary Table: Consequences of Unsustainable Growth

COMMON MISTAKE: Students often only focus on the negative consequences of high inflation and forget that deflation can also be detrimental to economic growth.

Conclusion

Achieving strong and sustainable economic growth is crucial for maintaining and improving living standards in Australia. Both excessively high and excessively low growth rates can lead to undesirable consequences, highlighting the importance of effective macroeconomic management.

VCAA FOCUS: Be prepared to evaluate the extent to which Australia has achieved its macroeconomic goals over the past two years and discuss the effect of this on living standards.