Section 1
What is the main issue presented in the media report?
- The Australian Government proposed the imposition of a cigarette sales excise tax in an effort to curb demand, and promote additional finance to public health administration. The cigarettes are slated to cost an extra 25% or AUS$2.16 per 30 pack carton.
- The debate surrounding the imposition of a new excise tax targets the economic efficiency of charging tariffs on consumer purchase of cigarette products. The counter argument points to the demand for the product, and also the $27.8 million dollar government allocation to a public health education initiative. Some argue that the monies spent on the campaign are unnecessary and might better serve in funding traditional education and health services costs, and that any such campaign should be offset by the forthcoming tax.
- The change in cigarette taxation policy comes at a time when Australia is working toward the reduction in demand of such products. The public health rationale provided for the tax is an economic mechanism that stands to curb consumer demand for cigarettes, and with it, divert discretionary spending elsewhere. Taxation ensures that the government extrapolates finance from this objective, so that public health programs may be funded in response.
Who are the key stakeholders that are impacted by the issue outlined in the report?
- Cigarette companies, consumers of cigarettes, retailers and government administration will all be impacted by the new tax.
- Cigarette companies – full price input of new taxes and tariffs will drive up prices, and reduce demand so that the future inevitably holds a threat of loss to profit. Investors will also sell shares in response to restricted rate of return on dividends.
- Consumers of cigarettes – consumers are generally curtailed from spending on products subject to excise tax, as the cost of those goods is disproportional to cost of similar products in the market. Reduction or elimination of smoking will likely result in quite a few Australian consumers from purchasing cigarettes regularly.
- Retailers – the new tax index will influence retail prices, and force out some products from normal inventory where the cost of those goods exceeds the threshold of consumer demand.
- Government administration – the taxation of cigarettes is viewed as a benefit to public health budgets, and it is likely that allocations from those resources will be expended on new programs or initiatives related to control of cigarette smoking.
What economic theories can be drawn from this media report?
- Aggregate demand (AD) and Aggregate supply (AS) or AS - AD ‘disequilibrium’ model (Tomlinson nd.).
- Price insertion in the formula as understood by the Calvo Pricing model presents a baseline disequilibrium AS-AD model. Taxation supplies the price input so that taxation on cigarettes imposes not only price adjustment, but welfare distribution of those monies. If consumption is a reliant on disposable income, investment is concerned with after-tax rates of return (Tomlinson nd.).
Cigarette companies will struggle to sustain profits in the face of taxation, conforming to economic logic that higher tax rates generally decrease Aggregate Demand for those products. While tertiary factors related income, age and other consumer drivers will have some counter impact the force of taxation is an adjustment that shrinks aggregate disposable income. The predicted result: future stagnation of the cigarette market, an economy of scale, stands to lessen the robust potential of the AS-AD dynamic in general however, rather than mutual expansionary growth.
- Graphical illustration of AS-AD axis of aggregate supply and aggregate demand (Figure 1).
Figure 1. Neo-classical economics suggests that taxation policy changes shift the AD curve from AD0 to AD2.
Section 2
What is the main issue presented in the media report?
- The Reserve Bank of Australia cut the cash rate to a record low in response to low inflation. According to the RBA, the Australian economy was predicted to grow at a ‘below-average pace in 2013’, with the labour market remaining ‘soft’, and investment in the mining sector at its peak (The Australian 2013).
- The consumer price index (CPI) inflation reportedly 2.5% below previous forecast prompted “a further reduction in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target” (The Australian 2013).
- Policy decision by the RBA was reached in accordance with the record low inflation rate to ensure economic stability in the face of any near future slowing. The series of rate cuts are expected to promote positive improvement in the housing market with consumer confidence returned in the mortgage lending segment. Share prices have also increased since the beginning of 2013.
Who are the key stakeholders that are impacted by the issue outlined in the report?
- Consumers, Financial Institutions, Real Estate, and Large Budget Companies.
- The overall impact to the stakeholders mentioned will be advancement of consumer credit which will increase spending, and also liquidity. The real property market in Australia continues to be in exceptional demand in comparison to global sector performance and consumer credit and low interest rates on mortgage loans are obviously driving this trend.
What economic theories can be drawn from this media report?
- The extension of consumer credit to consumers by lending institutions in response to cash rate cuts by the Australian Government is designed to add liquidity to core sectors still recuperating from global financial crisis. The increased availability of consumer credit will serve as mechanism for ensuring sustainable economic growth of the national market into the near future. The long term scenario is vital to equilibrium of the economy in the face of record low inflation.
- Here disequilibrium is the source of concern, and cash rate cuts the solution as the Australian Government seeks to ensure equilibrium of Aggregate demand (AD) and Aggregate supply (AS) by way of fiscal policy (Tomlinson nd.). The impact of the decision on monetary policy, or more precisely the currency exchange rate, is not exceptionally relevant in the Australian case.
- According to HSBC chief economist Paul Bloxham on inflation, "They have noted in the past that the link between the Aussie dollar and interest rates is pretty loose, so it's hard to know" (Newscom.au 2013).
References
‘RBA cuts cash rate to record low’, 2013. Newscom.au 7 May 2013. Available at: http://www.news.com.au/business/breaking-news/rba-cuts-cash-rate-to-275/story-e6frfkur-1226636840261#ixzz2YsIQsSlZ
Reserve Bank of Australia, 2013. ‘Cash Rate Target’. Available at: http://www.rba.gov.au/statistics/cash-rate/
‘Softer-than-expected inflation allowed rate cut, says RBA’. The Australian 21 May 2013. Available at:
http://www.theaustralian.com.au/business/economics/softer-than-expected-inflation-allowed-rate-cut-says-rba/story-e6frg926-1226647545710
Tomlinson, Stephen, nd. ‘Economics’. Cengage. Available at: http://custom.cengage.com/static_content/OLC/0324833326/data/lecture/8552.pdf
