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How has government policy impacted the Aussie economy?

There can be no doubt that government policy can and does have a significant and lasting influence of the economy and the behaviour of consumers. There is also no doubt that price signals, in other words changes in prices, can drive swings in demand for goods and services.

Recent data on two segments of the economy show how government policy decisions have worked in a way they were intended and how prices signals work.

The two examples are the carbon tax and the implementation of plain packaging for cigarettes and the coincident hike in tobacco excise.

The carbon tax was in place for just two years – from July 2012 to July 2014. It increased the price of electricity by around 10 per cent and was an issue that was front and centre in the political debate over that time. According to the Australian Bureau of Statistics, the volume of electricity and gas consumed by households fell by 7.2 per cent while the carbon tax was in place. This was despite population growth of around 3 per cent, meaning that per capita consumption of power fell by 10 per cent as consumers reacted to higher prices and global warming issues.

The carbon tax was repealing in July 2014 and in the 18 months since then, the price of electricity has fallen and consumption of power has increased by 8.8 per cent. Consumers are clearly using more power and are less concerned by electricity use as the price, especially relative to incomes, falls.

In terms of the volume of tobacco consumed, there were two significant policy changes at the end of 2012. Plain packaging for cigarettes was introduced and the excise charged on tobacco was increased. There have been subsequent tobacco tax hikes since then, which has pushed the price of cigarettes up to around $1 per stick.

The ABS data show that the volume of tobacco consumed has fallen 22.2 per cent since the December quarter 2012, a staggering fall in context of 5 per cent population growth and the on-going expansion of the economy. A mix of the plain packaging laws and the excise hike have been important drivers of the decline in tobacco consumed.

To be sure, other factors are likely to have played a part in the decline, including health education, the death of 50,000 smokers who no longer consume tobacco and even the lagged effect of banning tobacco advertising and smoking in public places are important.

Suffice to say, public policy in all of these forms has been pivotal in pushing usage of electricity down and then up, and for reducing smoking rates. It also shows that price signals do work.

Which brings us to a range of other policy issues where the government can determine prices and outcomes. Higher university fees will, for example, deter some students from going to university. High income tax rates discourage workers from entering the workforce. The higher the cost of health, the less likely people are to see their doctor.

The list could go on.

In the cases of the carbon tax and smoking, the policy changes over recent years have influenced demand in a way that an economics textbook would suggest.

All of which shows why there is such an impassioned debate about economic policy as the sectors who are winners of losers from any policy proposal fight to protect their own interests and governments aim to set the agenda according to their policy priorities.