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Analyse the Role and Impact of Fiscal Policy

Essay Topic: ,

Traditionally, the Australian government has attempted to achieve its economic objectives through the implementation of macroeconomic policies especially fiscal policy (the budget). Fiscal policy (FP) is a macroeconomic management policy as it plays a critical role in influencing the level of aggregate demand (AD) in the economy.

It aids the government in achieving its economic objectives, of managing and stabilising the business cycle so that the economy experiences internal balance (price stability & full employment), external stability (management of CAD, financing import expenses with export income and the ability to service our debt) and relatively stable economic growth.

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Graph Fiscal policy deals with the government’s use of government expenditure (G) and taxation (T) i. . the budget outcome to influence (AD) and resource allocation and income distribution. Fiscal policy is all about budgetary outcomes as they give an indication on the state of the economy; the 3 outcomes are neutral, expansionary and the government’s current contractionary stance where government revenue is greater than expenditure. A contractionary stance may be used to slow the rate of economic growth and aid in reducing inflationary pressures.

Within the budget there is a cyclical and a structural component. The structural discretionary component is the deliberate change to government revenue and taxation and the cyclical non-discretionary component involves the changes to government spending caused by changes in economic activity. The budget has deteriorated significantly on the back of a strong Australian dollar (AUD), falling terms of trade, plateauing of the mining boom and subdued consumer confidence resulting in a budget deficit of $19. b for 2012-13 and is forecasted for a deficit of $18b for 2013-14. The first economic objective is economic growth which aims to increase real income and spread the benefits of the mining boom and increase income distribution. In this budget the government has taken up a mildly contractionary stance delaying its short term goal of a budget surplus as it balances its commitment to fiscal consolidation against possible weaknesses in economic activity, increased unemployment and a lack of investment and growth.

This stance allows the government to gradually service’s its debt and return to surplus by 2016-17 as it realises slowdowns in the economy as the mining boom has moved of its peak and has plateaued along with commodity prices. The end of the mining boom will see Australia move from mining back to the services sector where around 75% of labour is employed, this transition will see E. G grow below trend (3-4%) at 2. 75% in 2013-14 before returning to 3% by 2014-15. To ensure long term sustainable E. G the government will implemented key structural reforms like ‘GONSKI’ ($9. 8b), ‘NBN’ ($37. 4b), ‘NDIS’ ($14. 3b) and the National Building Program (NBP $24b).

They aim to improve the nation’s productive capacity by boosting human capital, infrastructure capacity, labour productivity levels and reduce capacity constraints restraining allowing Australia to capitalise on growth in Asia. To fund these reforms the government has found $43b in savings over the next 4years and they include the abolition of the baby bonus ($4. b), increase in the Medicare levy ($11. 8b) and deferring income tax cuts ($1. 5b). By abolishing the baby bonus and the family tax benefits in the short run it leads to income inequality and a lower standard of living. Internal balance is another economic objective which looks at price stability by maintaining low inflationary pressures ensuring sustainable economic growth and full employment of the factors of production especially labour.

The government’s planned return to surplus by 2016-17 can be achieved by adopting a contractionary stance by reducing (G) in (AD). By reducing (G) it helps keep demand pull inflation down keeping to the RBA’s target band of 3-4%, low inflation is beneficial for our external balance especially exports and also keeps E. G at sustainable levels. Two major government reforms are GONSKI which aims to improve educational and human capital levels and NDIS which looks to return the disabled into the workforce to increase employment levels.

A gov’t instrument used to control internal balance and smooth out fluctuations in the business cycle are automatic stabilisers which are a cyclical component as it’s used according to various economic conditions. The two auto-stabilisers are progressive taxation meaning that when workers start earning more they move into higher tax brackets paying more tax and welfare payments which are handed out to the unemployed to help stimulate growth during a downturn in the business cycle, they are used to help the even distribution of income and improve our gini-coefficient.

Graph The final objective is external balance which is the ability of Australia to manage the CAD by financing import costs with export revenue as well as paying off debt. As the CAD may be deemed unsustainable if it exceeds 5% of GDP which may lead to a debt trap, Australia’s debt to GDP ratio stands at 1. 3% significantly lower than other advanced nations. Australia’s persistent CAD’s is a result of our narrow export base as we as the structural problem of low domestic savings.

A narrow export base contributes to our CAD as domestic industries esp. the manufacturing isn’t internationally competitive. To address this issue the government has taken to fiscal consolidation to attempt to increase national savings and reduce the savings investment gap as well as reduce inflationary pressures resulting in cheaper exports and reforms such as “NBN” and “NBP” look to reallocate resources to more efficient industries and improve out international competitiveness.

These policies and reforms help increase savings and revenue hence reducing our reliance on foreign capital and investment will help reduce our foreign liabilities; however delaying the return to surplus means we have increased foreign liabilities and servicing costs. The govt’s mildly contractionary stance aims to achieve its economic objectives of sustainable growth, internal and external balances. Through new reforms they are able to boost economic activity, resource allocation and distribution of income. “GONSKI” aims at improving our nation’s productive capacity to capitalise on growth in Asia and provide long term sustainable growth.

Resources reallocated into the “NBN” and “NBP” to increase productivity and international competitiveness as well as internal and external balances. The “NDIS” funded by the increased Medicare levy is an example of distribution of income. By delaying the return to surplus it doesn’t stall the economy as it goes through a transition period from mining to services, although the unemployment rate has risen to 5. 8% it still remains at low. However it does mean an increased CAD and external balance. So the 2013-14 budget has been effective in achieving the government’s economic objective.