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Fiscal Policy Summary Essay

1204 words - 5 pages

DISCUSS THE MAIN INSTRUMENTS OF FISCAL POLICY AND EXPLAIN HOW THE AUSTRALIAN GOVT BUDGET OUTCOMES INFLUENCE ECONOMIC ACTIVITY, RESOURCE ALLOCATION AND DISTRIBUTION OF INCOME

Fiscal policy refers to the Federal Government’s use of taxation and spending through the use of a commonwealth budget in order to achieve sustainability across economic objectives. The two main instruments of fiscal policy are government spending and government taxation, in which changes in the level and consumption of government expenditure and revenue, influences budget outcomes regarding a balanced budget (neutral stance), budget deficit (expansionary stance) and budget surplus (contractionary stance). This in ...view middle of the document...

A neutral stance of fiscal policy implies a balanced budget whereby government expenditure is fully funded by taxation revenue and the budget has no effect on the level of aggregate demand and economic activity. An expansionary stance of fiscal policy involves a net increase in government spending (G > T) whereby there is a rise in government spending and a fall in taxation. This will lead to a smaller budget surplus or a larger budget deficit than the government previously had. This in turn leads to an increase in economic activity as the budget balance is negative, decreasing unemployment, increasing the risk of inflation. A pure example of this occurred between 2008-09 and 2009-10 when the budget moved into deficit as revenue fell and spending increased as a result of a global slowdown leading to a rise in the net debt to around -$53.7b.
A contractionary stance of fiscal policy (G < T) occurs when net government spending is reduced as a result of a higher taxation revenue and a reduction in government spending. This would lead to a lower budget deficit or a larger budget surplus, which in turn decreases inflation and increases the level of unemployment. This ideal is seen in the 2012-2013 Federal Budget, whereby the budget stance is contractionary, with the Government planning to make $33.6b in savings over five years through large spending cuts and revenue increases.
The main economic effects of these government’s budgetary changes to expenditure and revenue as defined by fiscal policy stance are on the overall level of economic activity, resource allocation and income distribution.
The level of economic activity is impacted by changes in the stance of fiscal policy through variations in the budget outcome. The stance of fiscal policy is best measured by changes in the structural component of the budget outcome. In a general sense, an expansionary fiscal policy can lead to a larger budget deficit or a lower budget surplus, resultantly increasing the growth in aggregate demand and economic activity. On the other hand a contractionary fiscal policy can lead to a smaller budget deficit or a larger budget surplus. This resultantly reduces the growth of aggregate demand and economic activity.
During 1996 and 2007 the stance of fiscal policy was largely contractionary, as the Howard Government was committed to achieving a balanced budget over the course of the economic cycle. A cash surplus of $7.4b was achieved in 2002-03 because of stronger economic growth, with the surplus rising to $8b in 2003-04 even though the government increased spending and tax cuts. An implementation of expansionary fiscal policy stance through the global financial...

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