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Fiscal Policy (External Stability (Refers to the sustainability of…
Fiscal Policy
External Stability
Refers to the sustainability of Australia's external accounts as well as reducing the volatility of the currency
Structural issue that arises from the gap between a low level of savings and high level of investment which forces Australia to import foreign capital
When there is a budget deficit, national savings decrease as the public sector has negative savings and must borrow from the private ector also decreasing private sector savings
Alternatively the government cold finance its deficit by issuing bonds overseas which increases foreign liabilities directly
By maintaining a contractionary stance and aiming for fiscal surpluses the government ultimately reduces its impact on external stability
From 2018-19 and for the first time since the GFC, the governemnt will not need to borrow to find its day to day expenses. Move to a projected surplus of $7.6 billion in 2019-20.
Economic Growth
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Effective as both a discretionary and non-discretionary measure in maintaining a sustainable rate of economic growth
Discretionary Measures: Deliberate changes to fiscal policy the government undertakes to influence growth
- Intentional increase in spending such as $42 billion fiscal stimulus introduced during the GFC
- Changes to the taxation rates such as the 10% GST introduced in 2002 which slowed down economic growth in the short term
Non-discretionary: Cyclical changes caused by fluctuations in the business cycle. Automatic stabilisers will automatically adjust the level of spending and revenue to counter the boom or downturn with a contract/expansionary fiscal stance
- Unemployment benefits (government spending) - increases during a downturn
- Progressive tax system will produce less tax revenue during a downturn as people earn less income and thus pay lower taxes
During GFC, both discretionary and nondiscretionary measures were used in the budget to help the economy grow by 1.4% rather than the expected 0.7% contraction expected
Full Employment
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Fiscal policy is significant in influencing resource allocation mainly through discretionary measures.
Direct spending in specific areas such as construction and indirectly through the implementation or removal of taxes on certain goods to assist with microeconomic reform, such as removing tariffs on manufacturing to shift resources to more efficient sectors
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Job Active Program announced in the 2017-18 will be enhanced at a cost of $20.4 million over four years which is aimed to alleviate skill shortages and by providing immense job opportunities for those inexperienced and of matured age
Inflation
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Inflation rises due to aggregate demand exceeding supply, a contractionary fiscal policy can be implemented to constrict economic growth and thus inflation.
The effectiveness of fiscal policy to dampen AD is weak compared to its ability to stimulate AD. Therefore, it is used in a supporting role to monetary policy which will be the most effective method in dampening AD and reducing inflation
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Government spending in areas such as infrastructure and the labour market will help reduce capacity constraints, lowering cost of factors of production as well as increasing AS and reducing the likelihood of demand pull inflation
Overview
Calculated = Total Revenue - (Govt net capital investment + total expenditure) = Fiscal surplus (revenue > expenditure) /deficit/balance
Change in the budget outcome from the previous year i.e. (stance of the fiscal policy) which is significant in its impact and effectiveness in dealing with the demand side objectives
Alternatively, specific spending and taxing patterns in the budget is mainly used to assist with microeconomic reforms with supply side management
Main role of fiscal policy over the past two decades but it has also been significant as a counter cyclical measure especially during downturns in the business cycle
Income Distribution
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Fiscal policy is relatively effective in proving a fair distribution of income, indirect consumption taxes such as GST often have reduced its effectiveness as lower income earners have higher MPC and are affected more by these taxes
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