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Outline the Objectives of Economic Management and Analyse the Role of Fiscal Policy in Achieving These Objectives in the Australian Economy

By rosenone Jun 26, 2013 974 Words
3. Outline the objectives of economic management and analyse the role of fiscal policy in achieving these objectives in the Australian economy The Australian Government targets economic objectives that may provide equality and higher living standards throughout the country. For these benefits to reach Australian households, the Australia government has to overcome objectives such as economic growth, distribution of income, and external stability. To do so, the government uses the fiscal policy in order to influence the amount of government expenditure and revenue which can alter economic activity. The government’s fiscal strategy aims to ensure fiscal sustainability over the medium term; therefore the government is responsible for meeting its current and future spending commitments with revenue raised. Australia has had a low historical use of fiscal policy during the 1990s, however since the Global Financial Crisis; fiscal policy has been a powerful tool in maintaining Australia’s economy. Fiscal policy has a large influence over economic activity, through using the expansionary fiscal stance which involves a net increase in government spending, or a fall in taxation revenue. However, this was not the case during the period 1996-2007 as fiscal policy had a smaller role to play in the economy. As the Howard Government came into office, the stance of fiscal policy was largely contractionary. A contractionary stance occurs when government spending is reduced. An example of this stance is when the Howard Government was committed to achieving a balanced budget over the course of the economic cycle, as fiscal policy was tightened in 1996-97, 1998-99, resulting in a surplus of $1171 million. This meant that fiscal policy was generally not a major role in influencing the business cycle, instead monetary policy had the central role in maintaining economic activity.

Although fiscal policy was not greatly used from the mid-1990s to 2007, it has had a large impact on recessions. As the Global Financial Crisis hit Australia, the fiscal policy was introduced in order to increase the level of economic activity, instead of letting Australia plunge into a recession. The impact of the GFC dramatically changed the budget balance, through a decline in government taxation revenue and an increase in discretionary government spending. This led to the movement from a cash surplus of $19.7 billion in 2007-08 to a cash deficit of -$27 billion in 2009-10. Economic growth decreased to 1.4% of GDP, which gave the government the incentive to introduce the fiscal stimulus, while the Rudd Government used an expansionary fiscal stance to support aggregate demand. The stimulus package involved a $77 billion package, with a $42 billion Nation building plan and Jobs Plan in the 2009 budget to support infrastructure and investment and the Economic Security Strategy package of $10 billion in spending on cash transfers to low and middle income households. The result of expansionary fiscal policy helped Australia avoid a recession, as these stimulus measures were estimated to boost Australia’s economic growth by 2.75% of GDP in 2009-10. In addition, fiscal policy can influence the objective of inequality in income distribution. The government is committed into try to use a progressive taxation system which will provide a fairer distribution of income. The progressive taxation system is when higher income earners pay a larger proportion of tax compared to low income earner, leading to a redistribution of income to low income earners. An example of the progressive tax system can be seen in the ‘personal income tax thresholds’, where the highest income bracket of $180,001 and over has an effective tax rate of 30.3-44.9%. However, the structure of the progressive system of personal income tax changed when the Gillard Government announced it would increase the tax-free threshold to $18,200 on 1st July 2012 as part of the Clean Energy Future Package from the carbon tax and will rise again to $19,400 the following year. This threshold bracket changed from the previous 2009 and 2010 Personal Income tax threshold as all taxpayers where given a tax free threshold of $6000. Between 1996 and 2008, the Federal Government used fiscal policy in order to maintain external stability. External stability is an aim of government policy that seeks to promote sustainability on external accounts so that Australia can service its foreign liabilities in the medium to long run. External stability can be managed by the government achieving fiscal consolidation, which is running a budget surplus over the course of the business cycle. One of the main ways to run a budget surplus is to eliminate public debt, which in turn can help reduce the part of net foreign debt owned by the Australian Government. For instance, when the Howard Government was in power, there was a series of consecutive surplus budgets to retire a significant amount of public debt. From 1996-2007 the stance of fiscal policy was largely contractionary, since the Howard Government was committed to achieving a balanced budget over the course of the business cycle. It was tightened throughout the years of 1996-1999, and thereby, eliminated Commonwealth general government debt from the peak of $96 million (17.6% of GDP) in 1996-97 to -0.5% of GDP by 2005-06. This in turn increased Australia’s national savings and resulted in low net foreign debts. Subsequently, the fiscal policy has an effective role in achieving the economic objectives of economic growth during downturn economic activity, equal distribution of income and maintaining external stability. Australia was successful in using fiscal policy to avoid recession in 2009, when it implemented one of the largest fiscal stimulus packages in its history, as well as changes to the personal income threshold that gave a more equal distribution of income to lower income earners. By aiming to achieve fiscal surplus the Australian economy can achieve its economy objectives rapidly.

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