Discuss about the Fiscal Strategy and Outlook Budget.
Fiscal policy is a fundamental instrument in the modern economy. Typically, fiscal policy pertains to the means by which the government regulates the levels of tax rates and public expenditure to control the aggregate economy. Often, the policy is used together with monetary policy to stabilize the economy. Primarily, the policy is implemented with the aim of stabilizing economic growth, maintaining low inflation levels and stimulating economic growth during times of recession. Thus, the policy may be used to either stimulate economic growth during times of recession or slow down economic activity in times of inflation.
It is imperative to note that fiscal policy may also be utilized to remove deflationary gaps in the economy. Deflationary gaps are common during times of recession. It is the difference between the output level of full employment and actual output. High deflationary gaps indicate the existence of high levels of unemployment and underutilization of resources in the economy. Commonly, the gap is caused by a fall in the level of aggregate demand, exports, and investments within the economy. Subsequently, its existence in the economy may bring about an increase in the joblessness, deflation and low economic growth in the economy (Carmignani, 2013).
In this regard, the government implements expansionary fiscal policies to reduce the deflationary gap and stimulate economic activity in the country. Notably, during recession, the level of economic activity in limited. Thus, expansionary fiscal policy is used to enhance the aggregate demand. For this reason, the government either increases its level of spending or introduces tax cuts. Lower tax rates will increase the level of disposable income available for firms and households to spend on consumption goods. In turn, this will bring about an increase in consumer spending, thereby a rise in total demand. An upturn in demand would also lead to a rise in employment opportunities, thereby reducing the deflationary gap. Mainly, this is because firms will be forced to hire more workers to meet the new demand. Overall, an expansionary fiscal policy helps to stimulate economic activity and enhance growth.
On the other hand, during inflationary periods, the level of economic activity is high, and prices are also high. Consequently, the government is forced to utilize contractionary fiscal policy tools to slow down the economic activity in the country. In this regard, the government may reduce its spending or increase the taxation levels in the country. In turn, this causes a decline in the level of economic activity in the aggregate economy. Particularly, this is because an increase in taxation reduces the available disposable income for households and reduces after-tax profits for firms. In turn, both agents reduce their level of consumption spending. At times, firms are forced to lay off some workers, thereby increasing the level of unemployment. Eventually, this results in reduced economic activity, thereby bringing the level of inflation down.
For a long time now, the Australian government has been spending beyond its means. For this reason, the country has been experiencing significant budget deficits. Typically, the government budget is a detailed report of the revenues received and payments made by the government. Thus, a budget deficit arises when the total public expenditure exceeds the revenue collected through taxes and other fees. Previously, the Australian government purposed to bring the nation’s budget to a surplus in 2019-20. However, this trajectory has since been revised to 2020-21. The country’s current fiscal position does not warrant for a budget surplus (Payne & Hall, 2017). Instead, the economy is characterized by continued deficits.
In 2015, the country recorded a deficit of approximately 2.4 percent of the economy’s GDP. The average level of government budget between 1979 and 2015 is -0.94 percent of the country’s GDP. With respect to this period, the highest level of government budget achieved in Australia was recorded in 2000 at 2 percent of the overall GDP. In contrast, the lowest level of government budget was achieved in 2010, at -4.2 percent of the GDP. Within the same time frame, the highest level of government debt to GDP was an all-time high of 36.80 percent, whereas the lowest is 9.70 percent.
Although the Australian economy is strong, the economy is surviving on an unsustainable structural deficit. Predominantly, this deficit is an aftermath of irresponsible spending policies of the government. This has led to a massive accumulation of public sector debt. For this reason, policies should be instigated to provide viable solutions to the problem both in the immediate term and in the long run. Thus, policy must be implemented to facilitate reforms in the economy (Pettinger, 2016). In this regard, the Australian government may utilize a combination of policies to reduce the continued budget deficit by 2020-21.
First, the Australian government can cut its public spending to reduce the degree of its fiscal debt. Primarily, this is one of the most effective methods of reducing the government debt by causing a reduction in the amount payable as debt. Markedly, Canada introduced spending cuts in the 1990s and realized massive declines in its level of budget deficits (Harrison, 2011). In addition, the country recorded substantial increases in the level of economic growth (Congressional Budget Office, 2011). Consequently, this proved that cutting government expenditure may be a successful means to reduce budget deficits.
Secondly, the government may increase the taxation rates in the country. Basically, an increase in the level of taxation will translate to an increase in government revenue. In turn, this would help in offsetting the country’s deficit. In addition, the government may reduce its budget deficits by enhancing the level of economic growth in the country (Lewis, 2014). If the economy grows, the level of tax revenue will increase without even raising the taxes. Subsequently, firms will pay more corporate taxes, workers will pay more income taxes, and consumers will pay more in VAT. Over time, the level of the budget deficit will decline. The government may also opt for bailout or default (Pettinger, 2016).
When compared to other economies of the OECD, the Australian budget deficit is relatively small (OECD, 2016). Since 2007, Australia has been in the middle of the OECD pack. Mainly, this is attributed to the 4.4 percent point deterioration in the country’s budget balance to GDP ratio (Collins, 2014).
According to the MYEFO statement, the Australian budget deficit increased to $37.4 billion. Regardless of this deficit, there was a $2.3 billion decline in the projection deficit for 2015-16 (Woodley & Anderson, 2015). It is imperative to note that various factors have contributed to these deteriorations. First, the regime has dedicated around $3.5 billion in additional spending to cater for the innovation package, resettlement of the Syrian refugees, pharmaceutical subsidies and additional road funding (Woodley & Anderson, 2015). Regardless of the immense expenditures, the government is purported to make new savings to offset the expenditures.
Predominantly, the government aims at making significant savings in its budget. For instance, the government is expected to save approximately $2 billion over a four-year period from people who incorrectly claim welfare payments from the government. Likewise, it will save $650 million over four years by reducing incentives for MRI service and dealing away with incentives for pathology services (Woodley & Anderson, 2015). Furthermore, the government intends to cut down spending in health workforce programs. By so doing, it will be able to save around $595 million over a four-year period. What is more, the government purposes to reduce its spending on aged care services by 472 million over a three-year period. Moreover, child care subsidies would be reduced by approximately $441 million, especially from households that earn more than $250,000 (Woodley & Anderson, 2015). By and large, these changes are bound to offset the huge spending and thereby reduce the overall budget deficit.
There are various consequences that may arise from reductions in the level of government spending. Specifically, instigating spending cuts in the economy is a form of contractionary fiscal policy. Therefore, the level of aggregate demand in the economy is expected to decline substantially. Mainly, this is because there is a reduced demand for products and services by the government. In turn, this will bring about a slowdown in the level of economic activity in the aggregate economy. A decline in aggregate demand may force firms to reduce their production capacity. Thus, some employees will be laid off from the workforce. Consequently, the rate of unemployment in the country will rise. It is, therefore, imperative to note that although the implementation of spending cuts may bring about declines in the country’s budget deficit, the policy may lead to other significant problems in the economy. High unemployment rates and slow economic growth may arise as a consequence.
According to the 2016-17 MYEFO statement, the Australian economy continues to switch from the investment stage to the later stages of the mining boom. As a result, economic growth is expected to increase over the forecast period. In this financial year, the real GDP is expected to expand by about 2 percent. In the same way, economic growth is forecasted to increase to 2.75 percent in 2017-18 (Australian Government, 2017). On the other hand, the cash shortfall is projected to drop from $36.5 billion in 2016-17 to approximately $10 billion in 2019-2020 (Australian Government, 2017). In addition, household consumption and exports are predicted to enhance growth. Non-mining business investment is expected to increase over time.
Then again, the level of employment is expected to drop from 1.9 percent in 2015-16 to around 1.25 percent in 2016-17 (Australian Government, 2017). Projections indicate that this rate is further expected to increase to about 1.5 percent. Conversely, the unemployment levels in the country are projected to reduce significantly. As such, the rate is expected to drop from 5.7 percent in 2015-16 to 5.5 percent in 2016-17. The figure is predicted to remain constant in 2017-18 before dropping further to 5.25 percent in the following year. Afterward, the level of unemployment is predicted to remain constant at 5.25 percent (Australian Government,”2017).
Furthermore, the country’s level of inflation is expected to increase over time. Specifically, the degree of consumer price index is projected to rise from 1.0 percent in 2015-16 to around 1.75 percent in 2016-17. In 2017-18, the figure is expected to further rise to about 2 percent (Australian Government, 2017). In the same way, the wage price index is projected to rise from 2.1 percent to 2.25 percent between 2015-16 and 2016-17. In the following years, the figure is projected to further rise.
The government is still committed to increasing employment opportunities, investment, and growth in the country. For this reason, it has implemented various structural changes in the level of its spending and saving to reduce the level of budget deficit in the country. First, the government purposed to reduce its spending on the social welfare system by ensuring that only persons with genuine need receive government support. This is expected to reduce the deficit by $2.1 billion. In addition, the government purposes to scrap off the Asset Recycling Fund of 2014-15 (Payne & Hall, 2017). It also intends to introduce new vocational education and training loans. In turn, this would reduce government debt by around $25 billion within a ten year period. Largely, the budget is still expected to yield a surplus in 2020-21 (Australian Government, 2017).
Fiscal policy is a vital policy instrument in the modern economy. The implementation of the policy in a modern economy results in a wide range of effects on the economy. The policy is useful in regulating the level of economic activity in the aggregate economy (Amadeo, 2016). For this reason, there are various advantages associated with the use of this instrument as a means to stimulate or slow down economic activity in the aggregate economy. One major strength of the policy is that it can be used by the government to direct spending to specific projects, sectors, and regions. Thus, unlike monetary policy which is general in nature, fiscal policy can be utilized to stimulate the sectors of the economy that are perceived to require stimulation.
Besides, the effects of the policy can be realized within a short time period, and the results achieved much quicker as compared to other policies. Furthermore, this policy instrument can easily be implemented to discourage the existence of negative externalities within the economy. Explicitly, the government may use taxation to discourage polluters and firms that overexploit natural resources (“Use of Fiscal,” n.d.). In turn, this helps in reducing negative effects on the environment as well as generate additional government revenue.
As well, the policy can be used to reduce the gap between the poor and the rich. As such, the government may impose different tax rates on different levels of income, thereby creating more burden on the rich while reducing the tax obligations of the poor. Most importantly, fiscal policies have the power to reduce the level of a country’s budget deficit, thereby reducing the economic effects associated with high public debt (European Central Bank, 2005). Additionally, the expansionary tool of the policy has the capacity to reduce the level of unemployment in the country. Also, fiscal policy can substantially influence the level of national income and hence has an immediate effect on the economy.
Despite the numerous strengths associated with the use of the policy, there are various weaknesses also linked to its use. One major disadvantage of the policy is that it is relatively inflexible. Principally, changes in the level of government expenditure or tax rates may take a long period of time. Often, the lags arise due to moral and political implications in the process. The other weakness pertains to the fact that the use of fiscal policy to solve one macroeconomic problem may lead to the creation of another challenge in the economy. For instance, stimulating the level of aggregate demand in a bid to increase employment opportunities may bring about increased inflation in the economy. Mainly, this is due to the fact that growth in demand brings about a rise in the general price levels within the country.
What is more, implementation of fiscal policy may result in a conflict of objectives in the economy. As such, the combination of contractionary and expansionary fiscal policy within the economy leads to a conflict of objectives. Besides, the implementation of fiscal policy tools such as taxation may be disapproved by the residents of the country. Increasing the rates of taxation in the economy may create an unnecessary burden on the taxpayers and is thus unpopular among households and firms. In addition, it may be politically dangerous to implement such policies. Regardless of its weakness, the use of fiscal policy to control the aggregate economy has significant benefits to the Australian economy.
References
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Lewis, P. (2014). Australia’s Economy Is Healthy, So How Can There Be A Budget Crisis?. The Conversation. Retrieved 25 January 2017, from https://theconversation.com/australias-economy-is-healthy-so-how-can-there-be-a-budget-crisis-26036
Mid-year Economic and Fiscal Outlook: Part 1-Overview. (2017). Australian Government (1st ed., pp. 5-21). Retrieved from https://www.budget.gov.au/2015-16/content/myefo/html/index.htm
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