Macroeconomic Objectives Economic Growth And Fiscal Policy

Fiscal Policy and Economic Objectives

Discuss about the Macroeconomic Objectives Economic Growth and Fiscal policy.

Fiscal policy is the way by which the spending level is adjusted by the government that influences the economy of a nation. It is considered as the sister policy to monetary approach with the help of which a central bank persuades money supply of a nation. Both the fiscal and the monetary policy are used in several combinations in order to direct economic objectives of the country. It involves the government that changes the taxation levels as well as government expenditure that influences Aggregate Demand (AD) and also the level of economic activity. There are mostly two types of fiscal policy such as expansionary fiscal policy and deflationary fiscal policy. The expansionary fiscal policy involves the elevating of AD and as a result, the government will raise expenditure as well as tax cut (Arrow and Kruz 2013).

Figure: Expansionary Fiscal Policy

(Source: Created by Author)

On the other hand, deflationary fiscal policy involves the reduction of AD and as a result, the government will cut government expenditure as well as increase tax.

Figure: Deflationary Fiscal Policy

(Source: Created by Author)

The major role of the fiscal policy in the modern economy is that it helps to determine how to allocate all the resources. This is mostly linked to the issues of taxation and expenditure. The role also includes mobilization of resources in the private and public sectors. In a modem economy, both national income and per capita income are low due to low rate of savings. As a result, governments push the investment rate through forced savings. The government also undertakes fiscal policy in order to lead to a proposed investment (Leeper and Zhou 2013). The rate of growth is also increased with the help of fiscal policy by increasing the rate of investment in the modern economy. Several tools of fiscal policy such as taxation, borrowing as well as deficit financing are used in a joint manner so that they do have an adverse impact on consumption, distribution as well as distribution of assets. Another most important role that is played by fiscal policy is that it helps to persuade socially optimal investment. In other words, fiscal policy persuades investment into those useful channels that are considered both socially and inexpensively desirable. Fiscal policy also helps to provide employment opportunities to the individuals in the modern economy as it encourages the economy to increase expenditure that will in turn raise employment opportunities (Hein and Truger 2013).

Types of Fiscal Policy

According to the viewpoint of J.M Keynes, fiscal policy plays an imperative role that helps to lift the economy out of dejection. It also helps to close the gap that is related to deflation. The scenario that takes place when an economy is in depression is that it faces raised unemployment, reduced per capita income as well as reduction of economic activities. However, in order to increase expenditure, the government also imitates many public programs that also leads to augment in the aggregate demand level as well as employment level in the economy. In order to close the gap, the government raises their expenditure that directly raises the aggregate demand curve (Arestis and Resende 2015).

Fiscal policy has been the brainchild of famous economists J.M Keynes. According to his view, the government of any nation can control the economy’s condition by influencing the productivity of the nation by manipulating the amount of public spending and tax rate (Arrow and Kruz 2013). Fiscal policy is the most important tool in the hands of the government along with the monetary policy, which is indirectly regulated by them (Blanchard and Leigh 2013). This answer focuses on the current economic stances through which Australia is passing through as can be understood from the news article provided. According to theory, fiscal deficit is the situation where the total expenditure borne by the government of any country exceeds the revenue earned by them. There has been a constant conflict regarding the wellbeing of fiscal deficit where Keynessian followers support the scenario.

Current Stance: According to ABC News (2015), Australia has been facing severe deficit in their balance budget. There has been a downfall in the GDP rate to 2.5%. The government has been passing through a tough time where there has been budget deficit and the volume of deficit increased to $37 billion. The government has been expecting a rise in their unemployment level and consequently is expected to face anarchy in their economy. The budget deficit

Fiscal Policy: It has been observed that Japan through their Abenomics has brought in changes in their monetary as well as fiscal policy in the year 2013 whereby they planned to take up expansionary fiscal policies. It has been observed that Japan had successfully been able to reduce their deflationary pressure and also tried to keep their inflationary rate below 2% (www.gfmag.com 2015). However, Australia has been facing budget deficit but it can be said that following expansionary policy like Japan, it may come out of their ill condition. The Australian government is initially going to face a tough time but by using expansionary policy, they can increase the scope of aggregate demand within the economy. Since, there has been a large debt on government’s part therefore if interest rate is reduced the benefit can be reaped by the private sector in Australia. They can take the scope and increase their investment thereby expanding their supply. In this way the nation can generate demand, meet supply and thereby get out of the situation like Japan did during 2013-14.

Role of Fiscal Policy

Comparison of Australia’s Budget Deficit & OECD countries: It has been observed that the budget deficit of Australia is around 1.4% during the year 2015. Statistical data shows that OECD countries has been facing deficit since 1990s. In addition, data reveals that most of the OECD countries have been able to recover their situation and see surplus in their economy (data.oecd.org 2015). Data from 2015 reveals that Australia has around 1.4% deficit whereas the budget deficit of the entire OECD countries is 3.2% (www.gfmag.com 2015). Hence, from this figures it can be said that though Australia faced a decrease of around $37 billion during 2015, still it can be said that it is in a better condition when compared with the nations falling under OECD.

The MYEFO that was released by the government had some negative impact on the fundamental cash balance over the forward estimates. There are few indispensable steps in order to address some unresolved problems that innate from the previous government that have contributed towards the deterioration of the budget deficit includes investment measures linked with revoking the carbon tax. It also included infrastructure programs of land transport as well as implementation of wider protection approaches. A grant payment of $8.8 billion to the Reserve Bank of Australia (RBA) has been considered as the key cause that led to deterioration of the budget deficit (Cheung, Manning and Moore 2014). It has been stated by MYEFO that a deterioration of $2.9 billion was accredited to removal of uncertainty in relation to about 100 announced. The cut in government is also considered as one of the major cause that led to deterioration of the budget deficit. In other words, the government has more than counterbalance the supplementary expenditure with that of new savings measures.

The most imperative single payment across the four years is a grant of $8.8 billion given to the Reserve Bank of Australia in the current financial year. While the payment was made visibly by the Coalition, there has been a question about the fact that whether the cost itself was new or whether it was capital that should have been remunerated to the Reserve Bank while Labor was in government. According to the opposition, such a lump sum amount was never asked for and an official advice was released that stated that a cash grant could generate speculation in the market about the constancy of RBA. It also stated that there was no lawful basis in order to make cash injection (Ballantyne, De Voss and Jacobs 2014). Although, the payment was viewed as a new expenditure, it is worth noting that the RBA did not make any official request for cash grant.

Current Economic State of Australia

The likely consequences of government spending cuts include a negative impact on aggregate demand. The demand side conflict of a cut in government spending will mostly depend on the condition of the economy. In other words, reduction in government spending will lead to reduction of aggregate demand (AD). As a result, both economic growth and inflation will be reduced. A massive reduction in real GDP is likely to take place if the cut in government expenditure takes place in a complicated economy (Alesina, Favero and Giavazzi 2015). However, if the cut in government expenditure takes place in a thriving economy, it will reduce inflation with an insignificant decrease in GDP.

The A$0.6 billion decrease in the year 2016-2017 deficit in MYEFO is comparison to the budget figure from the previous year is gratifying for the government. It essentially overlooks the big story that is likely to have an impact on the unpredictably lower level of GDP. This will in turn put a huge hole in tax proceeds to the tune of A$5.3 billion that is reflected in the fiscal balance however; not the cash balance in this economic year (Valle de Souza, Dollery and Kortt 2016).

Year		Estimated Deficit (billion)
2015	MYEFO	35835800000000
2016	MYEFO	36500000000
2016-2017	Budget	37100000000

The fundamental cash balance is considered as the measure in this chart. It is a cash measure that records proceeds that is received. According to MYEFO, the fiscal balance is likely to worsen by A$4.4 billion this current year. MYEFO forecasts that GDP growth in the year 2017-2018 is likely to be 2.75 percent as compared to 3 percent forecast of 2016-2017. There are several costs that are associated with huge unemployment rates that comprise a loss of personal confidence as well as other communal problems. Governments also face consequences such as having to modify inadequate taxation revenue from helpful projects to social security payments. The rate of unemployment is considered as the widely extracted indicator of unemployment (Daley, McGannon and Hunter 2014). More than 1.5 million working aged individuals rely completely on social protection for a lifestyle. Slower expenditure of the government also plays a key part in this case. The upshot of the proceeds as well as expenditure revision is the proposed return to surplus of 2020-21.

The considerably deterioration cash balance in the near future, from 2017 to 2020 as compared to the equivalent projection in the 2016-2017 Budget illustrates the deteriorating economic outlook. The unanticipated lower private sector investment led to decrease in GDP that in turn lead to decrease in business confidence. This in turn led to descending revision to GDP growth over the subsequent few years. The deterioration of the current account mostly led to worsening of the severity of deficit for 2017. It was also accompanied by competitiveness that was considered as another imperative cause. The worst case in this case is the loss of the battle on the savings and a net impact of A$10 billion (Duchin, Gilbert, Harford` and Hrdlicka 2016). The economic outlook also crucially relies on the legislation of the government that is considered as the substantial agenda for cuts in expenditure. Under the Morrison MYEFO forecast, government expenditure as a share of GDP is predictable to be 25.2 percent of GDP in both the year 2016 and the year 2017.

Comparison of Australia’s Budget Deficit with OECD Countries

The major strength of making the use of fiscal policy is that it has noteworthy impact on the national income and as a result, it has immediate impact on the economy. It also helps to promote macroeconomic constancy mostly during economic recession by supporting aggregate demand and also private sector incomes. The government also employs it, when there is high rate of unemployment that in turn helps to stabilize the economy. This mostly increases investment as well as purchases and also lowers taxes. Tax cuts leads to more disposable income with every individual that in turn leads to increase in demand for commodities and services. In order to stabilize the economy with the help of fiscal policy, private sectors raises productivity that helps to create more jobs in the procedure. Another most imperative strength of fiscal policy is that it helps to reduce budget deficit (Auerbach and Gorodnichenko 2013). A budget deficit mostly takes place when expenditure in a country is more than its proceeds. Since the economic consequences of this deficit comprise augmented public debt, the country then can follow a contraction fiscal policy. As a result, public expenditure will be reduced and also raise the rate of taxes that will eventually lower the budget deficit in the economy. The several fiscal policies used by a country leads to expansion of the national economy. When the government diminishes rates of tax, individuals will have a larger incentive to expend as well as guide the economy forward. One of the weaknesses of fiscal policy is that it leads to conflict of objectives. Fiscal policy also leads to rising apprehension about the complexities that are generally faced by public retirement fund as well as health care systems in outlook of demographic expansion (Bjørnland and Thorsrud 2016). It also leads to intransigence such as delay in the implementation of fiscal policy. There are several measures that might go through lawmaking procedure. In the bad times, it is requisite to pay more or less tax so that the economy can be stabilized. However, one of the negative aspect that is associated with it is that both tax as well as cut in government expenditure gets increased during the good times (Matsusaka 2014).

References:

Alesina, A., Favero, C. and Giavazzi, F., 2015. The output effect of fiscal consolidation plans. Journal of International Economics, 96, pp.S19-S42.

Arestis, P. and Resende, M.F.C., 2015. Fiscal policy and the substitution between national and foreign savings. Journal of Post Keynesian Economics, 37(3), pp.436-458.

Arrow, K.J. and Kruz, M., 2013. Public investment, the rate of return, and optimal fiscal policy (Vol. 1). Routledge.

Arrow, K.J. and Kruz, M., 2013. Public investment, the rate of return, and optimal fiscal policy (Vol. 1). Routledge.

Auerbach, A.J. and Gorodnichenko, Y., 2013. Output spillovers from fiscal policy. The American Economic Review, 103(3), pp.141-146.

Ballantyne, A., De Voss, D. and Jacobs, D., 2014. Unemployment and spare capacity in the labour market. RBA Bulletin, pp.7-20.

Bjørnland, H.C. and Thorsrud, L.A., 2016. Commodity prices and fiscal policy design: Procyclical despite a rule.

Blanchard, O.J. and Leigh, D., 2013. Growth forecast errors and fiscal multipliers. The American Economic Review, 103(3), pp.117-120.

Cheung, B., Manning, M. and Moore, A., 2014. The Effective Supply of Collateral in Australia. RBA Bulletin, pp.53-66.

Daley, J., McGannon, C. and Hunter, A., 2014. Budget pressures on Australian governments 2014. Grattan Institute, viewed, 21.

Duchin, R., Gilbert, T., Harford, J. and Hrdlicka, C., 2016. Precautionary savings with risky assets: When cash is not cash. The Journal of Finance.

Hein, E. and Truger, A., 2013. Fiscal policy and rebalancing in the euro area: A critique of the German debt brake from a post-Keynesian perspective.

Leeper, E.M. and Zhou, X., 2013. Inflation’s role in optimal monetary-fiscal policy (No. w19686). National Bureau of Economic Research.

Matsusaka, J.G., 2014. Disentangling the direct and indirect effects of the initiative process. Public Choice, 160(3-4), pp.345-366.

OECD. 2015., General government – General government deficit – OECD Data. [online] Available at: https://data.oecd.org/gga/general-government-deficit.htm [Accessed 8 Feb. 2017].

Pasquali, V. 2015, Global Finance Magazine – Percentage of Public Deficit/Surplus in GDP Around the World. [online] Global Finance Magazine. Available at: https://www.gfmag.com/global-data/economic-data/public-deficit-percentage-gdp [Accessed 8 Feb. 2017].

Valle de Souza, S., Dollery, B.E. and Kortt, M.A., 2016. A critical evaluation of Australian mineral resources rent tax. International Journal of Public Administration, pp.1-9.