Macroeconomics For Inflation And Unemployment

The Role of Fiscal Policy in the Economy

Discuss about the Macroeconomics for Inflation and Unemployment.

The way by which a government adjusts its level of spending as well as rate of taxes to scrutinize and influence the economy of the nation is termed as fiscal policy. It is also considered as the sister approaches to monetary policy with the help of which a central bank influences the money supply of a nation. With the help of fiscal policy, regulators attempt to enhance rates of unemployment, control inflation as well as stabilize business cycles. Also termed as Keynesian economics, this policy mostly states that governments can influence the level of macroeconomic productivity by raising or diminishing level of taxes as well as public expenditure (Galí, 2015).

The key role that is played by fiscal policy in the modern economy is to conclude precisely how resources will be allocated. This is associated directly to the problems of taxation as well as spending. This is mostly because, allocation of funds relies upon the collection of taxes and the government using the proceeds for precise purposes. Another most imperative role that is played by fiscal policy in the modern economy is that of distribution as it helps to conclude more precisely, how the funds will be distributed throughout every section of the economy (Mertens & Ravn, 2014). Stabilization is another imperative role of fiscal policy as it helps to provide steady economic growth. Without any control on expenditure, the economic growth of the nation could become unhinged. This will in turn lead to uninhibited growth and contraction. The fourth major role that is played fiscal policy is that of expansion. Expansion illustrates economic growth that is considered as the overall purpose for the economy. However, fiscal policy is considered as a more complex process when it comes to the fact that how much government will tax citizen each year (Corsetti et al., 2013). J.M. Keynes is of the outlook that fiscal policy plays a key role in lifting the economy out of depression as well as closing the deflationary gap. When the economy is in depression, it is faced with increasing unemployment, decreasing income as well as severe diminishing investment and lessening of economic activities. The government also mostly undertakes public works program that in turn raises its expenditure that in turn helps to increase the level of aggregate demand out employment in the economy. The government also induces changes in aggregate investment by reducing taxes. The tax release measure acts as an effectual method that helps to increase the level of aggregate demand.

Australia’s Fiscal Policy

Australia Treasurer, Scott Morrison presented the Federal Budget to the Parliament of Australia for fiscal year 2017. The first budget has been introduced by the administration of Prime Minister Malcolm Turnbull. The government has acted cautiously amid slow economic growth in Australia, holding off on any key expenditure to restrict deficit expenditure. This is mostly done while refocusing expenditure of government on the creation of job as well as development. The government predicts to some extent larger fiscal deficits in terms of fiscal forecasts. However, the government is still expecting the budget to move into surplus in the year 2020/2021 mostly because, it is expected that the economy to gather power that will in turn bolster proceeds (Andrewartha, 2016). Small and medium sized enterprises are considered as some of the victors from the budget of the year, as they received a noteworthy cut in tax from 28.5 percent to 27.5 percent. However, most of the businesses will be able to take benefit of the tax cut break as the government prepares to expand the middle-sized business continuously. In terms of government revenues, the government is attempting to close the budget gap by breaking down on evading of tax. It can be concluded that the budget is associated with a mild contractionary fiscal policy as the government endeavors to restraint in spending as well as reduce the deficit. The counter-cyclical stance of Australian fiscal policy has been favorable to the accomplishments of two major objectives, such as promotion of long-term growth as well as alleviating the economy. While, it might prove to be complex to establish the precise contribution of fiscal policy to long-term growth, however; the link between fiscal policy and cyclical stability is much more direct. The advantages related to cyclical stabilization should not be undervalued. With counter-cyclical fiscal policy, the government makes groups of lower-income that are less susceptible to the adverse results of recession (Égert, 2014).

The government stays committed to returning the budget to a sustainable surplus as soon as possible. Continued discipline to counterbalance new expenditure as well as pass existing budget repair measures is required to combine the budget and also to lower government debt. The softer domestic prices as well as growth of wages are likely to affect the government receipts. The payment of government as a share of GDP has reduced since the year 2016 from 25.8 percent of GDP to 25.2 percent of GDP in 2016-2017. Real expansion over the forwarded estimates is 1.9 percent that is steady with the 2016-2017 budgets. The program precise variation leads to reduction in payments. The total deficit is anticipated to lower from $36.5 billion in 2016-2017 to $10 billion in 2019-2020 (Martineau & Smith, 2015). However, the fundamental cash is expected to maintain an enhancing trajectory over the forwarded estimates.  The government stays committed to more than offsetting all decision related to new strategies and has thus made decisions that are likely to enhance the fundamental cash balance over the forwarded estimates by $2.5 billion.

Impact of a Cut in Government Spending

The fiscal policy of Australia is mostly based on medium-term structure that is designed to ensure budget balance over the cycle. For example, the fiscal policy predicts that fiscal expansion will produce higher rates of interest that will in turn diminish investment spending.  Australia reported a deficit of 2.6 percent as a share of total GDP and a structurally adjusted deficit as a share of potential GDP. As compared to other OECD countries, Australia was not relentlessly affected by the worldwide economic crisis. The budget deficit of Australia in the year 2016 was -2.1 percent of GDP whereas; the budget deficit of Belgium was -2.7 percent of GDP and Canada was -2.5 percent of GDP (Argy & Nevile, 2016). 

According to the MYEFO statement, the factors that have contributed to the deterioration of the budget deficit are the cut in government spending. Since the government has more than offset the additional spending with measures of new savings, it had adopted cut in government spending. The reduction in government spending is likely to reduce budget deficit. The increase in tax is also likely to lead to deterioration of the budget deficit. It is similar to cut in spending that will lead to lower spending and also decrease in economic growth. However, it depends on the timing of increase in tax (Kniest, 2015).

The cut in government spending is likely to have a noteworthy impact on both aggregate demand as well as supply side of the economy. The government had beforehand intended to return the budget to balance in 2019-20 however; the target has been revised a year afterward. The Department of immigration and Broader Protection is considered as one of the champion out of MYEFO that gained more than $1 billion in added financial support over four years. An additional $342.2 million has been allocated over two years for relocation arrangements of refugees for protection seekers in offshore centers (Ball, DeLong & Summers, 2014). A total of $52.5 million is being cut from funding of arts whereas; Green Army projects are to be restricted at 500 per year thus saving up to $317.5 million from the program.

Government spending is mostly considered as a part of aggregate demand. The demand side collision of a cut in government spending will largely rely on the state of the economy. The cut in government spending is likely to have a negative impact on aggregate demand. In other words, cut in government spending is likely to lead to fall in aggregate demand. This will in turn decrease economic growth as well as inflation. If the cut in government spending takes place when the economy is already in complexities, then a noteworthy fall in real GDP is likely to take place. However, on the other hand, if cut in government spending takes place when the economy is thriving, it will help to diminish inflation with a negligible decrease in GDP (Leduc & Liu, 2016). Another impact of cut in government spending is that it will help to diminish yearly government borrowing that will help to reduce the debt of the total public sector. However, if cut in government spending leads to further economic downturn the enhancements in finances will be restricted. This is mostly because; cut in spending lowers economic growth that leads to lower tax proceeds and higher expenditure on benefits. 

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

Conclusion

The A$0.6 billion decrease in the 2016-2017 deficit in MYEFO as compared to the budget figure from earlier in the year is gratifying for the government. Unemployment is considered as the largest contributing factor to poverty. High rate of unemployment illustrates a waste of economic resources due to less production. There are other costs that are linked with high rate of unemployment that includes a loss of personal self-respect, loss of skills as well as other social problems. Governments also face results such as having to reallocate limited taxation revenue from prolific projects to social security payments. The broadly quoted indicator of unemployment is the rate of unemployment that is derived from the Australian Bureau of Statistics Survey of Labor Force (Gregory & Smith, 2016). According to reports, more than 1.5 million individuals of working age depend almost completely on social security for a livelihood however; only one –third are unemployed. The rate of inflation is the percentage rise in the general level of price in the economy from one year to the next. Unemployment is anticipated to increase slightly from the result of November of 5.8 percent peaking at 6 percent and then staying steady. The rate of unemployment is forecast to stay steady at around 5.5 percent to June 2017 as well as to June 2018. According to the latest economic outlook of 2016/2017 MYEFO, the government has been delivering on its policy for economic development as well as jobs, with the budget maintaining and enhancing trajectory that is consistent with the fiscal strategy of the government (Nakamura, Steinsson & Liu, 2016).

The factors that have led to worsening of the severity of deficit for 2017 were economic growth that in turn leads to deterioration in the current account. Competitiveness is considered as another most imperative factor that leads to budget deficit. The depreciation in the rate of exchange makes the currency comparatively more competitive. In addition to propelling out the budget deficits out by tens of billions of dollars per year, Morrison has pushed out the revenue to surplus to the year 2020-21. The inquisitive thing that is related to broadening of debt and deficit is that it has taken place due to increase in government expenditure along with shortfall in proceeds. Government expenditure as a share of GDP under the Morrison MYEFO forecasts is anticipated to be 25.2 percent of GDP in both 2016-2017.

The major strength that is associated with fiscal policy is that it can promote macroeconomic stability by supporting aggregate demand as well as private sector incomes during an economic recession as well as by moderating economic action during periods of strong development. Fiscal policy also generates added demand when productivity is weak as well as it subtracts from the demand when the financial system is flourishing. Another most imperative strength that is related to fiscal policy is that it can become imperative for countries that are part of the monetary union. This is mostly because, nominal rates of interest as well as exchange rate do not become accustomed to the circumstance of a single country but rather to that of the union as a whole (Sutherland & Hoeller, 2014). If the problem is related to unemployment, changes in taxation as well as government expenditure are likely to have a noteworthy impact on the level of national income. Fiscal policy may also become successful while shifting the LRAS curve towards the right that will in turn increase real productivity as well as the rate of inflation.

However, there are also several weakness that are associated with fiscal policy. This is mostly due an active fiscal policy that can exceed when there is augmented vagueness about developments of future income. Fiscal policy also leads to increasing concern about the difficulties that are mostly faced by public pension as well as health care systems in view of demographic development. A cyclically oriented tax cuts as well as increase in expenditure at present may simply translate into higher taxes as well as lower expenditure. Fiscal policies should have a medium to long-term point of reference as well as it should completely rely on automatic stabilizers in the short-run (Claeys & Darvas, 2015). In order to use fiscal policy in order to stabilize the economy, it is required to spend more or less tax in the bad times however; the worst thing is to increase tax or cut government spending in the good times. Fiscal policy also leads to conflicts between objectives. In other words, a fiscal policy that is designed to accomplish one objective may have an adverse impact on the other.

References

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Nakamura, E., Steinsson, J., & Liu, M. (2016). Are chinese growth and inflation too smooth? evidence from engel curves. American Economic Journal: Macroeconomics, 8(3), 113-144.

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