Fiscal policy definition
Fiscal policy refers to the process by which a government regulates its spending levels to ensure a stable economy. Fiscal policy work together with monetary policy and they are both implemented by the Central bank of the country. The fiscal policy aims to stimulate the pattern of economic movement, and also the extent and growth of aggregate demand, and employment (Miller, 2004 p. 94). Fiscal policy affects production by touching collective demand and making it a probable tool for financial steadiness.
At this junction, we consider how fiscal policy works, and the ways it must be supervised, and how it is putting into practice may affect the different population in an economy. Fiscal policy verdicts have a pervasive effect on the usual conclusions and behavior of distinct families and businesses. In other words, the implementation of fiscal policy is directly responsible for the levels of aggregate demand as well as aggregate supply.
Instruments of fiscal policy
The instruments of fiscal policy include government spending, taxation, and budget. Budget is the way through which the government allocates funds to different sectors and activities. Government spending and taxation are the tools used to determine the economic position of a country. These factors relate to the Keynesian model which involves the use of the government authority to determine the level of aggregate demand in the country. Broman (1998, p.47) claims “the economy is demand-driven that is the aggregate supply responds to changes in aggregate demand”. These demonstrate the basic Keynesian model as shown below:
Cutting on taxes the government influences the level of income which also affects the level of spending and demands. These alter demand, supply, and employment levels. “Increase in spending leads” to increased investment since the demand for goods and services increases as well and this produces a multiplying effect in the economy (Leung, 2000 p. 45). The investment accelerator and the national income multiplier together contribute to an increase in total demand by a bigger margin. Leung (2000, p.47) claims “increasing the government’s spending increases the levels of total demand”. This is the case where levels of taxation remain constant “(Leung, 2000 p. 48). Keynesian Model showing the effects of an increase in government spending.
Fiscal policy and the 2011/2012 federal budget
The 2011/2012 federal budget concentrated on an increase in the level of revenue, especially from the mining industry by increasing the rate of deductions charged on depreciation. The highlights increased spending is the health sector. The introduction and maintenance of mental health facilities and increasing the hospital funds were the main projects under consideration in this case.
The second highlight was on education, which included increasing the fund’s allocation to universities, and colleges and increasing the money spent on schools especially with regards to the reward programs for teachers. One such fund was the workforce development fund aimed at training industrial employees. Finally, about personal taxation, the income tax offset to be claimed in a fiscal year increased by 20% that is from 50% to 70% (national Australia bank, 2011 p. 5).
The below chart shows a summary of the tightening of the policy of the budget.
2010/11 2011/12 2012/13 2013/14
Budget 10-11 -40,756 -13040 1020 5430
10-11 41,468 -12288 3100 3250
Effect of Policy decisions
Receipts 80 -405 2000 1900
Payments 1900 2150 50 560
Total -1987 -2555 1951 1338
Parameter Variations Receipts -9,900 -5500 -312 1660
Payments -3964 2212 1,260 2,590
Total -5,993 -7,772 -1,570 -900
Budget 2010-11 -49,400 -22,700 3,500 3700
Last year’s budget involved a tightening which includes the mining tax. It can be expected to be worth around $4bn in a forward estimate year. The budget maintains its shape while expenditure tightened, and the economy accelerates. Real spending growth, moderate further tighten can also depict in the figure below.
The return of a small surplus in the 2012/13 budget is in line with market expectations because market rates stirred little.
Appropriateness of fiscal policy stance in the Australian Economy
With this budget in place, the Australian government is of the view that the level of unemployment will decline by a considerably large margin in the year 2012. This is a result of strategies to invest more in training workers hence ensuring that people are more equipped to work in the industrial sector. This also increases the level of industrial investments since the workforce is readily available. Increased industrialization increases the level of indirect employment in other sectors that offer subsidiary services to the industrial sector.
Besides that this budget aims at reducing the inflation levels considerably. When government expenditure increases, more demand created, and suppliers respond by producing more. This results in a demand-driven economy which implies that demand is the fundamental factor affecting the activities in the economy. A demand-driven economy cannot be affected much by inflation since at no time can the supply exceed the demand leading to the increased money supply, hence inflation.
The inflation level is in a straight line with the rate of unemployment, and this means that controlling inflation rates automatically reduce the rate of unemployment. Inflation also determines the rate of growth and expectation to go up by significant margins, owing to the current measures taken to curb inflation rates. This budget estimate aimed at increasing the exchange rate as a way of restricting imports hence encouraging the growth of domestic industries (Peterson, 2001 p. 76). This will work towards eliminating the current account deficit and promoting a balance in the current account.
Broman, F 1998, Macroeconomics, Allen & Unwinds, Chicago.
Leung, M 2000, Macroeconomics. Hung Fung Book Co, Hong Kong.
Miller, R 2004, Economics Today – The macro view, Canfield Press, San Francisco.
National Australia bank, 2011, 2011/12 Federal budget, Government press, Sidney.
Peterson, W 2001, Principles of economics: Macro, Irwin, Homewood.