1. Fiscal Policy Australia
Fiscal Policy- AustraliaFiscal policy entails the use of a country’ s budget in directing and
influencing economic objectives. Australia’ s 2013/2014 budget indicates that the carbon
tax and the Mineral Resources Rent Tax among other taxes have failed to raise expected
revenue for government to perform effectively. The government still needs to find ways of
reducing existing expenditure. Overall, Australia’ s 2013/2014 budget has the effect of
reducing the ratio of government expenditure to GDP. This means that the government is
using contractionary fiscal policy measures whose impact will be to reduce national income
(output). Therefore this report applies the IS-LM framework to explain that if Australian
government has to increase national income (output), then there is need to adopt
expansionary fiscal policy stance.Use of Fiscal PolicyFiscal policy is done through measures
aimed at varying the amount of government spending and revenue to attain a fiscal surplus,
fiscal deficit, or a balanced budget with a view to change the level of economic activity in a
particular fiscal period. There are two ways in which budget outcomes can be formed. First,
there is the cyclical component where budget outcomes are formed when automatic
stabilizers including government spending (through transfer payments) and tax receipts
adjust to the state of economy. The second way is the structural component where
economic activity is altered through government’ s discretionary, proposed changes such as
reduced spending.In most cases, governments rely heavily on discretionary fiscal policy
instead of automatic stabilizers. This is because despite fact that automatic stabilizers play a
counter-cyclical role within the budget, they are rarely strong enough. When government
aims at stimulating growth within the short-term, an expansionary fiscal position is
employed. To do this, the government makes use of increased government spending and
reduced taxation. This has the effect to substantially increase consumption and investment
consistent with Keynes’ multiplier model. On the other hand, in order to slow down the
economy, government uses a contractionary fiscal approach. This will also have the effect of
limiting foreign liabilities and current account deficit. Furthermore, the results of the fiscal
policy position can have a significant bearing on the level of income distribution and
resource use direction within an economy.Australia’ s Budget 2013/2014- Winners and
losersThe 2013/2014 budget had a number of winners. First, the Defense docket which was
funded to a tune of $113 billion over the forward estimates, which was an increase of $10
billion compared to the 2012/2013 budget. Second was Disability Care Australia which
received $3.3 billion with a $19.3 billion total investment in scheme over seven years,
implying a $14.3 billion in new money to be spent. Infrastructure docket also gained in that
2. it managed to receive a new spending of $3 billion over the forward estimates, which was
being part of the $24 billion infrastructure package. The specific infrastructural projects to
benefit from this funding included: the Melbourne Metro rail project whose allocation was
$1.8 billion meant for Sydney’ s WestConnex motorway, Sydney’ s F3-M2 link whose
allocation was $400 million, and Brisbane’ s Cross River Rail project with an allocation of
$715 million. Another big winner in the 2013/2014 budget was the Medicare docket with
an allocation of $2.2 billion for investment in Medicare benefits over five years, plus $2.2
billion towards private health insurance rebate for four years and $226 million on cancer
care. Among the many winners, other notable winners included Childcare reforms and
jobseekers with allocations of $300 million in both cases.There were many losers as well in
the 2013/2014 budget. Firstly, the 2013/2014 budget presented massive revenue write-
downs totaling to $170 billion in the last five years only. This involves a $18 billion deficit
for the 2013-2014 financial year, a $19.4 billion deficit for the current financial year, and a
$10.9 billion deficit for the 2014-2015 financial year. Secondly is the substantial cut down in
tax receipts totaling to $60 billion over the forward estimates. This reduction in tax receipts
was largely attributed to the high Australian dollar and the challenges presented by global
conditions. Thirdly, the mineral resources rent tax was reduced to $3.3 billion over the
forward estimates from the $13.4 billion original forecast.The budget also proposed a
reduction in higher education funding by $2.3 billion, as well as a $2.8 billion in tax cut
associate with carbon trading scheme. The 2013/2014 budget also proposed substantial
changes in superannuation tax arrangements targeting to raise $900 million in revenue
from these changes that will see earnings of more than $100,000 on superannuation
pensions and annuities that were previously tax free now taxed at 15 per cent. There was
introduction of $665 million cut from the teachers’ bonus over the forward estimates, as
well as $580 million in cuts to the public service over the forward estimates. These are only
but a few losers among the many affected by the 2013/2014 budget.Australia’ s Budget
2013/2014- Fiscal Policy IssuesWhen Treasurer Wayne Swan unveiled Australia’ s
2013/2014 budget, the most outstanding feature was the $19.4 billion deficit and an
estimated debt of $178 billion. In what observers have termed ‘ a mere blame game, the
current government attributes the outcome to the failure by previous regimes to live within
their means, which they only inherited. For instance, economic analysts who share a similar
view singles out the latter years of Howard government that saw the Costello budgets in
which were included a raft of tax cuts and handouts whose impact was to erode the
otherwise healthy surplus. Some of the contributory factors to the erosion of the tax base
included wages growth, jobs growth and exceptional falls in unemployment which led to
increased tax receipts.Other than the Howard government, the two and hall years’
leadership under Rudd’ s Labor government also exhibited high debts and ill-fated
economic policies in a period that was dominated global financial crisis. When Rudd came
into power in 2007, there was an estimated $45 billion in terms of net government saving.
However, by the time Rudd was leaving office in 2010, there was an estimated net
government debt of $42 billion. Although the Rudd administration had the stimulus
spending idea gain significant support, the issue that elicited great debate was the amount
and form of spending.Figure 1 below illustrates the government net debt of Australia over
3. the years.Figure.1: Government net debt of Australia over the years.Source: Commonwealth
of AustraliaThe budget 2013/2014 reveals that Australian government has failed to curb
spending and/or widen the tax base. This is the case despite fact that the budget proposed
the minerals resources tax and the carbon tax. Consequently, instead of addressing the
budget deficit, the government has in fact delivered more budget deficits. The budget
introduces public service cuts over the next four years which will include job cuts as a way
of saving. This will see government save $580 million. However, analysts argue that
meaningful savings in government spending need to come from cutting programs as
opposed to public servants.Policy Implications and sustainability IssuesAustralia’ s
2013/2014 budget indicates that the carbon tax and the Mineral Resources Rent Tax among
other taxes have failed to raise expected revenue for government to perform effectively. The
government still needs to find ways of reducing existing expenditure. This presents a real
structural problem for government and is also compounded by the need for government to
pay for its additional expenditure promises.The government aims at having a surplus
budget by 2016. This means that the medium term will have the economy continue to
grapple with the debt burden while the markets continually readjust to fiscal policy
measures of (increased government spending). As mentioned earlier, fiscal policy can be
implemented through discretionary changes in government spending or the tax rate.
Overall, Australia’ s 2013/2014 budget has the effect of reducing the ratio of government
expenditure to GDP. This means that the government is using contractionary fiscal policy
measures whose impact will be to reduce national income (output). If Australian
government has to increase national income (output), then there is need to adopt
expansionary fiscal policy stance. This can be explained using the IS-LM
framework.Australia’ s Budget 2013/2014- IS-LM Application to Fiscal PolicyThe IS-LM is
an important economic framework used within mainstream approach to assess the impact
of fiscal and monetary policy changes on output (income) and interest rates, and also the
effect on employment stemming from such policy changes. While the effect of changes in
monetary policy results into a shift in the LM curve, the effect of change in fiscal policy leads
to a shift in the IS curve. For the purposes of this report, the focus is on fiscal policy only.The
IS curve shifts to the right with the increase in the government spending. This happens
because, for a given interest rate, increase in autonomous spending leads to an increase in
equilibrium level of national income. This shift in IS curve depends on the size of the
expenditure multiplier and on the magnitude of the change in autonomous spending. A
smaller expenditure multiplier with a given change in autonomous spending leads to a
smaller shift in the IS curve.Figure 2 below illustrates the impact of increase in government
spending (an expansionary fiscal policy change).Figure.2: Impact of an expansionary fiscal
policy change (increase in government spending)Source:
http://bilbo.economicoutlook.net/blog/?p=25024It is assumed that the economy was at an
existing fiscal policy stance represented by IS1. At the original fiscal policy position, the
combination of the level of equilibrium for the interest rate and national income is marked
by point i*1, Y*1. The intersection of IS1 intersects and LM, form the equilibrium point,
which is identified by A. Thus, there exists an output gap given as (YFE – Y*1) where YFE is
the full employment national income while Y*1 is the current national income level.
4. Therefore the need to stimulate aggregate demand and to avoid mass unemployment
associated with the current low level of output would drive Australian government to
increase government spending. This has the effect to shift the IS curve to IS2 thus
establishing a new point of equilibrium at B which represents higher interest rate and
higher national income at the new equilibrium at i*2, Y*2.Ordinarily, firms produce more
output and hire more workers at a higher level of aggregate demand. It is for this reason
that there is rising national income in this scenario. Since the higher national income leads
to increase in transactions demand for money, there will be higher interest rate within the
IS-LM framework. This is because at the original equilibrium interest rate (i*1), increased
demand for money leads to excess demand for money since money supply is fixed. The
rising interest rates will encourage people to hold less cash. This implies that the expansion
in income could have been more than the one shown by the shift from Y*1 to Y*2 if the
interest rate would not have gone up.It is important to note that the final aggregate demand
represented in figure 2 above is less than the initial aggregate demand. This is because the
increase in interest rates has a negative effect on private investment. This negative effect
(also known as financial crowding out effect) therefore offsets part of the increase in
government spending. It if government spending would continue increasing until the IS
curve shifts to ISFE, it would have been possible to attain full employment at point C.
Furthermore, the gradient of the LM curve tends to determine the extent of the financial
crowding out. Where the LM curve is vertical therefore, the fiscal policy will be rendered
ineffective. This would mean that a given rise in government spending would be offset with
the same magnitude of decline in investment as the magnitude of increase in interest
rate.ConclusionIn summary, fiscal policy is the use of government budget to direct and
influence economic objectives. The budget 2013/2014 reveals that Australian government
has failed to curb spending and/or widen the tax base. This is the case despite fact that the
budget proposed the minerals resources tax and the carbon tax. Consequently, instead of
addressing the budget deficit, the government has in fact delivered more budget deficits.
Overall, Australia’ s 2013/2014 budget has the effect of reducing the ratio of government
expenditure to GDP. This means that the government is using contractionary fiscal policy
measures whose impact will be to reduce national income (output). If Australian
government has to increase national income (output), then there is need to adopt
expansionary fiscal policy stance as explained earlier using IS-LM
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