Discuss the use of fiscal and monetary policy.
Market economy’s major issue is that the rate of economic growth varies from year to year, following economic cycle of boom and bust. Furthermore, the operation of market forces can create inequitable and unfavourable outcomes. Governments play an important role in stabilising the economy, sustaining economic growth, and changing economic outcomes, which in the long run results in higher levels of growth and improved living standards. Policies designed to smooth such fluctuations are called macroeconomic policies, and the two macroeconomic policies implemented within Australia are fiscal policy and monetary policy.
Fiscal policy is a minor macroeconomic (countercyclical) policy that is utilised by the Australian government to achieve their economic objectives. This includes stabilising economic activity, influencing resource allocation and redistributing income, as well as reducing the level of inflation and unemployment within the economy. In this manner, fiscal policy is able to address areas of market failure, especially market instability, wherein there are severe fluctuations in the level of economic growth that distort economic decision-making, reduce consumers’ purchasing power, and force an increase in interest rates.
A QUOTE OR TWO
The main instrument used by the government in order to implement fiscal policy is the Commonwealth Government’s Budget. The Budget is released in May as an annual statement, and delineates the government’s planned expenditure (G) and revenue (T) for the next financial year. Revenue received by the government includes direct tax (of which progressive income tax makes up almost 70% of revenue) and indirect tax (such as GST, which applies at a flat rate of 10% to items sold), The other sphere of the instrument is government expenditure, which encompasses social security (the biggest outlay – transfer payments from taxpayers to welfare recipients), health, education, infrastructure, and other forms of transfer payments such as unemployment benefits. The Federal Government announced $444 billion revenue to be made and $464 billion in expenditure for the 2017/18 financial year, with their statement in May indicating only a small change in net government spending over the next financial year ending June 2019.
The budget outcome gives an indication of the overall impact of fiscal policy upon the economy. Possible outcomes include a surplus (T > G) and a deficit (G > T). As of the 2018/19 Budget statement released in May, the government has stated they are undertaking a relatively contractionary stance within their decreased budget deficit to $14.5 billion (0.8% of GDP) greater expenditure than revenue, comparing to the 2017-18 Budget with a deficit of $29.4 billion (1.6% of GDP). Given that the main fiscal policy aim is to achieve budget surpluses when the Australian government has recorded a series of budget deficits since the GFC, it is evident the government is working...