Fiscal policy
Australia is considered as one of the most developed and biggest mixed economies of the world. In 2017, the GDP of Australia was AUD 1.69 trillion. The country holds the second position in the ranks of wealthiest country in terms of wealth per adult. Australia holds the record of having longest running economic growth for more than 26 years (Li and Spencer 2016). In other words, for more than two decades, the country never faced recession. The term ‘Recession’ is explained as two successive quarters of negative economic growth. It has been a remarkable success for the economy to achieve such a longest period of growth. Economic policies of the government played a crucial role in this remarkable performance of the Australian economy (Fazzari, Morley and Panovska 2015).
Monetary as well as fiscal policy contributes in economic growth. The government makes policies to control the money supply in the economy and also determines the level of government expenditure to push forward the economy. However, one view says that fiscal policy can stifle the economic growth through the distortionary impacts of taxation and ineffective government spending. On the other hand, government plays a critical part in economic development through the provision of infrastructure and public goods. Hence, the government policies have both the positive and negative impacts on economic growth (Wanna, Lindquist and De Vries 2015).
The taxation system of Australia is quite improved. It is levied at the local, state and federal government levels. The federal government of Australia collects the revenue from business and personal income taxes. The other types of taxes are goods and services tax or General Services Tax (Corsetti et al. 2013). The following report/essay focuses on the fiscal policies of Australian government in the last three to five years. The positive and negative aspects of the Australian fiscal policy and the influence on economic growth will be discussed in the report/essay.
Fiscal policy is one of the two most important tools of the government of any country to control the flow of the economy. The government of a nation makes adjustments in the expenditure and the rate of taxes to observe and affect the economy through the method. This policy is combined with monetary policy and applied in the economic system to direct the economic goals of a nation (Condon et al. 2014).
Before the Great Depression, the governments of all the countries took the laissez-faire approach towards the economy. In this approach, the government was not involved in the economy, as people believed that less involvement of the government can lead to better business. It was a fundamental part of the free market mechanism. However, after the Great Depression in 1930 and World War II, the need for government regulation was felt in the international economy. The governments decided to take active part in regulating inflation, unemployment, interest rates, exchange rates, cost, demand and supply of money in the economy. Hence, the practice of policy formulation and implementation started to prevail in the world economy (Furman and Shambaugh 2016).
Expansionary and Contractionary Fiscal policy
John Maynard Keynes introduced the concept of fiscal policy. He stated in his theory that, the governments can affect the macroeconomic activities and performances of an economy by raising or reducing the levels of tax and public spending. This reduces inflation in the economy, increases the employment and maintains the value for money. The balance between the fluctuating tax rates and public spending is very important to stabilize an economy (Borcherding and Keynes 2015)
Fiscal policy is of two types, expansionary and contractionary. Expansionary fiscal policy stimulates economic growth. It is most effective when business cycle is in the contraction phase. To stimulate a stagnant economy, public spending needs to be increased and taxes should be reduced. It also has a risk of rise in inflation in the economy. It is because when the quantity of money increases in the economy, the aggregate demand for goods and services increases. This causes the value of money to decrease. Hence, more money would be needed to buy same quantity of goods. When an economy is slowed down, the level of unemployment increases and consumer spending reduces. Then the government can stimulate the economy by reducing the tax rates. Thus, people would have more money in their hands to spend on the public goods and services. This way the consumer demand for goods and services increases leading to a rise in the total production, employment and economic growth (Hansen 2013).
On the other hand, when the inflation becomes too high, then for a slow down in the economy, government uses contractionary fiscal policy. The tax rates are raised to pump out the excess money from the economy and government spending is reduced to lower the money circulation, as long running inflation can damage the economic growth. If this continues for a long time, the economic growth would be disturbed and level of unemployment would increase (Arrow and Kruz 2013).
Taxation and government spending are the tools of fiscal policy. Taxes are levied on income of people, gains from investment, sales of commodities and properties and services. Government spending consists of subsidies, transfer payments on welfare programs, government salaries, public projects, infrastructural developments etc.
Figure 1: Expansionary and Contractionary Fiscal Policy
Fiscal Policy in Australia
(Source: Author)
The focus of economic policies of Australia is to create a mixed tax system, which would support the investors to drive their businesses forward and also influence the individuals to save, invest and participate in economic growth. It had driven the innovation, productivity, competitiveness, job creation and wage growth in the economy. The fiscal policy of Australia is one of the most important aspects of public policy of Australia and has an important part to play making a policy buffer for protecting Australia from the major economic shocks (Fenna 2015).
Australian fiscal policy is designed on the basis of medium-term framework, which ensures the budget balance over the economic cycle. The Australian government’s fiscal policy is designed with an objective to achieve an average budget surplus over the economic cycles. The fiscal strategies underline the concept of medium term framework with the provision of flexibility towards changes in economic conditions (Wanna, Lindquist and De Vries 2015). The policy is based on four elements:
- Investment in a strong financial system by redirecting the public spending towards quality investment for a boost in productivity and labor force participation
- Maintaining a well-built fiscal regulation by scheming the expenditures for reducing the government’s share on the economy of the country over time, to free up the resources for private investments to push the job creation and economic growth, with the help of reducing payments-to-GDP ratio and stabilization and reduction of net debt over the next period
- Supporting the growth of the revenue by implementing policies that encourage more revenue earning
- Improving the net financial worth over time to strengthen the balance sheet (Palley 2015)
The Australian government also has a strategy of budget repair. This is planned and implemented to deliver a sustainable budget surplus to a minimum of 1% of the GDP as earliest as possible, which would be steady with medium-term fiscal policy. The strategy includes:
- New and innovating spending actions will be compensated by reducing the spending elsewhere in the budget
- The total effect of the changes in receipts and the payments because of the changes in the economy will be used as an enhancement to the budget line
This repair strategy would be maintained until a well-built and long lasting surplus is created and sound economic growth, along with low unemployment (Burkhauser, Hahn and Wilkins 2015).
Hence, the aim of fiscal policy of the government is to redirect the budget back to a sustainable level of surplus at a feasible speed with emphasis on reduction of expenditure as a percentage of GDP and towards investments for promoting jobs, opportunities and growth. Thus, sustainable tax policies are made.
In Australia, the estimates regarding the impact of fiscal policy indicate that the multiplier effect of the government expenditure is positive and greater than 1, while that for the taxes is negative. Hence, during the downturn of the economy the rise in spending and fall in taxation would enhance the recovery of the economy. The deficit during economic downturn is compensated by surplus during growth, and this allows the budget to be balanced in the medium to long term, and debt does not pile up too much. Thus, the fiscal policy aims to achieve two fundamental objectives of economic stabilization and promoting a long term growth. The relation between fiscal policy and cyclical stability is more straight and easy to comprehend than the relation between fiscal policy and economic growth (Mertens and Ravn 2014). Cyclical fiscal policy refers to the approach of increasing public spending and reducing taxes during the economic boom and reducing spending and raising taxes during recession. Counter cyclical approach represents to the policy of raising taxes and reducing spending during the boom period and increasing public spending and cutting taxes during recession (Aghion, Hemous and Kharroubi 2014). The Australian economy has been found to run the counter cyclical fiscal policies (Condon et al. 2014). During the times of negative shock, the fiscal policy was made expansionary to avoid high risk of recession and debt amount increased too. However, the rise in debt did not make the debt-to-GDP ratio unsustainable. In the last three to five years, Australia achieved one of the lowest debt-to-GDP ratios of the world (Leigh and Blakely 2016).
Objectives of Australian fiscal policy
In the last 3 to 5 years, the focus of Australian budget was to implement the economic plans for growth and jobs. The government has launched a Ten Year Enterprise Tax Plan, which would boost the household and national incomes by providing some incentives for the organizations to innovate and invest and ensuring that the organizations pay the precise amount of tax in the country. This plan is expected to deliver slightly more than 1% increase in the GDP permanently in the long term. It will give assistance to higher wages, growth and new employment opportunities through reduction of tax rates for the companies over the next few years to a globally competitive level, with a smaller cut for smaller businesses (Argy and Nevile 2016).
The changes in the level of the Government investments, various taxes, the types and level of the borrowings of the Government help in the operations of fiscal policy. The economic activities are directed influenced by Government, it is done through the help of recurrent and capital expenditure and indirectly it is done through the influences of the investments of the Government, taxes and transfers on personal consumption. In the present institutional arrangements, fiscal policy is the single instrument of the macroeconomic policy that is under the direct control of the Government (Coale and Hoover 2015). It is an instrument that is used to stabilize the fluctuations in the various activities within an economy. The fiscal policy shows actions of the Government or the impact of the automatic stabilizers. One example of the actions taken by the Government are fiscal stimulus package which provides support to the average demand through public investments and cutting of taxes (Jordà and Taylor 2016).
Automatic stabilizers are a type of Government investment and income which is influenced by the size, inertia of the Government and changes in the economic activities. They stabilize the fluctuations in the average demand and they operate without any particular actions from the Government (Ghosh and Siddique 2017). For instance, when the economy is slow then the amount of tax collected is declined on the side of the revenue, due to the corporate profit and tax payers, the income reduces. The Unemployment benefits and the other social planning increase on the expenditure side. The impact of these changes offsets the part of decrease in the average demand that could have raised. The cyclical influence makes the fiscal policy to expand when there is downturn and contract when there is upturn in the economic activities. As per the theories automatic stabilizers over the economic cycle should not affect the structural position of economic activities. Deterioration of short term cycle in the budget bottom line needs to be reversed when the economic situations improves (Fraser, Macdonald and Mullineux 2014). A fiscal policy should be made with long term objectives rather than short term stabilization. Long term sustainability of the should be aimed and it should be able to overcome the future difficulties, like population of ageing and the requirement to raise the long term potential of economic growth of the country with the help of investments in the field of infrastructure and education (Rose 2017).
Budget Repair Strategy
In Australia fiscal policy is a matter of Charter of Budget Honesty Act 1998 that makes it compulsory for the Australian Government to report against the medium term fiscal strategy. Fiscal Policy should have principles of sound fiscal management as its basis, which includes the debt of the Government, and the management of the fiscal risks, the status of the economic cycle, integrity and stability of the tax base, sufficiency of the national saving and the equity between the generations. If the charter is focused on the medium term objective it would not be able to preclude a role of actions by the government or the automatic stabilizers (Meara et al. 2015).
In the recent past, the Commonwealth expenditure has outnumbered the revenue collections. An underlying deficit of budget of $47 billion or 0.3% of the GDP happened in the year 2013-14. The Australian government has spent more than the revenue earned. For the continuous economic growth, and emerging challenges, a sensible and cautious fiscal policy needs the delivery of the sustained surplus of budget. After many years of sustained growth and high terms of trade, the fiscal position of Australia was not much stronger. Hence, a disciplined approach of the fiscal policy is necessary. Australia has always kept the nation’s budgets and finances under control, which has helped to set an ambitious goal for the growth (Aph.gov.au 2017). This had a severe effect on the company tax receipts in 2012-13. Less than probable capital gains tax and the resource rent tax have contributed in the reduction of the company tax receipts. Since the budget of 2012-13, the tax receipts were reduced to almost $17 billion. It reduced the total write downs in the tax recipes in the past five years to almost $170 billion (Budget.gov.au 2016).
A fundamental factor of the fiscal strategy of the Australian government is to response to changing economic as well as fiscal conditions. The fiscal policies are formulated in a way that the process of economic growth is maintained. The government let the automatic stabilizers of the revenue side of the budget to be active in the short or near term. With a correct policy formulation, the potential budget deficit of $17.8 billion in the financial year 2013-14, $17.4 billion in 2014-15, $11.6 billion in 2015-16 and $5.6 billion in the financial year 2016-17 could be avoided. The net impact of the budget has brought an improvement of around $28.4 billion in the primary cash balance in the budget (Budget.gov.au 2016). The fiscal sustainability was also improved by the implementation of the policies, which increased sustainability in growth in the country and increase the productivity with the help of necessary investments in skills, education and critical infrastructure. The return to the budget surplus occurs gradually and the Australian government’s fiscal policies give scope to the monetary policies to be effective for economic growth. The fiscal strategies are consistent with low inflation also. RBA has got the scope for easing up the monetary policy by reducing the interest rates since 2011 by 200 basis points. The lower rates of interest are providing support to several sectors and many industries and assisted the transition from resource to non resource sectors to happen and drive the economic growth (Ncoa.gov.au 2016).
Impact of fiscal policy in Australia
Conclusion
Thus it can be said that, the fiscal strategies of Australia in last three to five years have followed the medium term framework and it has helped to reduce the underlying cash deficit of the country significantly. The country has progressed from cash or budget deficit to budget surplus. The budget is the tool for striking the correct balance between the strong fiscal position and economic growth. The Australian government uses medium term fiscal policy with a good and transparent plan for returning the budget from balancing in 2015-16 to a surplus in the year 2016-17. The government has delivered the fiscal outcomes consistent with the fiscal strategies, which have supported the steady growth and lower level of unemployment. A well framed stimulus package has helped the economy to stay unaffected from the shocks of financial crisis. Since then, the government ensured a strong policy on public finances for maintaining growth and low level of unemployment. In the past three to five years, the tax receipts were considerably affected by weaker nominal GDP growth. The high AUD and weak commodity prices have lowered the profits of the organizations in all sectors.
References
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