Fiscal policy is an instrument used by the government to regulate the amount of money in circulation. A physical policy is spelled out in government expenditure and taxation regime or structure. Fiscal policy is also used to control the distribution of national income, allocation of resources, and accelerating the aggregate demand (Ahuja 58). Besides, fiscal policy is employed to check the inflation rates in a country by ensuring price stability.
Instruments of fiscal policy
There are three tools of fiscal policy, namely; the government expenditure, taxation, and budgetary systems (Rapp 2). The government employs these tools to stimulate aggregate demand, generate employment opportunities as well as to attain price stability. All these measures provide an ample environment for economic growth.
In order to stimulate aggregate demand, the government increases its spending and allows tax cuts. Going by Keynesian theory, increasing government spending, the economy becomes vibrant as many income-generating activities are initiated by enhanced expenditure (Ahuja 257). Similarly, employment opportunities are generated from the investment projects initiated, which in turn boosts government revenues. On the other hand, an increase in government expenditure, through the multiplier effect, stimulates demand and increases the national productivity rate.
On the other hand, tax cuts increase real personal income or disposable income (Rapp 2). A tax cut reduces the amount that is deducted from individuals’ pay or demanded from organizations as tax. Therefore, personal real income increases, and consumer purchasing power increases as well. An increase in consumer purchasing power stimulates the aggregate demand of a country since each consumer will have some extra income to buy goods and services. However, a portion of increased real income is saved; the savings have a multiplier effect on the economy (Ahuja 301).
The 2010 Federal Reserve Budget
In the 2010 Federal Reserve budget, the Australian government adopted an expansionary stance. The budget increased transfer payments of $3.9 billion per year (Wayne et al. 1). Generally, the Australian government expenditure increased from $343.1Billion in 2009 to $354.6 Billion in 2010 (Wayne et al. 1).
From the 2010 Federal budget, it is evident that the Australian government has embarked on an expansionary economic program. By reducing the personal income tax, the government increases real personal income. An increase in real income stimulates aggregate demand and consequently increases transactions within the economy. Secondly, increasing the national expenditure is an expansionary strategy that is aimed at stimulating aggregate demand and the entire economy. An increase in government expenditure shifts aggregate demand to the right, a move that motivated producers to step up their productions to enjoy resulting high prices (Wayne et al. 1).
Finally, an increase in payments, especially an increase in pension, empowers the elderly and other beneficiaries’ to contribute positively to the economy. From an economic point of view, increasing transfer payment reduces cash from households with a low propensity to consume to a group with a high propensity to consume. In addition, the unconsumed money ends up as saving, which has a multiplier effect on the economy (Rapp 2).
Evaluating the effectiveness of Australian Fiscal policy
Australian fiscal policy is appropriate in addressing the impending economic situation such as economic growth, unemployment, inflation, and current account deficit. The growth rate of the Australian economy in 2010 is 3.3 percent; to increase the growth rate, the Federal Reserve has adopted an expansionary fiscal policy. An increase in government expenditure boosts investments in a country; as the investment increases, the national output increases dramatically.
The unemployment rate stands at 5.4 percent in the current financial year; this reflects a relatively low rate of unemployment. Increasing the national expenditure or government expenditure helps to generate more employment opportunities to reduce unemployment levels. On the other hand, the inflation rate stands at 2.8 percent; reducing personal income taxes increases disposable income, thus stimulating aggregate demand. The current budget being expansionary will lead to a slightly high inflation rate to a level known as mild inflation (Ahuja 344).
Finally, the Australian Current Account Deficit (CAD) is high at 7 percent (Wayne et al. 1). This is due to the low level of production, especially for export purposes, because the country has little production capacity. Negative CAD has persisted for over fifty years, and deliberate measures are being undertaken to avert the problem by allocating additional resources to Export Producing Zones (EPZ). The allocations will stimulate production for exportation (Wayne et al. 1).
Ahuja, H. L. Modern Economics. Delhi: S. Chand and Company LTD, 1980.
Rapp, John. Eco204Notes. 2007. Web.
Wayne Swan, Bowen Chris, and Sherry Nick. Phasing Down Interest Withholding Tax on Financial Institutions to Support Banking Competition. The Treasury Australia. 2010. Web.