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Fiscal Policy Essay Fiscal policy refers to the use of the annual budget by the government to affect the level of economic activity, resource allocation and income distribution. In doing so this budgetary strategy can influence positive outcomes towards the economies objectives involving; growth, full employment, low inflation and external stability. The instruments which allow fiscal policy to do so are government spending and taxation. Changes in the level of these particular instruments can impact specific areas of the economic objectives therefore help enforce change. Fiscal policy has been a major contestant in promoting Australia’s economic objectives, and in the years the effectiveness of this policy has shown how it can help stimulate or encourage action towards its objectives. In promoting economic growth the Australian government took on the charter of budgetary honesty act in 1998. This ensured that the budget was kept in balance over the economic cycle, providing that there was no increase in the tax burden on 1996-97 levels and a commitment to the retirement of public debt through the accumulation of budget surpluses when economic growth was positive. In the years it’s shown that the government has achieved budget surpluses since 1996 and in 2005-06 the Australian’s public debt was paid off. The achievement of these budget surpluses and the retirement of public debt led to a lower interest rates, which further led to higher rates of sustainability by encouraging private consumption, investment spending and employment growth. In fact supporting economic growth by use of fiscal policy was also used and was successful in doing so. The Australian government deliberately used fiscal policy to introduce fiscal stimulus measures to support aggregate demand, employment and growth in real GDP. These actions included short term cash transfers to low and middle income households in the years November 2008 and February 2009, and new spending on infrastructure projects in the 2009-10 budget through COAG. In the long run these measures were estimated to boost real GDP by 2.75% in 2009-10 and 1.5% in 2010-11. In addition expansionary fiscal policy was used to reduce unemployment and help promote higher sustainable economic growth. In this case cyclical unemployment was targeted because in recent decades experienced economies have shown that fiscal policy as well as monetary are ineffective in terms of reducing structural unemployment. In order to reduce cyclical unemployment expansionary fiscal policy was used to offset cyclical downturns in the economy and increasing levels of unemployment that accompany periods of slower economic activity. Hence was determined that expansionary fiscal policy would stimulate aggregate demand and increase the output of goods and services in the economy. Given that the demand for labour is consequential from the demand for goods and services that it is used to produce, higher levels of production will require increased levels of employment, therefore leading to a lower unemployment level and rate. While fiscal policy was used to endorse lower unemployment rates it was also used to help support aggregate demand and unemployment. This was of course around the time of the global financial crisis and recession in 2008-09. This was done by introducing a fiscal stimulus packages in Australia and in doing so the budget deficit grew to -4.5% GDP as well as the RBA cutting the cash rate by 4.25% and with new discretionary spending on cash payments to households and infrastructure projects through the nation building and jobs plan employment would have been supported. Furthermore the problem of rising inflationary pressures on the economy was to come and contractionary fiscal policy was a way in achieving lower inflationary pressures. This is done by an increase in the structural surplus or a reduction in the structural deficit of the budget outcome. Either way the outcome will be a reduction in the net injection of funds from the government sector into the economy and a reduction in demand pull inflation. An example of this would be the Rudd government were it aimed to reduce inflationary pressures by a restrictive fiscal stance. It was forecast that the government was to reduce the growth of public demand in 08-09 and total government expenditure was to increase from $280.6b in 07-08 to $292.5b in 08-09. It was also forecast that as a percentage of GDP, government expenditure was to fall from 24.9% to 23.8%. There was recognition by the Rudd government in the 08-09 budgets that fiscal policy had an important role to play in supporting tighter monetary policy in bringing inflation back under control. Undoubtedly fiscal policy had been used once again to help in reducing the size of the current account deficit to under -5% of GDP. This is the condition for achieving sustainability in growth of the current account deficit. It was intended by the Australian government to mainly use fiscal policy to reduce the size of the current account deficit. Fiscal policy has had a medium term focus of rising public saving through the build-up of underlying budget surpluses between 1998-2008. These surpluses have eliminated the public sector’s call on national saving. It has also contributed to eliminate public debt and to reduce that part of the net foreign debt owed by the Australian government. This has allowed more savings to be used for private sector investment, and reduced Australia’s reliance on foreign savings as a source of investment funds. This fiscal combination strategy is based on the ‘twin deficits argument’ of there being a link between the budget deficit and the current account deficit. To sum up the effectiveness of Fiscal policy in achieving Australia’s economic objectives has been undoubtedly encouraging. Fiscal policy has been one of the most effective macroeconomic policies in promoting as well as supporting economic growth, full unemployment, low inflation levels and in reducing the Current Account Deficit.