Assess the use of fiscal policy to achieve an equitable distribution of income and full employment PDF

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Assess the use of fiscal policy to achieve an equitable distribution of income and full employment. Fiscal policy is utilized by governments around the world to improve aspects of its economy including the equitable distribution of income and achieve full employment (NAIRU). The annual budget is the main example of the use of fiscal policy in Australia and outlines the predicted levels of government expenditure and taxation revenue for the coming year. Fiscal policy’s taxation component is largely responsible for improving the equity of distribution of income. Governments may either impose/introduce taxes in the annual Budget or lessen/remove taxes. In the early 2000’s, the Goods and Services Tax was introduced by the Australian Government on most products excluding fresh fruit and vegetables and a few others. This tax was created with the aim of ‘reaching’ everyone in the economy as the GST would be impacting on everyday items. This particular policy hasn’t been very successful in achieving greater equity in income distribution because it has a greater impact on lower income earners. Those on low incomes have a higher marginal propensity to consume, thus the GST tax has a higher proportional effect on them compared to high-income earners. Moreover, the introduction of the Luxury Goods Tax has impacted higher-income earners to a greater extent, resulting in a reduced income/wealth by taxing them on non-essential goods/services such as prestige cars and watches and handbags. This particular tax can be seen as reducing income inequality or lowering the Gini coefficient. Conversely, the use of tax cuts and changes to the tax system have been effective in achieving greater equity in the distribution of income. Tax cuts to lower and middle income earners introduced by the Morrison Government have increased their disposable income. Allowing them to purchase goods and services and improving their quality of life. Additionally, the raising of the tax-free threshold in the 2010’s has the effect of increasing income distribution equity. The SMH article ‘Tax reform key to all areas of the economy’ illustrates the widespread effect that the raising of the tax-free threshold has on the livelihoods of those most impacted, people on the lowest incomes, often migrant workers or the disabled/impoverished. These tax reforms above are very influential in achieving progress in the equity of the distribution of income as those that they affect most often have little ability to negotiate for pay rises or better conditions themselves. The use of taxes and tax cuts are extremely key to achieving an equitable distribution of income in the economy. On the other hand, the discretionary expenditure component of the Federal Budget is important to achieving full employment or progress towards it. The ‘NAIRU’ is defined as full employment, made up of seasonal, structural, frictional and long-term unemployment. The cyclical unemployment is a key focus of the government in its Budget, thus attracting spending to sectors of the economy impacted by cyclical factors. The 2008 Global Financial Crisis is a prime example of an external factor impacting upon domestic employment. The reduction in aggregate demand was widespread and Kevin Rudd’s Labor Government’s $180 billion stimulus package aimed to promote and trigger consumer and business spending and lead to higher employment in the economy. The national ‘Pink Batts’ scheme introduced in the 2008/9 Federal Budget was designed to assist unemployed individuals especially in the construction/services sector in finding employment through the installation of home insulation packages across the country. This scheme led to a reduction in unemployment of 0.9% in 2009/10 on forecasts by the ABS. Also, the stimulus given to businesses/schools was an incentive to invest in infrastructure projects which would promote jobs lost in the slump of the GFC. The Christian Brothers Centre at Oxford Falls was part-funded by the Government and led to a reduction in cyclical unemployment as its construction employed builders, architects, plumbers and many other workers. Moreover, the current Covid-19 pandemic and economic crisis has resulted in the loss of many jobs due to the shutdowns and lockdowns. The Government’s JobKeeper package has been effective in limiting job losses as a result of cyclical (external factors). The Australian Financial Review article, ‘Jobkeeper, Effective or not?’ discusses the necessity of the governments’ fiscal response to the pandemic and economic crisis in moving towards full employment. The ‘mini-budgets’ throughout 2020 have been examples of the ability of fiscal policy to respond quickly to economic issues, demonstrating fiscal’s short term impact time lag and usually medium (1 year) term implementation time lag but currently short-term time lag due to extraordinary circumstances. The government and Scott Morrison have repeatedly stated the ‘scaleability’ of the government expenditure (Jobkeeper package), referencing the importance of fiscal policy at the current time.

Fiscal policy is highly effective in achieving an equitable distribution of income and full employment as long as government choices and policy decisions are made with consideration. In times of external stress (GFC, Covid-19) the role of fiscal spending is of greater importance in lowering the unemployment rate towards full employment (NAIRU). At all times, governments must use taxation effectively through implementing new taxes or tax reform to lower the Gini coefficient of the economy....