Fiscal Policy Essay PDF

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Using information from the 2018/19 Federal Budget, assess the impact of fiscal policy in achieving the government’s economic objectives. The 2018/19 budget will have a significant and effective impact in achieving the government objectives regardless of all the difficulties faced. The impact on stabilisation of economic activity, reallocation of resources and redistribution of income will be assessed in this essay. Fiscal policy is the means by which the government adjust the spending level and revenue to influence a nation’s economic performance, it is also a component of macroeconomic policy. This is usually executed in the budget on the first Tuesday of May in Australia, which sets out the government expenditure and revenue policies for the upcoming financial year. It is estimated that Australia’s budget will be in $14.5B deficit for the 2018/19 financial year and return to a modest $2.2B surplus in 2019/20 and then stronger .. … The budget outcome can be changed through either deliberate discretionary changes as part of the structural component of the budget which are the policies introduced. Or it can be changed via the non-discretionary cyclical components of the budget including welfare payments and taxation receipts. Ultimately either of these changes will impact the Aggregate Demand (AD=C+I+G+(X-M)). This is seen below in the case of an increase in economic growth. Graph: A budget stance can be contractionary, neutral or expansionary, the 2018/19 budget was mildly contractionary as it attempts to consolidate the fiscal stance by reducing debt which is predicted to peak at 18.6% of GDP in 2018/19

This 2018/19 budget will have a great impact in stabilisation of economic growth and keep up the economic growth in Australia which is set to be 3% .In order to achieve this, it is needed to increase the aggregate demand within Australia which is equal to C(Consumption) +I(Investment)+G(Government expenditure)+(X-M)(Net export). For government expenditure that contributes 24% to the aggregate demand in Australia, the budget set out that there will be $24.5 billion additional funds added into the $76 billion rolling government infrastructure investment. This will has a multiplier effect which suggest that it not only increase government spending but will also provide more jobs in Australia and stimulate investment. It is vital to note that Government have been trying to repair the budget back to surplus in order to pay back the debt from previous years including during GFC and it is expecting to decline since 2019/20. In addition, this budget also has changes directed to increase consumption which contributes most to aggregate demand at 59%. The most significant change is the tax relief which directed to the middle and low-income earners via tax offset. People with income up to $37000 can have as much as $200 dollar tax offset and those with earns over $37000 will have up to $530 benefit from this tax relief. This policies can encourage low and middle income earner to increase spending. Moreover, the 32.5% tax bracket will be increased from 87,000 to 90,000 in July 2018 in order to prevent bracket creep due to wage growth. However, there is concerned that in the taxation receipt will become less progressive as the 37% tax bracket is abolished. This also give people more

disposable income to consume which will stimulate consumption. Furthermore, the budget had also set out policies to increase investment in Australia as a vital contributor to the Australian aggregate demand. The company tax has been reduced to 25% from 27.5%. Government would hope this can flow through to increase business investment and wage growth. However, in previous years, government have identify that these tax relieved sometimes goes straight to the owner of the business instead of making investment. Additionally, the extension of 20,000 tax write off for business with turnover less than $10million will trigger small business to make more investment.

The other main government main objectives and functions is to redistribute income form high income earner to low income earners or people unable to work. This is generally achieved by transfer payment and progressive tax system which the 2018/19 budget has addressed. The tax cut this year is directed towards low and middle-income earner who earns up to $90,000 pa. As introduced previously, they can receive tax offset up to $530 annually. This policy gives low income earners more disposable income and reduced the gap between them and wealthy people. However, this could lead to a less progressive tax system as government is looking to abolished the 37% in 2025, which might lead to higher gap between the rich and poor. In addition, government intend to increase equality in Australia via improving services in the society through the budget. $980 million will be spent on new public hospital over the next 4 years and governments are intended to provide 14,000 extra home care packages to elders allowing them to stay at home longer rather than seeking for residential care to cope with the issue of aging population which had reached 15% of the total Australian population in 2016. This outlined the difficulties Australia going to face in the next 2 decades but the 201/19 budget has addressed it in an effective way as they also encourage elders to work by providing $10,000 subsidies in total without affecting their pension.

The last key objective government performed is allocation of resources and prevent market failure. In order to achieve this, government need to provide merit goods and public goods to the society. Therefore, in this budget, they announced the additional $24.5billion on the 76 billion rolling infrastructure projected including the $5 billion on Melbourne subway to the city. This could also create jobs with in Australia and thrive to reach full employment. In addition, $2.4billion is invested in public technology infrastructure includes super computer, BOM forecasting and GPS system. This is going to benefit businesses in agriculture transportation an IT and it is government’s initiatives to support the growth and increase competitiveness and productivity in these industries. Moreover, the government have targeted specific industries like agriculture and medical with high export and development potential with more funding. For instance, $51.3 million will be spent in supporting agriculture export between 2018/19 and 2021/22. $500 million will be funded aiming to support the research and development of the medical industry over 10 years for Australia to become the world leader in genome research. This would have a significant impact on exports if resources are efficiently utilised in these sectors. However, the issues with these policy is considered to be the time lag. As these investment and funding usually took years before industries like agriculture and medicine can grew into a significant leader in the world. By then, there could be changes in environment industries in or the global

economics. Thus, these investments made might have little return in these substantial amount of resources allocated in the future if the surroundings changed.

In conclusion, Australia is facing difficulties in the economy but the 2018/19 budget will have a significant impact in achieving the government’s objectives which is, sustaining economic growth, redistribution of income and allocation of resources....