Understanding the meaning of fiscal policy

Discuss About The State Systems Under Imperfect Maintenance?

The focus of this essay on the medium term influences on fiscal policy. It is important for the government of any country that their economy performed well and their balance sheet must be strong. The essay also explains the sustainability of the economy, a stable economy is important for government as well people who are living there.  The fiscal policy gives direction to the government to work accordingly and work until financial system shows profit.  Industrialization is main factor to raise the economy and helps in generating more jobs if the rate of employment increases that means economy is performing good. Moreover, the balance sheet of the government shows goods revenues. This essay is about the fiscal policy of Australia in last three years. Government of Australia is struggling to keep the regular pace in their economic growth. The economy of Australia is not performing well and the reason behind that is increase in the unemployment rate. From the last few years, the unemployment rate of Australia has increased and economy has goes down. The essay describes the meaning of fiscal policy and comparison between fiscal and, monetary policy and their working styles and difference among them. Further, the essay explains the objective of fiscal policy and relationship between fiscal policy and macroeconomics variables. In the next section essay explains the three-year fiscal policy of Australia in which medium term strategy explains in details with budget surplus strategy. The essay explains the last three year estimated and projection investment by graph. Afterwards, essay explains the various challenges, which are faced by the fiscal policy in its implementation.                            

Fiscal policy can be defined as the policy or decision made by the government regarding the collection of taxes from public and how to spend that money which is collected. The money which is collected by the government is revenue and spending that money is expenditure for the government. So, fiscal policy is the efficient utilization of government revenue and effective expenditure strategy for overall development of the economy (Hansen, 2013). For the growth and development of country government spends money on different sectors such as education, military, health, defense services, infrastructure and trade. In Australia, government spends large money on the welfare as federal government expected more than $ 156 billion in the budget for the year 2016 for welfare spending. Revenue or money for the spending can be generated through taxation, borrowing money from different sources, sale of fixed assets, state owned enterprises and consumption of reserves (Mertens and Ravn, 2014).

Fiscal policy V/S Monetary policy

Fiscal policy affects the monetary policy but always contrast with the monetary policy of the country. Fiscal policy is administered by the government or legislative body under laws where as monetary policy is administered by the central bank of a country (Burgert and Schmidt, 2014). Fiscal policy determines the taxation strategy and expenditure of government where as monetary policy determines the demand and supply of money, deposit rates or interest rates, lending rates or borrowing rates and exchange rates. In Australia, monetary policy is regulated and controlled by the RBA (Reserve Bank of Australia).

The main objective of fiscal policy is to stabilize and stimulate the economy of nation in the period of recession and depression.  For example, when Australia was facing financial crisis at global level, government announce the ‘stimulus budget’ of more than $42 billion in 2009 for the purpose of stimulating the economy (Parliament of Australia, 2017). At the time of inflation in the country, one of the most useful tools is fiscal policy which can be utilized in controlling the situation with increasing the rate of taxes on income and revenue of companies to reduce the consumption level. When government expenditure is more than the revenue it is generally called as budget deficit.  In Australia, government used the budget deficit strategy to overcome from the situation of downstream of economic growth. Budget surplus is also used by federal government to overcome from inflation by increasing the revenue and decreasing the expenditure in the country. Another purpose of fiscal policy is to stimulate the financial market.  Share market of country can be influenced by the different fiscal policies of the government (Arrow and Kruz, 2013). To stimulates the share market government uses the budget deficit strategy and budget surplus is used when governments wants to decrease the share market of economy. One of the main objectives is to make growth and welfare of the economy by supplying goods to the public.

Macroeconomic policy is also responsible for the development and growth of economy and for maintaining the stable environment in the economy. The macroeconomic policy of any country has three main components which are monetary policy to control factors related to money, fiscal policy to control factors related to economy and exchange rate policy to control factors related to finance and currency. So, the different variables of macroeconomic policy are affected due the changes in the policy of taxation and expenditure by the government such as aggregate demand of the goods, saving and investment of the public, rate of GDP (Gross Domestic Product), inflation, rate of unemployment and commodity prices (Corsetti, et al., 2013). The relationship between macroeconomic variables and fiscal policy can be explained as follows:

Objectives or tools of fiscal policy

Growth percentage of real GDP: The aim of the fiscal policy is to make the higher economic growth and to enhance the growth and development per person which leads to increase in the living standard of Australia’s future generation. Growth in the economy is also helpful in increasing the quality of services like education and health (Parliament of Australia, 2017). In December 2015, the percentage of real GDP increased by 0.61 which was higher than the expectation of government and market. Annual growth rate of real GDP was 3.1% which was more than in comparison with 2.76% which was the expected prospective rate of growth in Australia. The main factors for higher growth rate were dwelling investment, growth in the spending of consumers and public (Borio, 2014).

Percentage of Inflation: An increase in the prices of commodities, services and goods in the economy of a country can be called as inflation in the economy of that country. Due to increase in the demand of goods and services, supply of goods will decrease and prices will be increases by the supplier for earning higher profit. Main factor behind the inflation is increase in the purchasing power of general public which tends to increase in the prices of goods and services (Elmendorf and Sheiner, 2017). In March 2015, the percentage of inflation decreased by 0.10 which was lower than the expectation of government and market. In December 2015, Annual rate of inflation reduced to 1.4% from 1.8 % which was due to the cost pressure of domestic products.

Rate of Unemployment: Unemployment can be defined as the number of individuals who are not working in the present and seeking for the job actively (Argy and Nevile, 2016). Unemployment in the country increases due to the reduction in the level of production by different organizations which results in the fewer requirements of workers. Macroeconomic policy and fiscal policy of Australian government always focuses on reducing the rate of unemployment and increasing the economic growth which result in the more demand of workers in the country. In March 2015, the percentage of rate of unemployment decreased by 0.11 which was more than the expectation of government and market in comparison of 5.71% of unemployment rate in the march. Numbers of person employed in the March 2015 were increased by 26000 and employment rate increased in March was 2.1% in the year 2015.

Terms of Trade in the Australia: In present situation, Australia has recovered from the downstream of financial crisis at global level and facing the risk of boom condition of trade and commodity prices are also increasing (Fazzari, et al., 2015). But in 2015, there was significant decreased in the prices of commodity that were 3.3% in the month of December which result in the reducing terms of trade in Australia by 11% annually.

Relationship between fiscal policy and macroeconomic variables

Fiscal policies and monetary policies are required to be work together for boom in the overall macroeconomic factors of the country. For the purpose of achieving long term and sustainable growth in the economy of Australia, Federal Government have to face many challenges and negative and positive factors in the economy.

Medium term fiscal strategy

This strategy is made by the regulatory bodies to achieve on average, profit on the budget, during the period of economic cycle.

• By investing in stronger economy for more returns and redirecting government expenses to worth investment to increase employee’s contribution and productivity.
• It is important to maintain the strong economic discipline to diminish share of the government of the economy in excess of time to open the model for other investors as if private industries are welcomed which help in generating more jobs as economy.
• Expenses to Gross domestic product declining:
• Increase the balance of the government by improving the net financial value (Alesina, et. Al., 2010).

It meant to convey profit on the financial plan by increase in the one percent in gross domestic product by 2023-24..

The overall effect of changes in revenue and expenses, if there is modify in an financial system will be

If the effect is optimistic than it will stored as and upgrading to the financial plan base line.        

An obvious method must be designed to extra on the budget and impactful decisions must be taken by the government at regular intervals.

The budget repair strategy works until there is surplus on the budget and it runs till economy shows growth consistently and the unemployment rate goes down (Blanchard, et. al., 2010).

It keeps on working until there is sustainable growth in the economy with a regular speed as redirecting expenses for venture to encourage expansion, opportunities with jobs.

Governing bodies is works towards to take the financial plan to profit earliest achievable. The financial plan preserves a stable and creditable route towards profit. The primary cash shortage is anticipated to get better in every year in excess of the onward approximation from $35.1 billion in 2015?16 (2.1% of gross domestic product) to $6.9 billion in 2018?19 (0.4% of gross domestic product). In comparison to`2014-15 the fundamental hard cash balance has gone worse through $3.9 billion in 2015-16 and $12.5 in the 4 years to 2017-18. Though, demote to whole duty proceeds is considerably bigger than the range of this worsening. Predictable income tax revenue has been printed down through approximately in 2015 $5.9 billion and $20.1 billion to 2017-18. From the budget of 2014-15, it takes the entire jot down in income tax revenue to 2017-18 to $52 billion (Fiscal Strategy 2016).

The major contributor to jot down the taxes of government is the quick drop in the flatten ore cost. Contributes about $20 billion of the entire $52 billion. Feeble estimated earnings expansion since the 2014?15 has also considerably demoted likely excise revenue.

Financial plan do not look for to compensate the weakening in revenue by radically dropping administration expenditure or mountaineering duties. However, the standard yearly motion of consolidation pending 2018?19 is 0.5% of gross domestic product; generally steady with the regular motion of gathering in the financial plan of 2014-15.

Management has placed them an aim of getting a excess of 1% of gross domestic product till 2023?24. At presented the projected extra over the average phase still not achieve the aim, that way to even if major growth has by now been completed, there is extra job requisite in the prospect to convey on the job of repairing financial plan.

Original money equilibrium is expected to come again to excess in 2019?20, the identical year as anticipated at the 2014?15 MYEFO. Self-effacing extra of up to 0.7% of gross domestic product, are likely more than the leftovers of the middle tenure by a excess of 0.4% of GDP by the ending of forecast phase (Fiscal Strategy 2016).

The financial system of Australia is still correcting to increase in the investment and currently going below in the trend of economic growth that has impact on the fiscal strategies. This financial plan intentionally transmits expenditure towards areas, which will construct a stronger financial system, recognizing the significance of increase to fiscal sustainability. The $5.5 billion small business packages and jobs will create easy for Australian economy to grow and perform with consistent pace, this will not only impact on Australian economy positively but it will help in reducing the unemployment rate in Australia. Because the recent trend from last few years has shown that the unemployment rate in Australia has increased and this will also a reason that Australian economy is not performing well and passing through a bad phase.

This financial plan also contains$4.5 billion family packages. This will help the Australians families to contribute more to the economy this package is also beneficial for the families who are running their family business form a longer period. (Auerbach, et. al., 2013).

Increasing the governing bodies balance sheet at regular intervals

A stable balance sheet offers flexibility in working and also gives opportunities to government to take tough decisions for the development of the economy.

Financial plan excesses more than the path of the monetary rotation

This financial plan retains a stable route towards excesses. The shortfall is predictable to descend from $37.1 billion in 2016?17 to $6.0 billion in 2019?20.

Revenue of the government will be reduced because of the factors which are responsible for lowering the trade in country and reducing the growth and development of economy of the country. State governments and Commonwealth both are facing subsequent budget deficit in Australia and this problem of budget deficit will be increased due to the various future challenges (Daley, 2016). Revenues of the state government are also reduced due to increasing in the expenditure in the sectors of infrastructure and health and reduction in the grants from Commonwealth government. Since the GFC (Global Financial Crisis), Government of Commonwealth is facing budget deficit of higher than 2.1 % of GDP from last six years in the five years continuously. Negative balance of fiscal budget from 2009 to 2019 is continuously increasing and projection of net debt is declared from 2 to 16% of GDP and approximately $330 billion in the year 2019.

Figure 1 Source: (Daley, 2016)

Above figure showing that the projected GDP, terms of trade, cash balance and cyclic impact of budget on the economy of Australia. Cash balance can be defined as the total receipts over and above payment and income from the future funds.

Figure 2 Source: (Daley, 2016)

Above figure representing the budget deficit and net debt of state government is increasing. After 2005, expenditure of government through intense borrowing is continuously increasing on infrastructure which results in increase in depreciation, interest and operating budget expenses.

For the purpose of maintaining balance in the budget Government of Australia will required to make effective strategies for proper utilization of revenue and reducing expenditure level in the future. Government of Australia has to face many challenges and opportunities while making effective strategies for long term fiscal policy such as change in the climate, an ageing population, depletion of natural resource, the economic rise of Asia, changing models of global demand and supply, new technologies and change in the exchange rates (Australian Government, 2017). An effective economic planning is done by the government in the budget of 2016-17 which is helpful in making more diversified and stronger economy in Australia. The main objective of this planning is to give emphasis on the tax system of country, decreasing the burden of long-term debt, employment and growth of economy, looking for balancing the budget and stabilize the overall economy of Australia.

Conclusion

The essay concludes that fiscal policy is important for the government because this policy designs the framework of the expenses which government does on the public by collecting tax from them. It also explains the Australian that current financial plan is not working accordingly and shows deficit it showing the deficit in comparison to the plan of 2014-15. Government should have strong balance sheet because strong balance sheet gives advantage to government to implement new policies or introduce new schemes for the welfare of the people and also helps in increase the economy. The essay also concludes that Australia is suffering from high unemployment rate which is stopping the economy to increase not only younger’s but there is increase in the older people employment also. Government is taking necessary steps to reduce the unemployment rate which will impact on the economy positively. Budget repair strategy explains that if budget is not working according to the plan and fails to show the surplus o then government should redirect their expenses and again work on the budget to get income. At last the essay concludes the challenges which are faced by the government in implementing them and how government effectively makes use of their fiscal strategy.

References

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