The document summarizes contemporary fiscal policy in Australia, specifically focusing on budget repair efforts since the global financial crisis. It discusses how the government has aimed to return the budget to surplus through spending restraint and maintaining tax revenue in order to reduce high net government debt levels. However, budget repair has been a slow process due to economic weakness, revenue shortfalls, and difficulties passing savings measures. The document also outlines tax reform proposals to address bracket creep in the income tax system by expanding brackets to prevent more people being pushed into higher tax brackets over time due to inflation.
2. Contemporary Fiscal Policy in Australia
INTRODUCTION
After an emergency fiscal policy stimulus to deal with the post GFC downturn
the main theme of fiscal policy has been one of budget repair rather than
demand management.
Monetary Policy has been given the role of stimulating aggregate demand, even
though the impact of record low cash rates has been weak and patchy.
Budget repair involves:
Returning the budget balance to surplus
Using the budget surplus to reduce the level of net government debt
Returning the budget to surplus has been a difficult and relatively slow process.
Reducing government debt will also be a decade long process.
There have also been attempts to reform aspects of the tax and transfer (welfare)
system during this period.
3. Fiscal stimulus v fiscal austerity
Fiscal stimulus Fiscal austerity
Policy
measures
Direct injection of net government
spending (more G, less T)
Return budget to surplus to allow
reduction in government net debt by
spending restraint and sustaining tax
revenue.
Short-term
impact
Direct boost to aggregate demand
from government spending.
Indirect boost to aggregate
demand from rise in disposable
income after tax cuts
Fall in aggregate demand from reducing
the size of the budget deficit
Long-term
impact
Stimulus to aggregate demand
reduced by impact of crowding out
on interest rates, private sector
investment and exchange rate.
Negative supply-side impact of
higher net government spending
Debt problems develop (interest
payments, debt refinancing, threat
to credit rating)
Less scope to deal with next
financial crisis
Indirect boost to aggregate demand from
higher private sector investment, more
confident consumers, rise in net exports
from more competitive exchange rate
Supply-side gain from greater role of
private sector
Debt problems reduced and eventually
eliminated
‘War-chest’ to deal with next financial
crisis
5. Cyclical impact on budget balance
Increase in
economic
growth
More individual
income tax
More company
tax
More indirect tax
(e.g. GST, excise
duty)
Reduced welfare
spending
More employment,
higher incomes
Higher company
profits
More production and
spending
Reduced numbers
needing support
8. Caution
Outcomes Reliable, but ‘lagging’ or actual past data
Forecasts
Projections
Less reliable, ‘leading’ or future data
Very unreliable, basically forecasts projected into the future