Fiscal Policy of Australia - Essay Example

? Australia: Fiscal Policy Australia: Fiscal Policy Answer The government’s policy related to its spending and raising revenues is called fiscal policy. It associates matters of treasury and other public finance (Vitek, 2012). In other words, fiscal policy can be referred to as the method to raise or spend the government’s revenue in order to attain sustainable economical condition (Vitek, 2012). To cope with instable economical conditions (inflation, unemployment, and deflation) the government makes appropriate decisions to regulate the flow of cash and credit in an economy either by taking loans from the international financial bodies or by reducing the public tax burden (Perry, et al., 2008). Therefore, fiscal policy addresses matters relating to the government’s debts and expenditures. It provides an understanding about measures that a government takes to collect taxes and incur expenditures. Answer 2: Fiscal policy aims to affect the economy through changing spending and collection of the government’s revenue. It includes all measures that are involved to stimulate the economical activity (Vitek, 2012). The main objective is to stimulate the national income through aggregate demand (Vitek, 2012). There are three instruments of fiscal policy 1. Government revenue or taxation 2. Government expenditure or Government spending 3. Government debt and management or government deficit The main instrument of fiscal policy is taxation (Perry, et al., 2008). By increasing or decreasing the tax burden on the public, it can influence government revenue (Vitek, 2012). Increasing tax burden will increase the general prices that will result in reduction in cash flow in an economy. Contrary, decreasing tax will reduce the general prices resulting in an increase of cash flow. Y   The above diagram shows the effect of taxation on an economy. It shows the effect of increase (Da1) and decrease (Da2) of tax on an economy. When the tax is increased from Da2 to Da1 it results in lower equilibrium and vice versa. Government expenditure is another instrument of fiscal policy in order to encourage the economy to grow (Perry, et al., 2008). Government expenditure involves spending activities of the government in the country which promotes expansion of businesses and creation of job opportunities (Vitek, 2012). It mainly involves expansion of the governmental sectors like schools, infrastructure projects, industries, and hospitals etc. The above diagram shows two different autonomous investments. When AD1 is the investment, the national income is raised and when the autonomous investment is decreased to AD2 the equilibrium declines. Government deficit refers to spending more than the government’s revenues. Mainly, under-developed countries are deficit financed because the growth of the economy is poor (Perry, et al., 2008). This tool aids underdeveloped countries to improve their economic conditions and boost growth. Resources for deficit budget are met by borrowing referred to as deficit financing (Hansen, 2003). Answer 3: According to Australian national statistic, the Australian government decreased taxes which caused the government’s revenue to fall by five million dollars. Taxation relief was a substantial step by the Australian government to encourage growth in its economy. Decline of about two million tax revenue was due to ineffective tax collection from companies. According to the information, tax burden was increased for people having higher incomes. Taxation was levied on industries and large scale companies whereas small businesses had significant reliefs (Perry, et al., 2008). Moreover, heavy tax was imposed on the duty free cigarette which resulted in a major saving in the transfer payment that was being done for import of tobacco and cigarette. The Australian government seems to be more inclined towards reducing the taxation rate (Perry, et al., 2008). This tool of fiscal policy encouraged people to invest and spend. The decrease in the taxation policy was a step to encourage companies to invest more. There have been several measures to control transfer payment; the major control was done by imposing a tax for high incomers and cigarettes. The tax amount obtained from coal mines was aimed to invest in order to boost infrastructure (Vitek, 2012). For the prosperity of the economy, the Australian government has spent about AU$1.5 billion for providing opportunities and benefits to the public (Perry, et al., 2008). According to the Australian statistic, budget 2012 depicts that the government has spent mostly on the community service of the country (Hansen, 2012). About sixty three billion dollars have been spent by the government for production of new free air television channel. The other significant expenditure by the Australian government has been done on the educational sector of about AU$11.7 million (Vitek, 2012). Country’s defense and health sector has been modified. The major spending was done in the naval sector by replacing submarines (Perry, et al., 2008). Whereas, the country has encouraged immigrants and has spend a large amount of the budget for the sea-asylums. Answer 4: According to International Monetary fund (IMF), Australia has been the most competent economy to cope with the recession and is remarked for its benchmark performance (Rosenberg, 2012) According to the national static, through its monetary and fiscal policies the country has maintained a 3 percent growth rate despite difficult global financial scenario. The country has consolidated its fiscal policy by easing its monetary policies, trade policies and depreciating its exchange rate (Rosenberg, 2012). This step has caused the Australian economy to expand its overseas business and international trade. Unemployment The government expenditures on the asylum sea immigrants have caused the labor cost to fall. It has encouraged the industrial and construction sectors to grow. There has been a magnificent increase in the employment level of Australia since 2009-2012 (Rosenberg, 2012). During 2010-2012, the unemployment level has felt from 10 percent to 8 percent. Government expenditures on infrastructure and health have created several job opportunities for its people (Rosenberg, 2012) Inflation After recession Australia has been facing a high price level and inflation rate. Fiscal policies addressed several economical issues. The major achievement of Australia’s fiscal policy has been observed in managing inflation rates. According to the Australian national statistic, the inflation rate in 2011 was 3.3 percent, the budget of 2012 has reduced inflation rate in 2012 to 1.7 percent (Meredith & Dyster, 2012). This shows that the inflation rate of the Australian economy has felt by 1.6 percent. Depreciation of the exchange rate has allowed the country to control its Consumer Price inflation CPI (Meredith & Dyster, 2012). Australian banks are also expecting low pick up rates as compared to the previous years (Rosenberg, 2012). This will slightly moderate the cost pressure on the economy. List of References Hansen, B., 2003. The Economic Theory of Fiscal Policy, Volume 3. London: Routledge. Hansen, B., 2012. Economic Policy Reforms 2012 Going for Growth: Going for Growth. New York: OECD Publishing. Meredith, D. & Dyster, D., 2012. Australia in the Global Economy: Continuity and Change. Melbourne: Cambridge University Press. Perry, G., Serven, L. & Suescun, R., 2008. Fiscal Policy, Stabilization, and Growth: Prudence Or Abstinence?. London: World Bank Publications. Rosenberg, J. M., 2012. The Concise Encyclopedia of The Great Recession 2007-2012. New York: Scarecrow Press. Vitek, F., 2012. Policy Analysis and Forecasting in the World Economy: A Panel Unobserved Components Approac. New York: International Monetary Fund. Read More