Fiscal Policy - Summary

DISCUSS THE MAIN INSTRUMENTS OF FISCAL POLICY AND EXPLAIN HOW THE AUSTRALIAN GOVT BUDGET OUTCOMES INFLUENCE ECONOMIC ACTIVITY, RESOURCE ALLOCATION AND DISTRIBUTION OF INCOME

Fiscal policy refers to the Federal Government’s use of taxation and spending through the use of a commonwealth budget in order to achieve sustainability across economic objectives. The two main instruments of fiscal policy are government spending and government taxation, in which changes in the level and consumption of government expenditure and revenue, influences budget outcomes regarding a balanced budget (neutral stance), budget deficit (expansionary stance) and budget surplus (contractionary stance).   This in turn affects the overall level of economic activity, resource allocation and income distribution.  
The budget outcome is the resultant government budgetary position in terms of spending and revenue. The Two main components of the budget outcome are the structural (deliberate changes in government spending and/or taxation that affect the budget outcome) and cyclical (Changes in government spending and/or taxation which are caused by changes in the level of economic activity) components. Three possible budgetary outcomes influenced by their respective components include:
  * A Balanced budget – Government expenditure is equal to taxation hence government revenue finances all of government spending. (G=T)
  * A Budget Deficit – Government expenditure exceeds government revenue and the budget balance is negative (G > T)
  * A Budget Surplus – Government expenditure is less than government revenue and the budget balance is positive (G < T )
(Three possible budget outcomes Diagram 14.3) *These budgetary outcomes are illustrated in figure 14.3

From these budget outcomes, the overall effect on economic activity can be defined as the stance of fiscal policy in terms of neutral, expansionary and contractionary....