How does the fiscal policy affect economic activity and income distribution in the Australian economy?
Fiscal Policy is a macroeconomic policy that can be used by the government to regulate aggregate demand and production. Fiscal Policy is implemented through the government’s annual budget and also involves the regulation of aggregate demand by the government changing its level of planned spending (G) and planned tax revenue (T). Fiscal policy has the power to redistribute income, reallocate resources and regulate (stabilise) the economy through policies affecting economic activity.
The main tools of the fiscal policy are spending, revenue collection and the budget outcome (either as a surplus, deficit or balanced). The budget stance gives an indication of the overall impact of fiscal policy on the state of the economy, which can be described as expansionary (G > T), contractionary (T > G) or neutral (T = G). According to David Gruen, “…fiscal policy has always been with us; what has returned in the past couple of years is the use of active discretionary fiscal policy as a counter- cyclical tool.” [Source]. Spending, revenue and budget outcomes are affected by discretionary or structural factors, involving policy changes by the government, whereas, non- discretionary or cyclical factors relate to the impact of changing economic conditions regarding the levels of spending and revenue collection.
*should budget outcomes be defined
Economic growth occurs when there is a sustained increase in a country’s productive capacity over time, which can be measured by Gross Domestic Product (GDP). An increase of economic activity, subject to an expansionary fiscal policy, involves increased economic growth, investment and business/consumer confidence. This stimulates aggregate demand. Aggregate demand determines how much firms will produce (output = GDP) and the quantity of resources firms require to produce goods and services (this will determine employment). If...
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