Description: Argues That Fiscal Policy In Australia Is Shifting Away From Being Used As A Tool Of Macroeconomic Management Towards Being Used As A Political Tool.

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The stance of fiscal policy has changed significantly over recent years. Fiscal policy involves the use of the Commonwealth Government's Budget in order to achieve the Government's economic objectives. The Howard Government's primary fiscal objective has been 'to maintain budget balance, on average, over the course of the economic cycle'. This infers using fiscal policy as a tool of macroeconomic management: deficits during recession years, and surpluses during years of higher economic growth. During its first two terms in office the Howard Government used fiscal policy as part of its macroeconomic agenda. However, the last two budgets have shifted away from using fiscal policy as a macroeconomic tool of economic management and have reflected what the government considers to be its long term role - playing a minor support role while monetary policy plays the major role in economic management. This shift in the role of fiscal policy can be attributed to the fact that monetary policy is a more effective macroeconomic tool, the recent reduction in government debt and the increasing use of fiscal policy as a political tool opposed to an economic one.

YearBudget Result $ Underlying Balance

1996/97Actual $5.3 billion cash deficit

1997/98Actual $1.2 billion cash surplus

1998/99$4.2 billion cash surplus

1999/00$12.7 billion cash surplus

2000/01$2.3 billion cash surplus

2001/02$0.5 billion cash surplus

2002/03$2.1 billion cash surplus

During its first two terms in office the Howard Government used fiscal policy as a tool of macroeconomic management to achieve balanced budgets. Fiscal policy was used to reduce public sector debt. By reducing the large amount of public sector debt incurred over the late 1980s and early 1990s the Government ensured that future budgets will focus on domestic rather than external needs. The Howard Government argued that Australia's high Current Account Deficits (CAD) were the result of excessive government borrowing and low public savings. By running large surpluses it reduced Australia's net public sector debt from around 30% of GDP in 1996 to 12% of GDP in 2002. These large budget surpluses recorded over the late 1990s were accompanied by expansionary monetary policy. The graph above shows that the cash rate reached relatively low levels (around 5%) during the fiscal consolidation period. Lower interest rates stimulate the economy via the multiplier effect:

Between 1999 and 2001, the Howard Government made fiscal policy increasingly expansionary: the underlying balance recorded ($12.7 billion surplus) in 1999/00 was reduced to $0.5 billion by 2001/02. This expansionary stance in fiscal policy was used to pump prime the economy in face of an economic downturn and to compensate for the introduction of the...

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