Fiscal Policy

The terms “fiscal policy” and “budgetary policy” are interchangeable – they mean the same thing. Fiscal policy is implemented by the federal government each year when they hand down the budget.

Like monetary policy, fiscal policy is a macroeconomic management tool. This is because when manipulating the budget, the federal government will make changes that affect the entire Australian economy, rather than just a small part of it. Despite this, it is worth noting that any changes within the budget can have consequences for individual sectors, such as the decision to charge an excise on a good that is sold within Australia, or the decision to change the tariff structure for any goods imported into the country.

You will need to be able to understand fiscal policy in two ways. First, you will need to understand the mechanics of the policy – the way in which it works. In general, many students find it challenging to understand this concept, and as such it has been a favourite topic for the examiners in the past. (Students often have more success with monetary policy, given that interest rates have been discussed as both a supply and demand factor during Unit 3. The concept of government revenues and expenditure is a new one, and as such it can take some time to absorb this knowledge.) To overcome this, keep in mind that the federal budget is not unlike a budget that you could write for yourself – you need to know where your money will come from, and what you will spend it on. By changing any part of your own budget you will also change your actions. (“This month I will earn less from my job at the cinema, but I will gain more by tutoring students in year 11” – as a result of this change you will spend more time tutoring year 11 students.) Similarly, any change in the federal budget can also change the actions of those affected.

You will also need to understand the way in which fiscal policy can affect the Australian economy. During your study of this topic you will notice that this has changed somewhat in recent years – in the early 1990’s the government adopted a pure Keynesian approach, but since the election of the Howard government in 1996 fiscal policy has been used in quite a different manner. It is also important to assess the effectiveness with which fiscal policy has been able to achieve the economic goals of the federal government.