Policy Approach

Definition

Fiscal policy is defined as the action by the federal government of Australia in collecting revenue from the Australian economy and spending the proceeds of these actions. Each year, the government will hand down a budget, and in this budget the treasurer will state how the revenue will be collected, and what it will be spent on. This can have several flow on consequences for the Australian economy.

In general terms, we can say that there are three types of budget outcome that the federal government could use:

A Surplus Budget: This is when the anticipated revenues exceed the expected expenditure. In other words, the government will have some money left over at the end of the year. In a traditional Keynesian approach, the government would run a surplus (or contractionary) budget when the economy was strong, and it was felt that no extra stimulus was necessary.
A Deficit Budget: In this case, the anticipated expenditure is greater than the expected receipts. Once again, in a very traditional sense, the government would run a deficit (or expansionary) budget when it was felt that the economy needed an extra boost. By spending more than they collect, the government is injecting extra funds into the economy, which can then be used to create jobs or distributed as transfer payments.
A Balanced Budget: Prior to the work of John Maynard Keynes in the 1920’s and 30’s, most governments tried to run balanced budgets. This is when the expected revenues and expenditures are nearly equal. Keynes suggested that surplus and deficit budgets could be used to help smooth out fluctuations in the business cycle. However, in recent years in Australia, the government has attempted to balance the budget over the course of the business cycle. This is known as fiscal consolidation; the idea being that there will be no net call on national savings over the course of this phase. This was first introduced in the budget papers for the 1996/7 federal budget, and has been pursued as a guiding principle ever since.

It is important to note that the actual impact of a budget may not align exactly with the simple way in which it has been introduced here. For example, a deficit budget may be considered a contractionary budget in some instances. If a large deficit is recorded in one year and then a smaller deficit is recorded the following year, this could be considered a mildly contractionary budget. This is because it is "less expansionary" than the budget which was handed down in the previous year. Think of it like the accelerator in a car; when the deficit is smaller, the government has taken their foot off the accelerator slightly. The car is still being propelled forward, but not as quickly as it was before.

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