Policy Approach

Strengths of Fiscal Policy

There are several strengths to the manner in which fiscal policy is used in Australia. Some of these strengths allow the economic management system used in this country to overcome many of the weaknesses that are evident in other policies.

Some of the strengths that you should know are:

Focus - While monetary policy will affect all areas of the economy, fiscal policy can be used to have an impact in just one area. For example, in the 2010/11 budget Wayne Swan was able to announce that small businesses can now deduct the purchase of small assets from their taxable income, rather than depreciate them. Although this ultimately affected a very small group of people, this illustrates the ability of this policy to target specific groups within the economy.
Stability – The existence of automatic stabilisers in the federal budget mean that the policy is able to respond to changes in the Australian economy while the financial year is in progress. The cyclical component of the budget helps to “smooth out” the fluctuations in the economy during the fiscal period.
Resource Allocation – Australia is a market economy, and as such the majority of resource allocation is decided by the free market. However, fiscal policy allows the government to have some say in the way in which resources are allocated. Through the budget, the government can ensure that those things which won't be provided by the free market (such as defence and street lights) will continue to be offered.
Flexibility – Although the budget is only handed down once each year, the federal government has shown in recent years that they are willing to move away from the financial plan when circumstances dictate that a change is necessary. For example, the budget for 2008/9 was announced as a surplus, but when the global financial crisis gripped the world a variety of stimulus measures were announced, ultimately pushing the budget into deficit. This affected forward estimates for the budget all the way through to 2015/16.

It is easy to see the way in which these strengths relate to the goals of the Australian government. For example, the global financial crisis created significant challenges for policy makers in this country. The government responded quickly with an interim budget, announcing measures such as the extension of the first home buyers grant, an expansion of the "Education Revolution" package, and special, one-off payments of $900 for all taxpayers.

In relation to the goal of full employment, the Australian government has demonstrated all of the strengths of fiscal policy during this process. The economy was moving into an extremely unstable period, and yet due to these fiscal measures the unemployment rate remained relatively stable. In fact, although a peak of 8.5% was predicted by the government, in reality it did not even reach 6%. This also demonstrates the benefit of focus - with increased expenditure on providing funds to first home buyers, and also funding for insulation companies, the government was able to ensure that employment in some of the most volatile sectors (such as construction) was protected.

And finally, the reform of the taxation system was flexible enough to respond quickly when the downturn began. Rather than waiting for the next budget cycle, or trying to protect the surplus that had been expected, the government spent $42 billion helping to protect the domestic economy.

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