Policy Approach

Weaknesses of Fiscal Policy

Given the nature of fiscal policy, certain weaknesses may already be apparent to you. Keep in mind that you will need to be able to relate these weaknesses to the economic goals of the government in the final exam.

Political Bias – There is no doubt that the federal budget is as much a political document as it is an economic one. The party in power will use the structural component of the budget to make political statements. For example, the 2007/8 budget was criticised because of the fact that it was handed down in the lead up to a federal election. As such, certain initiatives (such as the significant cuts to personal income tax rates that were implemented at this time) were seen by some as an attempt to "buy" votes.
Political Structure – Closely related to the first point, Australia has a bicameral system of parliament. This means that the budget must pass through two houses of parliament before it is adopted. In recent years, close election results have meant that the party handing down the budget will not necessarily have the majority in the Senate, and this may require some negotiation to have the budget passed. Recently we have seen that the government has removed the implementation of an Emissions Trading Scheme from their budget documentation because they do not have the support of the Senate.
Implementation Lag – The budget is generally only handed down once a year, although in unusual circumstances an interim budget may also be used. As such, any new projects can take a long time to get started. In particular, reforms to infrastructure may take several years to gain approval, pass through the political process, gain funding and then begin.
Competing Objectives – The federal government aims to achieve a variety of economic goals, and at times these goals compete. For example, the government might want to provide extra payments to low income earners so that equity is improved. However, it is possible that this will place extra pressure on productive capacity, and inflation might result. The government must therefore choose which of these objectives is "more important". In reality, of course, it is impossible to rank objectives in this way.

Once again, you will need to be able to examine these weaknesses in relation to the goals of the Australian government.

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