Policy Approach

Policy Aims

At the beginning of the 1990s, the Keating Labor government believed that a succession of large budget deficits would be effective at reducing the high unemployment rate that persisted at that time. Despite criticism that has been leveled at the government since that time, the fact remains that the unemployment rate did fall during this period. At this time we would say that fiscal policy was used in a traditional Keynesian manner. This simply means that it was used in a way that was designed to affect aggregate demand. Deficits were used to stimulate aggregate demand, whilst a surplus would have been used to try and cause a reduction in aggregate demand. The Howard government moved away from this strategy, but the election of the Rudd government and the onset of the global financial crisis have seen a strong return to the Keynesian approach.

Each budget will have specific goals, but there are also general goals that you should know. Today, it is generally accepted that the budget is the best policy for dealing with the following broad outcomes:

Increase National Savings: The federal government has implemented a range of policies to try and increase the level of national savings. For example, in the 2010/11 budget the treasurer announced a 50% discount on the tax that is payable on the first $1,000 earned from savings.
Reducing the Current Account Deficit: A range of policies can be used to encourage exports, and many of them are implemented through the budget. For example, we need to ensure that our export infrastructure is efficient. In the 2010/11 budget spending of $71 million for an intermodal terminal precinct in Moorebank (near Sydney) was announced to achieve exactly this goal.
Ensure that Long Term Growth is Sustainable: It is generally believed that by minimising the size of the government contribution, the private sector will be more likely to participate in the market. This process is known as "crowding in", as it is done to encourage participation by the private sector. (The opposite is "crowding out" - this is when the public sector becomes so dominant that there is no incentive for a private operator to enter that market.) However, the current government is aware that through management of aggregate demand, the government can directly encourage growth with a budget deficit. This process was used in both the 2009/10 and the 2010/11 budgets. In addition, investment spending by the government can help to ensure that the infrastructure requirements of the economy are met. This will also help to ensure that long term growth is possible.
An Equitable Distribution of Income: Fiscal policy is the main weapon that is used in order to achieve a more equitable distribution of income. The automatic stabilisers in the budget will ensure that as income levels increase, more will be taken in income tax. At the same time, when people become dependant on transfer payments, the federal budget will ensure that those payments are available.

Mr Rudd was elected on the promise that he is a "fiscal conservative", and as a result both he and his treasurer (Mr Wayne Swan) set about finding ways to increase the surplus from around 1% of GDP to 1.5% of GDP. As we now know this did not come to pass; the events of the global financial crisis ensured that the government handed down the largest deficits that have ever been seen in Australia.

In the 2010/11 budget speech, Mr Swan outlined the specific goals for the current budget. He suggested that this budget should:

Manage the challenges of returning to full capacity in a two speed economy: This point recognises that pressure on productive capacity will cause inflation, but this pressure is not uniform throughout the country.
Climate change: Although the government has delayed the implementation of the Emissions Trading Scheme, they did allocate a significant amount of money in the 2010/11 budget to ensure that we can manage the changes that we are likely to see.
The fiscal pressures of an ageing population: As people live longer, they are more likely to spend a longer period out of the workforce, which means that they will not earn an income. Therefore they won't pay income tax, but they will still require government services. This demographic shift needs to be managed so that budget outcomes can be sustainable into the future.

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