The Keynesian approach to fiscal policy suggests that an improvement in employment conditions can be achieved by running a budget deficit. This will add to aggregate demand, which will ultimately result in the creation of jobs. In the early to mid-1990s, this was exactly the approach used by the Keating government, and at that time the Australian economy experienced significant falls in the unemployment rate.
Following the election of the Howard government in 1996, the focus of fiscal policy shifted. At the same time, the role of monetary policy was altered, so that the goal of full employment was specifically mentioned in the charter of the RBA. To this day, the RBA is continually balancing the goals of full employment and price stability – most central banks around the world today focus on price stability almost exclusively.
However, the federal budget still has an impact on the ability of the economy to achieve full employment. Today the government will use more indirect approaches to try and achieve this goal. For example, significant cuts to income tax rates between 2001 and 2008 have resulted in an increased in disposable income for consumers in this country. It is reasonable to assume that the majority of this money has been spent, and as a result we have experienced an increase in aggregate demand. There is no doubt that this policy has contributed to the fall in unemployment that was seen during this period; the unemployment rate fell from 6.6% to 4.3%.
The previous government also used specific packages within the budget to try and create jobs. For example, in the 2005/06 budget the government allocated just over $2 billion for a package that was designed to help people find and keep a job. In 2006/07 the taxation system was simplified for small businesses to try and encourage expansion in this area.
However, the government has recognised that the budget can do more to try and increase the participation rate, and therefore it is this area that has received more attention in recent years. For example, changes to the way in which superannuation is taxed mean that it is now advantageous for a person to remain in the workforce until they are 60. After that time, they will pay no tax at all on their accumulated superannuation benefits. In reducing the number of early retirements, the government has ensured that the labour force will remain strong. More controversially, in the 2005/06 budget the coalition government also acted to ensure that people receiving welfare were only doing so if they were actually unable to work. For example, young mothers whose children had reached school age are now required to look for work, rather than continuing to receive benefits. This was part of the Welfare To Work package that was announced in that year. Despite the controversy surrounding this initiative, it is true to say that the participation rate has certainly increased as a result of the changes made in the budget over the last few years.