The current fiscal stance of Australian government? (1 Viewer)

[roli]

According to the this year's Budget, there was a record surplus by Treasurer Swan, which indicates a contractionary fiscal policy stance.

However, this would dampen aggregate demand and thus lower economic activity. That doesn't sound like the right thing to do in the present, stalling economic climate?

And according to my teacher, we have an expansionary fiscal stance currently, which just confuses me even more.

OH, and we have a loose monetary policy (cash rate went down), which means that the government-controlled RBA is trying to raise economic activity. This contradicts with a government contractionary fiscal policy stance, doesn't it?

So yeah, I would appreciate some confirmation on what the fiscal stance is.

Thank you.

 

[veloc1ty]

The government doesn't actually control the RBA, it acts independently. And I don't think they are trying to stimulate economic activity, they've just loosened the brake in case we stop too hard (lol @ economic metaphors).

 

[roli]

Oh yeah, I meant that it works closely with government. So uhh, if you think the stabilisation policies are currently used to slow down the economy, does that mean you think the fiscal stance is contractionary?

 

[lionking1191]

the stance was mildly contractionary but tax cuts and such are expansionary so the overall stance can be best described as neutral. Rudd did commit to helping the RBA in its effort to control inflation so the contractionary stance was addressing the probs of the time at which it was announced.

ps. most of the 'record surplus' was due to an increase in revenue from soaring company profits

 

[shinninggum]

Well, theoretically by the changes of government revenue as a percentage of GDP, it increased from 1.0% to 1.7% (indicator that it is a contractionary stance) but based on the tax cuts and welfare programs and stuff, it is considered an expansionary stance in reality. Though, the RBA monetary policy is considered pre-emptive in lowering current inflation rate, and saw that current economic conditions that the economy is slowing down, it needs some stimulus. So in this case, both fiscal and monetary policy are encouraging us to spend, despite really bad inflationary pressures

 

[morganforrest]

According to the this year's Budget, there was a record surplus by Treasurer Swan, which indicates a contractionary fiscal policy stance.

However, this would dampen aggregate demand and thus lower economic activity. That doesn't sound like the right thing to do in the present, stalling economic climate?

Yes, and we were facing record inflation inflation in June/July when the budget was delivered. The Rudd-Swan government preferred to target inflation rather than run a looser budget to promote growth at the risk of higher inflation.

And according to my teacher, we have an expansionary fiscal stance currently, which just confuses me even more.

This is not technically true. While the government has expressed a need to move toward a more expansionary fiscal stance to encourage business investment, it hasn't actually delivered any budget to demonstrate that, or initiated any policies to encourage. One could even argue that current ASIC policies against short-selling were evidence of a move against expansionary fiscal policy, though this would be a stretch.

OH, and we have a loose monetary policy (cash rate went down), which means that the government-controlled RBA is trying to raise economic activity. This contradicts with a government contractionary fiscal policy stance, doesn't it?

The RBA is an entirely independent institution with its own goals as specified in its "Statement on Monetary Policy" (see http://www.rba.gov.au/PublicationsAndResearch/StatementsOnMonetaryPolicy/Aug2008/introduction.html )

The RBA is indeed trying to raise business investment by reducing the cost of borrowing. The RBA is able to respond slightly faster than the government, hence the contradiction between policies. The RBA meets every month to determine monetary policy for the next month, Treasury releases a new budget every year.

So yeah, I would appreciate some confirmation on what the fiscal stance is.

Thank you.

The current fiscal stance, as demonstrated in the July 2008 Budget (www.budget.gov.au/) is contractionary in order to combat high inflation, however the Government is slowly changing its position towards encouraging a more expansionary outlook. This cannot be implemented until July 09.

 

[theism]

they're keeping a budget surplus ($30bn.. not enough rudd!)

interest rates are down,
which means the tightening of monetary policy has been effective.

 

[gnrlies]

I think it is important to recognise a few things...

Firstly the current financial crisis is as the name suggests a financial crisis. Australian businesses and investment opportunities remain strong which means that we are not likely to head into a recession. The real issue here has been the availability of capital (finance) as there has been a huge decline in investor confidence and a shift towards less volatile securities. This is what will slow growth in Australia, not necessarily any fundamental within the Australian economy itself (i.e. it is largely external factors beyond our control).

The current stance of fiscal policy is contractionary when you compare it to last year. The reason is because the underlying cash balance as a percentage of GDP is bigger this year than it was last year. The main reason the surplus has increased is due to the significant increase in taxation receipts emanating from the commodities boom the previous year. Expenditure has actually increased which is why some might say it is expansionary, however by any technical measure it is a contractionary budget.

Australian governments have been committed to surplus budgets since 1996 and so it has become a bit of an obsession for policy makers. The main argument for a surplus is in order to cope with the future challenges that face us as a nation such as the ageing population. The original idea of running a sustained surplus centered around the concept of paying back national debt. This is no longer an issue because we don't have any national debt anymore. Since 2005 (when our debt was fully repaid) there has been nothing in the economic theory to suggest that we should be running huge surpluses. This being said, it is appropriate for the budget not to go into deficit. Given that after 2005 Australia entered into the commodities boom, it was only a natural tendency for the budget to head into surplus without the government doing a great deal.

The argument behind the current surplus is to reduce pressure on the RBA to lift interest rates in order to fight inflation. Whilst this is the official line, I question the integrity of this commitment. Even if it were a true motivation for the size of the surplus, it is not the role of Fiscal policy to be doing this. It should largely be neutral, and in fact the budget increased spending which is hardly assisting the RBA.

In any case the RBA lowered rates not because of its success in lowering inflation as stated by the previous post, but rather because the forward projected path for inflation has fallen, and there has been a reassessment of priorities in the current global environment. Whilst the RBA does not attempt to influence output in the medium term, it does recognise that in the short term there needs to be some flexibility in the pursuance of low inflation so as not to exacerbate our situation (where growth might be compromised).

 

[veloc1ty]

Gnrlies I'm printing that post out for future reference, it explains things so clearly.

 

[ilovezino]

The fiscal stance was titled 'midly stimulatory'. This is predominately due to the reduction in income tax levels, hence creating a multiplying effect on the economy. Spending also increase by 1.1%. Thre reason for the surplus being so high is due to the commodity boom which has generated excessive amounts of corporate tax revenue.

Secondly, the budget was set in may... the global climate wasnt anywhere near the dysfunctional state it is in today. The budget did however attempt to combat inflation, but this was offset by politicised policies such as Alchopops and the luxury car taxed (now stopped by senate).

So meh!:S

 

[gnrlies]

The fiscal stance was titled 'midly stimulatory'.

this is incorrect

 

[leisl1990]

its mildly contractionary

but if we exclude cyclical factor its slighly expansionary because of large income tax cut.

anyway, the government is probably gonna spend the surplus in the next few months, because of the financial crisis stuff. there is probably gonna be a lot of change coming up.

 

[Q2C-ME]

hmmm i think the issue at hand is ur teachers misconception...and i think the basis of her errorr is that she has mistaken the "keynesian" point of view which only looks at the structural aspects....back in the day shuld wuld b wrong...biut recent changes further put the previous keynesian belief of the stance into jepoardy.

 

[gnrlies]

I think that perhaps it is important to add one more thing. Read on if you want to impress the marker regarding fiscal policy in 2008/09.

This thread has largely discussed 'stance' which essentially means what it was intended to do to the economy at the tiime of its delivery. Earlier in the year it was expected to be contractionary, so the stance was (and in that sense it still is) contractionary.

BUT here is where you can differentiate yourselves.

The budget in actuality is likely to have an expansionary effect on the economy relative to last year for two reasons. Firstly there has been a major re-assessment for economic growth (and therefore tax receipts). So the 20 billion odd surplus is likely to be significantly diminished. To what extent is hard to say. We need to wait for MYEFO (Mid Year Economic and Fiscal Outlook) which is coming out soon (probably not before your exam). But we know that this must be the case due to the governments response to the financial crisis (by injecting 10 billion to spurr growth).

The second reason is the 10 billion itself. Such an injection will come from the current surplus, or previously accumulated surpluses, but whichever way you want to look at it; it is an adjustment of the underlying cash balance and of course you need to take that off the revised surplus figure.

So for the year 2007/08 the contractionary budget will be expansionary - go figure.

 

[magik22]

the stance was mildly contractionary but tax cuts and such are expansionary so the overall stance can be best described as neutral. Rudd did commit to helping the RBA in its effort to control inflation so the contractionary stance was addressing the probs of the time at which it was announced.

ps. most of the 'record surplus' was due to an increase in revenue from soaring company profits

I wouldn't say it's neutral. It's more expansionary 'stance' because in comparison to the last financial year, the surplus was only an increase by 1.6% of GDP. Which is pretty much nothing. Yes, with additional tax cuts it has the fiscal stance further to expansionary.

 

[nick90]

With the $10.4 bn stimulus package, I guess this means the surplus is now halved?!

What does this mean for the grand 'Building Australia Fund', 'Education Investment Fund' and 'Health and Hospitals Fund'?