Introduction:

Fiscal policy holds an elemental place in today’s world economy. Customarily, fiscal
policy may be defined as a way to gauge a nation’s economy by keeping an eye on the
nation’s spending levels and controlling the tax rates via strategized approach. Both the
monetary policy and the fiscal policy are frequently used altogether with the sole
purpose of attaining stability in nation’s economy. Chiefly, the main parameters on
which the implementation of fiscal policy is dependent are: stimulating economic growth
during times of recession, maintaining low inflation levels and stabilizing economic
growth. So, this policy could be employed for the purpose of either slowing down
economic activities during times of inflation or stimulating economic expansion during
recession periods.
It is necessary to observe that the fiscal policy could comprehensively be employed to
eliminate the gaps of deflation present in nation’s economy. Such gaps are quite usual
when the economy is facing recession.
The difference between full employment output level & actual output is ‘deflationary
gap’.
Increased deflationary gaps in the economy specify the presence of increased
unemployment levels and low utilization of resources. Normally, such gap is produced
as a result of a considerable drop in investments and exports within the company and
collective demand levels.
(Carmignani, 2013) narrated “Eventually, its presence in nation’s economy may result in
the elevation of unemployment, low economic growth as well as increased deflation”.
In this context, a macroeconomic or a developmental fiscal policy is implemented by the
government, in an attempt to cut down the gaps caused by deflation, and to flourish
economic activities. Prominently, during the times of recession, the economic activities
tend to take place in smaller numbers. As a result, macroeconomic policy is employed
to increase the aggregated demand levels. Due to this reason, what government does?
Either it introduces tax cuts or it increases its spending levels.
Smaller tax rates will cause the disposable income level for organizations to rise, and
family to invest on consumables.
Ultimately, this may cause the consumer spending to increase, as well as raising the
demand levels too. A rise demand would certainly be a source of enhanced job
opportunities, and in turn minimizing the gap of deflation. It is mainly because of the
fact, that organizations will be compelled to induct more number of employees to cater
the rising demand levels. Overall, a macroeconomic fiscal policy, is very helpful in
streamlining the economic activities of a nation, thereby leading the nation to attain
economic stability.
Graphical representation of the deflationary gap
Alternately, when we speak of inflation periods of time, prices reach at the peak levels
whilst the economic activities also don’t get unnoticed due to their significant rise.
Accordingly, contractionary fiscal policy tools are being in use by the government, which
is compelled to do that, these tools are helpful in slowing down the monetary activities in
the nation. Considering this fact, government might increase the taxation levels or it
might reduce its spending in the nation, which in turn induces a reduction in economic
activity levels as far as combined economic infrastructure is concerned. Specifically, this
happens as a rise in taxation substantially decreases the accessible disposable income
specific to families and after-tax profits are decreased for organizations. Hence, level of
consumption spending gets reduced for both the agents. Sometimes, organizations are
compelled to terminate some employees, hence causing the unemployment level to
rise. Ultimately, this causes a reduction in economic ventures, thus causing the inflation
levels to go down.
Since for a little while now, Government of Australia is expending more exceeding its
boundaries. This is the reason why the nation has been facing notable deficits in
budget. Usually, payments made by the government and revenues received, when
presented in a detailed format, makes up a government budget. Therefore, a budget
shortfall takes place when aggregated public expenditures overshoot the collected
revenues.
In the recent past, it was asserted by the Australian Government that they will work to
develop the budget of the nation, reaching its profusion for the year 2019-2020. But, this
strategical plan got revised to year 2020-2021. (Payne & Hall, 2017): ‘The nation’s
present budgetary position doesn’t vindicate for a surplus in the nation’s budget’.
Alternatively, nation’s economy is distinguished by sustained deficits.
The nation had experienced a deficit of around 2.4% of nation’s total GDP in the year
2015. The mean level of governmental budget for the year 1979 & 2015 is equals to -
0.94% of nation’s total GDP. During this period, greatest governmental budget level
attained in Australia was indicated in 2000 to be at 2% of the total GDP. Alternately, in
2010, at -4.2% of total GDP, the nation had experienced the lowest governmental
budget level. During the same period of time, the most elevated government debt to
GDP level was also at its peak values, reaching to 36.80%, while recorded lowest value
was 9.7%.
Even though, economy of Australia is well organized and strong, it is kept alive mainly
on an unendurable deficit structure.
This deficit, is chiefly a trail of reckless expending policies laid down by government.
This has caused a tremendous build-up of debt in the public sector. This is the reason
why, strategies need to be initiated to furnish workable solutions, pertaining to both long
run and short run. (Pettinger, 2016): ‘Such policy should be framed and executed to
smoothen the economic reforms’.
In this respect, a combination of policies may be utilized by the Australian Government
in order to effectively minimize the sustained budget shortage by the year 2020-2021.

The Australian government can begin by cutting down its public expenditures to
minimize fiscal debt considerably. Specifically, this has come out to be one of the best
productive strategy of minimizing the governmental debts, which is achieved by
generating a depletion in amount that has to be payed as debt. (Harrison, 2011):
‘Notably, spending cuts was introduced by Canada during 1990’s and recorded great
declines of its budget deficit levels’. (Congressional Budget Office, 2011), Also, the
nation experienced significant rise in the economic growth levels .
Accordingly, it was proved that bring the government expenditures down to an adequate
level, may serve to be a sensible way of eliminating budget deficits.
Moreover, the taxation rate may also rise on orders of government. Actually, a rise in
taxation level will ultimately cause a governmental revenue increment. This in turn
would be beneficial in counterbalancing the nation’s deficit. (Lewis, 2014): Additionally,
the budget deficits may be reduced by the government, by intensifying the economic
expansion level of the nation. In an event when there is a significant growth in the
economy, the tax revenue level rises with no changes incorporated in the taxes.
Additionally, workers will pay more income taxes, and consumers will pay more in VAT
as well as organizations will be bound to pay more corporate taxes, by the time, the
budget level deficit will be reduced to an adequate level. Default option may also be
considered by the government (Pettinger, 2016).
When we do a comparative analysis of other OECD economies, we find that the budget
deficit of Australia comparatively smaller (OECD, 2016). Australia has sustained the
middle position in OECD pack since the year 2007.
Primarily, this is allotted to 4.4% point decline in nation’s budget balance to the ratio
(GDP ratio) (Collins, 2014).
Australian budget deficit increased to $37.4 billion, as per the statement made by
MYEFO.
Irrespective of this shortfall, in the projection deficit for 2015-16, there was a reported
reduction (Woodley & Anderson, 2015).
It is indispensable to record that numerous elements have caused these deteriorations to
take place. Firstly, $3.5 billion has been dedicated by the regime as an additional
expending in order to facilitate the additional road funding, pharmaceutical subsidies,
resettlement of the Syrian refugees and innovation package (Woodley & Anderson,
2015).
Irrespective of enormous expenditures, government is professed to generate new
savings, in an attempt to counter-balance the expenditures.
Primarily, it is the objective of government to formulate significant savings ideas to be
incorporated in the budget. For example, it is expected, that the government would be
saving around $2 billion during a period of 4 years, out of those people who falsely
submit their welfare payments claims. In a similar fashion, it will result in saving of $650
million during the period of 4 years, by causing the incentives, meant for MRI services to
be cut down, and proceeding away with pathology services incentives (Woodley &
Anderson, 2015). Moreover, the intention of the government is to reduce the expending
in the health programs, specifically the health workforce programs.
By doing this, it will cause $595 million to be saved during a 4 year time duration. More
importantly, it has been proposed by the government that its expending be reduced by
around 472 million dollar on aged care services, for a time duration of 3 years.
(Woodley & Anderson, 2015): Furthermore, there has to be a reduction of approx. $441
million in the child care subsidies, specifically from families earning above $250,000 .
On the whole, these alterations tend to counter-balance the enormous spending and as
a result of that, minimizes the aggregated deficit in the budget.
Various consequences exist, that could take place as a result of cut down in
government spending levels. Most importantly, initiating cuts in expending levels in
economy, is one form of policy, also referred as ‘contractionary fiscal policy’.
Consequently, aggregate demand levels of an economy is projected to deteriorate
significantly. It is primarily due to the fact that there exists a decreased governmental
demand for services and products. As a result of that, this will introduce deceleration in
the frequency levels of economic activities, when we consider economy as a whole. The
organizations may be compelled to minimize their production capabilities due to the
existence of this aggregate demand decline. Hence, few workers will get terminated.
Subsequently, it will cause an increase in country’s unemployment rate. It is thus
pressing to maintain, that even though if the spending cuts strategy gets implemented
nationwide, it will effectively reduce the deficit of nation’s budget, but at the same time,
economy may face other serious troubles in the longer run. Few of those consequences
include, slow economic growth and Higher unemployment rates.

“the Australian economy continues to switch from the investment stage to the later
stages of the mining boom”, as per the statement of MYEFO in 2016-2017, thereby
economic expansion is projected to grow during the suggested period. During this fiscal
year, the actual GDP is projected to grow by around 2%. (Australian Government,
2017), in the same fashion, economic expansion is expected to flourish to 2.75% during
2017-2018.
(Australian Government, 2017), furthermore, cash deficit is forecasted to around $10
billion in 2019-2020. Additionally, exports & consumptions of household are expected to
facilitate growth. The business of “Non-mining business investment” has been projected
to grow significantly with the passage of time.
There again, the employment level is anticipated to fall to around 1.25% in 2016-
2017(Australian Government, 2017).
Predictions show that the mentioned rate is expected to rise further by about 1.5%.
Contrarily, it is expected that the unemployment levels in the nation will be brought
down significantly.

Intrinsically, the rate is anticipated to fall to 5.5% in the year 2016-2017. This figure is
projected to remain fixed or constant during 2017-2018, before further coming down to
5.25% in the successive year. Later, the unemployment is anticipated to be at a
constant level of 5.25%.(Australian Government,”2017). Moreover, the nation’s level of
inflation is projected to rise with the passage of time. Notably, consumer price index
degree is expected to increase to around 1.75% in 2016-2017. The figure is further
expected to increase to around 2%, for the year 2017-18 (Australian Government,
2017). In the similar fashion, the index of wage price is expected to increase from 2.1%
to 2.25% during the period of 2015 to 2017. In the successive years to come, this figure
is expected to rise much significantly.
Government is always striving hard to enhance job opportunities, growth and foreign
investments into the nation. Due to this reason, various structural changes in the level of
its spending and saving policies have been implemented thus far, in an attempt to
minimize the budget deficit level of the nation.
Firstly, there is a government proposal to minimize its expending on social welfare after
ensuring that just those persons who have real authentic need, will be receiving the
governmental aid. This will effectively cause the deficit to be cut down by $2.1 billion.
(Payne & Hall, 2017)- Additionally, there is another proposal by the government, which
is concerning scrapping off Asset Recycling Fund for the year 2014-2015.
It also aims to launch new training loans and vocational education. As a result, this
would help in reducing governmental debts by almost $25 billion during 10 year period.
(Australian Government, 2017). Mainly, it is still expected that the budget, will yield a
surfeit in the year 2020-2021.
In the modern economy, fiscal policy is a vital policy instrument. The execution of policy
in present-day results of economy in an extensive range of consequences on economy.
The policy is beneficial in governing the economic activity level in economy as a
whole(Amadeo, 2016). Due to this reason, the use of this instrument as a means to
stimulate or slow down economic activity in the aggregate economy has got multiple
advantages associated to it. One of the prime dominance of this policy lies within the
fact that it could be utilized by government to administer spending to particular regions,
sectors and projects. Therefore, unalike, the financial policy, which is generic in nature,
macroeconomic model could be used in order to trigger the economy sectors which are
recognized to need stimulation.
In addition to that, the consequences of policy could be understood in a short amount of
time, and the consequences are achieved in a much faster time, compared to different
other policies. Further to this, the implementation of this very policy instrument could
comprehensively be realized, so as to dishearten the presence of antipathetic
externalities present within nation’s economy. Obviously, taxation may be utilized by the
government to demotivate firms and polluters for their overutilization of natural
resources. (“Use of Fiscal,” n.d.), which in turn, assists greatly in minimizing antipathetic
effects onto our environment, besides generating additional revenues for the
government at the same time.
The gap between the rich and the poor could well be eliminated by employing this
policy. In turn, different tax rates may be imposed on various different income levels, as
a result of which it creates more trouble for rich whereas minimizing the tax
commitments for the poor masses.
Primarily, fiscal policies tend to possess the ability to minimize the nation’s budget
deficit levels, as a result minimizing economic influences linked to elevated public debt
(European Central Bank, 2005). In addition to that, policy’s expansionary tool does have
the potential to effectively minimize the unemployment level nationwide. Similarly, fiscal
policy may have substantial influence over the national income levels and therefore, it
casts an instant impact on nation’s economy.
Despite the fact that various dominance linked to the policy usage, there exists
numerous weaknesses which are linked to its use as well. One of the core disadvantage
of such policy is that, it is somewhat comparatively unchangeable. Significantly,
changes in tax rates or changes in government expenditure levels may consume a
great amount of time, quite often, the delays come into play due to political and moral
implications concerned to the process. The next weakness concerns to the usage of
fiscal policy, in order to resolve 1 macroeconomic problem, that may ultimately lead to
formation of yet another economical challenge.
For example, increased inflation in the economy can be brought about by stimulating
the level of aggregate demand in a bid to increase employment opportunities. Primarily,
this is due to one reason, that expansion in demand, tends to bring an increase in
generic price-levels within a nation.

&& What is more, implementation of fiscal policy may result in a conflict of objectives in
the economy. As such, the combination of contractionary and expansionary fiscal policy
within the economy leads to a conflict of objectives. Besides, the implementation of
fiscal policy tools such as taxation may be disapproved by the residents of the country.
Increasing the rates of taxation in the economy may create an unnecessary burden on
the taxpayers and is thus unpopular among households and firms. In addition, it may be
politically dangerous to implement such policies. Regardless of its weakness, the use of
fiscal policy to control the aggregate economy has significant benefits to the Australian
economy. &&

Pros and Cons of Fiscal Policy

Fiscal policy concerns to the spending policies and tax of one particular country’s
government. A restrictive or tight fiscal policy, which is inclusive of cutting back on
federal spending and increasing taxes. An expansionary fiscal policy, also termed as
loose policy, is yet another opposite entity, which is being used to facilitate economic
advancement. Most of the tools associated to fiscal policy, are concentrated on
“Keynesian Economics”, and they are optimistic for an uplift of aggregate demand.

Pro: Can Direct Spending To Specific Purposes

Unalike financial policy tools, that are generic in nature, a government could administer
consuming towards particular regions, sectors and projects, to enhance the economy,
where it could be discerned to be required

Con: Can Create Budget Deficits

The deficit in the government budget deficit occurs when it expends increased amount
of money every year, as compared to the money input it takes in. If taxes are low for too
long and spending is high, such type of shortfall could sustain to broaden to hazardous
levels.

&&Pro:Can Use Taxation to Discourage Negative

Externalities
Taxing polluters or those that overuse limited resources can help remove the negative
effects they cause while generating government revenue.

&&Con: Tax Incentives May Be Spent on Imports

The effect of fiscal stimulus is muted when the money put in to the economy through tax
savings or government spending is spent on imports, sending that money abroad
instead of keeping it in the local economy.
&&Pro: Short Time Lag
The effects of fiscal policy tools can be seen much quicker than the effects of monetary
tools.

&&Con: May Be Politically Motivated

Raising taxes is unpopular and can be politically dangerous to implement.

&& The Bottom Line

Monetary and fiscal policy tools are used in concert to help keep economic growth
stable with low inflation, low unemployment, and stable prices. Unfortunately, there is no
silver bullet or generic strategy that can be implemented as both sets of policy tools
carry with them their own pros and cons. Used effectively however, the net benefit is
positive to society, especially in stimulating demand following a crisis.