Fiscal Policy: Government Management

What are the intentions of fiscal policy and how does it acheive these?

  1. Smooths out fluctuations in the business cycle.

The fiscal policy uses counter cyclical actions that aim to counter either an upturn or downturn in the economy to maintain steady positive growth.

A government can do this by controlling G (government spending, injection) and T (taxation, leakage) to oppose the actions of the economy.

For example:

  • to minimise an upturn, the government will reduce government spending and increase taxation. This takes away income from the economy and reduces activity.

  • to increase a downturn, the government will increase government spending and decrease taxation. This provides more income for the economy to use to increase activity.

e.g., increases excise on tobacco (5% increase, $3.3 B over 5 years)

job keeper subsisdy

home builder package

  1. Reallocation of resources.

Subsidies, taxes, and the provision of public goods are used to reallocate resources.

Subsidies: a form of financial assistance or benefit that is provided by the government to individuals, households, or firms, often on merit goods. Subsidies provide more money and labour into the economy.

Taxes: a mandatory financial charge of levee imposed by a government on individuals and firms. These taxes help to decrease the amount of money and labour that is in an economy.

Provisions: this referes to public goods that are funded and provided by the government due ot their reallocation.

e.g., increase in the Medicare low income threshold

spending on public schools

petroleum resource rent tax

  1. Redistribute Y (income) and wealth (W).

This is done through transfer payments (Welfare checks/centrelink) and the progressive tax system ( the more you earn, the more oyu are taxed/have to pay) as well as the marginal tax rates.

e.g., parenting payment

Job seeker (G)

Age pension (G)

progressive tax system

*the government tends to realocate and redistrbute rather than smooth out fluctuations as they dont want to have to change leakages of injections.