Discuss about the Monetary Policy Pros and Cons System.
Predominantly, fiscal policy is applied alongside monetary policy. Simply put, fiscal policy refers to government measures through taxation and expenditure aimed at influencing the economic conditions of a country.Majorly, there are two tools of macroeconomic policy, fiscal policy, and monetary policy. Primarily, there are three types of fiscal policies. Namely, expansionary, contractionary and discretionary fiscal policies management. Usually, expansionary policies are implemented to boost or stimulate economic activity whereas contractionary fiscal policy is implemented to reduce economic activity. The discretionary fiscal policy comes in the form of fiscal stimulus packages. In Australia, fiscal policy is the mandate of the Australian government. Following the recent historic economic downturn, the global financial crisis of 2008-09, it was imperative that fiscal policy be implemented alongside monetary policies to cushion the Australian economy against the effects of the global economic crisis.
Majorly, taxation and government spending and revenue are the commonly used fiscal policy tools in Australia and globally. Through increased government expenditure during recessive times, the government is able to stir economic management activity and provide employment opportunities.However, reduced government expenditure during economic growth levels are aimed at stabilizing economic conditions such as inflation through the implementation of contractionary fiscal policy. During economic downturns, the government offers tax breaks and cuts to encourage investment and consumption as opposed to saving.However, during high economic growth times, taxes are increased to regulate consumer spending to stabilize the economy. Typically taxation is used to control the flow during different economic cycles. Particularly, it can be said that taxation is effective in controlling consumption and production patterns due to its direct application through levies and penalties for violations.
Noteworthy, Australian fiscal policy played a vital role in reviving the Australian economy after the negative effects of the recent Global Economic Crisis, also known as the Global financial crisis. However, fiscal policy had the help of monetary policies, demand, and supply based advantages plus strong regulated financial systems that helped it through the financial crisis of the year 2008-09.
Fiscal Policy Australia.
Objectively, fiscal measures are implemented to promote public welfare and economic growth through the supply of commodities and to stabilize economic fluctuations. According to the Australian 2016-17 Budget, small and middle-sized businesses are the beneficiaries of tax cut ranging from 28.5 percent to 27.5 percent to encourage growth and expansion. Further, the Australian Budget 2016-17 has increased the tax bracket of middle-income earners to higher income earners thus an implementation of fiscal policy through taxation(Focus Economics 2016).Noteworthy, in Australia, the fiscal policy is done by the Australian government as a macroeconomic policy. During the global financial crisis, discretionary fiscal policy in the form of fiscal stimulus packages was implemented into the economy(Dolomere n. d).Predominantly, the Australian fiscal policy is based on the Charter of Budget Honesty Act of 1998 which advocates for the implementation of medium-term policies.
Further, the expansionary fiscal policy was implemented through Australian government financial handouts and expenditure in medium-term business ventures.For instance, the Australian government implemented the building schools revolution which is considered successful following the global financial crisis of 2008-09(Roydon 2008).Through expansionary fiscal policy, aggregate demand for commodities rose and instances of cyclical unemployment reduced thus the assertion that fiscal policy is effective.However, the effectiveness of fiscal policy is dependent upon timely policy implementation and political will. This is one of the major shortcomings of the fiscal policy effectiveness. The fiscal policy requires direct and timely implementation for it to be successful. Following the political mandate and will, fiscal policy might be implemented too late to have effective solutions to the targeted problem.
Majorly, there s expansionary and contractionary fiscal policy management. Usually, expansionary fiscal policy is implemented to stimulate economic activity during contractive cycles of enterprises wheres contractionary fiscal policy is implemented to slow down the rate of economic activity thus making it seldom applied (Amadeo 2017).Typically, under contractionary fiscal measures taxation is increased and public expenditure reduced by the government to slow down economic activity. Usually, contractionary policy is effective in curbing inflation thus the need for implementation of contractionary fiscal policy in cases of inflationary pressures in the economy. The Australian Budget 2016-17 implemented some degree of contractionary fiscal policy. Further, the Australian government is pursuing tax avoidance incidences and exploring a new form of taxation such as the “Google tax” on multinationals to boost its revenue figures to supplement the budget deficit.
Predominantly, expansionary fiscal policy is effective during a recession as evidenced by the Australian fiscal policy during the global financial recession of 2008-09.Noteworthy, the Australian Budget 2008-09 recorded a surplus of $ 21.7 bn which was aimed at stimulating the different declining sectors of the economy at the time(Australian Government N.d). Further, tax breaks and cuts were extended to Australian households to encourage private expenditure and investment which overall stimulates the aggregate demand for goods and economic activity. Remarkably, the Australian government increased its expenditure through its $4 bn investment to purchase residential mortgages with an aim of reviving the collapsing housing sector. Public expenditure was increased by the Australian government between the years 2008-12.Following the implementation of fiscal policy in 2008, there was increased government expenditure looking out for the public welfare of the Australian population.
Notably, the Australian government expenditure following the global financial crisis of 2008 increased. Currently, the Hodd government is experiencing budgetary deficits due to the high expenditure estimates as compared to the revenue collection(Duncan and Cassells 2017).Particularly between the year 2008 and 2009, the Australian government expenditure as compared to its Gross domestic product was $150.7 bn in social security and welfare. Currently, social security and welfare is the largest expenditure of the Australian government at $161.4bn Australian dollars.Following the Global Financial Crisis of 2008-09, the Australian government implemented various fiscal policies to cushion its economy against the effects of the crisis. After the crisis, there was increased government expenditure on public utilities such as schools, housing, tax breaks and transfer of incomes between December 2008-March 09, which led to a rise in the exchange rates and GDP in the year 2008-09.
By and large, it can be said that fiscal stimulus boosted the economic activity after the recession but later led to a decline in economic activity due to the strengthened exchange rates and reversal of the export contribution to the economy to the demand. The aftermath of the global financial crisis was characterized by increased taxation to the tune of $39 billion and reduced government expenditure to the tune of $ 7 bn thus a perfect example of contractionary fiscal policy by the Australian government in its 2012-13 Budgetary allocations(Weber 2012).Also, the contribution of foreign demand for goods between China and Australia during the Global financial crisis can’t be ignored as having contributed to the economic growth rate of Australia during that period of time, specifically 2008-09.Specifically, the trade volume between China and Australia during the crisis amounted to $78.1bn having increased from %67.6bn in the year 2008.
This is a significant contribution to the Australian gross domestic product given the global economic downturn at the time(Priestley n .d).This goes to show that sole application of fiscal policy is inadequate to effectively cure the negative effects of economic downturns thus the need to incorporate other demand based and supply side based policies to supplement fiscal policy.Also according to an article in the Guardian, low public debt and budgetary surplus hugely contributed to the Australian economy quick recovery from the effects of the global financial crisis (Alexander 2013). In addition, fiscal policy is used to control national debt in the long term(Weber 2012).During the Global Financial Crisis, the Australian Federal government rested its fiscal policy inclusive of increased expenditure and fiscal stimulus to boost economic activity(Makin 2010).
However, according to an Australian article, the fiscal policy did not solely stimulate the Australian economy out of the depression but exchange and interest rates regulation, which is basically monetary policy. Furthermore, there was the implementation of the Economic Stimulus Act 2008 which offered rebates on taxes, investment taxes for businesses in the United States of America which helped the country overcome the negative plights of the recession(Romer 2013) thus proof of the effectiveness of fiscal policy in stimulating economic activity. Further, the Australian government implemented a $22 bn fiscal surplus in its schooling infrastructure and $4bn for business incentives(Barret 2012).Besides fiscal policy, flexible labor market and exchange rates also aided Australia in its out of recession phase. In addition, there was in place stronger financial regulation which puts across the importance of other measures alongside fiscal policy to effectively deliver on its mandate.
Typically, the Australian government has implemented fiscal policies through tax cuts and increased spending to stimulate economic growth following economic downturns such as the 1990 s recession and the Global financial crisis of 2008-09.Noteworthy, fiscal policies are advocated for under the Keynesian Economics. Majorly, fiscal policies are effective due to the fact that they are targeted for specific projects or purposes thus making the result effective for the intended purpose. Simply put, fiscal policy is purposeful in its execution. Also, through fiscal policies, the results are achieved faster as contrasted with monetary policies.Moreover, the implementation of a timely fiscal policy response to the global financial crisis by the Australian government was successful(Swan 2011).Through fiscal policy employment opportunities were salvaged and business cycles. This is further proof of how effective fiscal policy can be. Fiscal policy has various advantages and shortcomings.
However, the implementation of fiscal policies such as expenditure can lead to budgetary deficits which is bad for the economy(Hayes 2016).Further, through taxation, which is a major fiscal policy tool, negative externalities can be avoided or minimized in the sense that heavy taxation can be levied on pollutant companies and harmful products to discourage production and consumption respectively. Also, through tax savings or government spending, the acquired revenue through fiscal policy might be utilized outside the country thus not benefiting the citizens of that particular government thus the assertion that citizens are not always the beneficiaries of implemented fiscal policies. The dependence of implementation of fiscal policies through taxes and expenditure is dependent on the politics of the day thus the belief that party policies are central to the decision-making of fiscal policy. All in all, fiscal and monetary policies are both considered economic stabilizers despite their different approaches.
Despite the application of the fiscal policy to stabilize the economy, it is criticized for being slower in its results as compared to monetary policy.Further, the implementation of fiscal policy through reduced government expenditure might negatively affect the public welfare and interest because inefficiency and market failures may result from the reduced public expenditure.Also, time lags might render the fiscal policies ineffective by the time they are effectively implemented. Fiscal policies require political will and legislation to be effective and operational thus the need for nonreliance on fiscal policies solely to stabilize economic fluctuations(Tejvan 2016).Moreover, an increase in taxation as a way of curbing expenditure might act against the desire to get employment in the sense that high taxation rates for low-income earners isn't likely to incentivize them to seek work due to the low disposable income after taxation(Tejvan 2016).
In addition, the effectiveness of fiscal policies isn’t solely dependent but is complemented by demand based factors of the economy. That is to say, there's need for consumers to have substantial disposable income and confidence for them to increase their expenditure thus the need to incorporate other crucial components of the economy that directly impact on the demand for goods. Further, the implementation of the fiscal policy hasn’t always provided positive results. Currently, the Australian budget seeks to address budgetary deficit owing to the past fiscal surpluses (Makin 2017).There s need for expansionary fiscal policy to stimulate economic activity and reduce the growing public debt levels. Lack of strong political will has been pointed out as the reason why the issue of budgetary deficits hasn’t been properly addressed by the Australian government. According to some economists, fiscal policy on its own wasn’t able to drive Australia out of the global financial crisis.
Primarily, Foreign demand for Australian products and monetary policy alongside fiscal policy are collectively considered responsible for the economic growth rate of Australia following the global financial crisis of 2008-09(Groenewold N. d).According to a survey by the Australian Institute, the injection of the fiscal stimulus into the economy following the Global financial crisis of 2009 was warranted and justified.Particularly,62 percent of the interviewed citizens applauded the government fiscal policy for shielding the Australian economy against further ruin(Australian Institute n.d).Further, increased government expenditure revived the Australian economy during the global financial recession period(Jacobs 2017).The Australian government invested heaving in the medium term infrastructure of schools and availed various stimulus packages to various sectors of the economy during the Financial Crisis.
In addition, following the end of the mining boom, the Australian government has increased its expenditure following the mining boom transition. Similarly, public sector employment opportunities have grown due to increased government expenditure by 12.4 percent(Jacobs 2017).Noteworthy, New South Wales and Victoria have experienced large government expenditure in terms of infrastructure. Further, increased government expenditure has created and maintained employment opportunities following the downturn of the financial crisis of 2008-09.All in all, the implementation of fiscal policy and government expenditure has done more good than bad to the Australian economy following the global financial crisis and the end of the mining boom in Australia.Theres need to strengthen Australian fiscl policy due to the significant changes it has helped transform the Australian econoy after the recent economic downturn.However the s need to incorporate monetary policies alongside fiscal policy due to the advantages of monetary policies over fiscal policies.
By and large, fiscal policy is considered effective in most economies. This can be attributed to the significant part it played in stabilizing the economy following the global financial crisis of 2008-09.Primarily fiscal policy can be expansionary or contractionary depending on the economic business cycles at the time. Typically, expansionary fiscal policy is effected during economic downturns whereas contractionary fiscal policy is intended for high economic growth times.Once in a while discretionary fiscal policies in the form of stimulus packages are advanced to the economy. The survival of the Australian economy is partly attributed to the foreign demand for goods by China, low national debt levels, timely execution of the fiscal policy, strong financial regulation of the Australian economy and monetary policies collectively.
Notably, fiscal policy is advantageous because it can be directly applied to a specific aspect of the economy, its authoritative in nature having its mandate in the government, its results are achieved faster in the event of political will and the necessary infrastructure. However, due to its dependence on political will, time lags may render it ineffective. Further, fiscal policy can result in negative public welfare. Though some economists maintain that fiscal policy solely cushioned the Australian economy from the negative effects of the Global Financial Crisis.Ultimately, the fiscal policy played a very significant role in reviving the Australian economy following the onset of the Global Economic Crisis of 2008-09.
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