Fiscal policy Discussion - Australia perspective

Nothing is more essential to politics than economy. In Australia there has been a contentious debate in public arena about the subsequent budget deficit being delivered and that the government debt is ballooning. This is why Economics policy dominated the previous Australian Federal election campaign 2013. This paper evaluates and critically analyses the fiscal policy approaches of incumbent Coalition government and the alternative government labor party. The paper will pay a particular attention to economics, policy and politics. The word economy comes from Greek word for one who manages a household (Stonecash, Gans, King, & Mankiw, 2009). To be honest households and economies have much in common. At the heart of economics is the principle of scarcity, choice and unlimited wants. Economics is refers to how individuals and society choose to allocate scarce resources in order to satisfy unlimited wants. The phrase economic growth is generally used to refer to the increase in the standard of living. Economic growth occurs when more goods and services are sold in the country in the current year than previous year. The Australian government aims to achieve consistent growth without the negative side effects of external stability. The Federal government aims to achieve this by ensuring; 1. 2. 3. 4. 5. Low inflation Sustainable economic growth Full employment External stability Equitable distribution of income

However, achieving consistent economic growth is almost impossible because economy moves through a series of phases (contraction, recession, recovery, boom), and each phase has its own problems. For instance, during recession many people will lose their jobs and when the economy is booming it is likely that prices will increase faster than income. The fact that we live in a globalised world; the Australian economy is often affected by the external factor. In other words, reduced economic growth in one country usually has a negative impact on growth in their trading partners. The Australian economy is affected by the economic performance of its main trading partners such as China, Japan and US. Policy makers are often faced with tough decision to make when it comes to drafting government budget. The pre-election vote compass survey has indicated that voters are more concerned about economic policy than any other polices agenda of campaign. Economic policy passed out by the government has a huge impact on individual families, business, and nation as a whole.

ABC Vote Compass analysis of most significant policy issues: retrieved from ABC website.

The implication of this graph is that the generation of the twenty first century are quite kin to understand the principle of economics as a result embarks in following economic policy of the incumbent government as well as that of potential alternative government. Australians are concerned about how the ruling government chooses to collect tax from them, and how the money will be expended. Australian believes that better economics management tantamount to consistent economic growth & development, creation of jobs opportunity, stable price of goods and services, better health care system, equitable distribution of income and decent retirement for elderly persons. The life-time consumption patterns of an individual are constructed on the expectation of the future income. The permanent income hypothesis theory of consumption states that the choice made by consumers regarding their consumption patterns are determined not by current income but their long-term income expectation (Friedman, 1957). Both sides of Australian politics have different approaches in managing economy and bringing the budget into surplus and achieving sustainable growth. The current Coalition government believes that it is important to avoid deficit budget whenever possible. As part of "getting the budget back under control", through living within our means and called for no further increase to the $300 billion debt limit. The latter phrases have created pessimism, and lack of jobs security among Australian public servants. The community and Public service Union (CPSU) delegates have expressed

serious concerns after Department of Human Services (DHS) signalled it would commence testing the Future Jobs staffing model, which opens the way for the down grading of jobs classifications in the service delivery areas. As a result, 120 jobs have been ear marked go in Centrelink, Medicare, Child Support and CRS Australia. Overall, 14000 APS employees are affected by the recently announced Machinery of Government Change and the government is getting rid of 12000 public servants over the next two years (CPSU Union news, 1 October 2013). On the other hand, Australia Labor party believes in maintaining a prudent approach to fiscal policy by focusing on jobs creation and economic growth. The former Labor government had adopted fiscal policy and maintained a strong focus on economic growth since Rudd government in 2007. For example, in the second half of 2008, it was apparent that the global economic downturn was going to affect Australia. It was spill over effect of stimulus packages delivered in 2008 and 2009 that saved Australian economy from effect of Global Financial Crisis. The government decision to implement fiscal policy adjustments, i.e. whether to act on the spending side or the revenue side are largely political and are often influenced by the political partys philosophy and interest groups. Fiscal policy refers to the action by the Federal government of Australia in collecting revenue from the Australian economy and spending the proceeds of these actions. Fiscal policy encompasses a wide variety of policies. There are many types of incomes, for which the tax rules could be changed, or categories of government spending, where changes could occur. In May every year, the Australian government of the day releases the budget, and in this budget statement the treasurer will clearly stipulate how the revenue will be collected, and what it will be spent on. This can have a huge impact on the economy depending on outcome of the budget that can either be surplus, balanced or deficit budget. In the wake of the global financial crisis, there was a significant worry in most Central Banks that the countries would face deflation. In fact countries such as Ireland, Spain and United State were faced with a short period of deflation. Some countries in Eurozone were hit the hardest particularly Greece. Austerity measures were initiated in an attempt to reduce public debt by a combination of cuts in public spending, reducing or freezing labour costs, increasing tax, privatising government assets as well as reconfiguring public services and welfare state. As a result many banks in Eurozone defaulted due to collapse in revenue and bailouts were needed in countries such as Greece, Spain Ireland, Iceland, Portugal and Cyprus. Austerity has both short and long term consequences. For instance, in Eurozone, austerity has increased income inequalities through jobs loss, cuts in welfare benefits, increased taxes and charges for public services (Whitfield, 2013).

Wolf (2013) argued that, not only was the scale of austerity unnecessary and ill-timed it was unjust and based on flawed economic theory. This has been supported by Blyth (2013b) who stated that austerity is a dangerous idea, because it ignores the externalities it generates, the impact of one persons choices on anothers and the low prob ability that people will actually behave in the way that the theory requires. Alesina and Ardagna (2010) suggested that fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending cuts. An alternative strategy should spell out robust policies to reconstruct the economy, the state and public services. Economic and industrial policies should be directed towards investment for clean-energy economy, investment in infrastructure, jobs creation and financial institution reforms and regulatory regimes. Although the government finances must be sustainable over the long-term, it is appropriate to stimulate the economy during economic downturns and save during economic booms. Recently, there has been a parallel line between Big Society policies and moves by Coalition led State governments in Australia to cut back on and outsource government responsibilities as a strategy to get budget into surplus. For example, Queensland, New South Wales and Victorian governments have all south recommendations from audit commissions on how best to reduce their deficits. An interim report, published in mid June 2012 of the Queensland commission of audit was used to justify the substantial cuts to Queensland public services (Queensland commission of audit, 2012). In 2012-13 Queensland budget, 14000 full-time equivalent positions were cut, 10,600 forced redundancy, and 13,400 part-time workers were not reinstated (Queensland Government State budget 2012-13). Meanwhile, in New South Wales audit commission identified six reforms themes in their financial report which was publicly released in February 2012. The two themes listed are devolution and partner ships and outsourcing and the final theme is budget constraint (NSW Final Report of the Commission of Audit, 2012). However, the final report of the Victorian audit commission is yet to be finalised and released. Evidence suggests the cuts to jobs and spending in implementing Big Society policies have delayed the UKs recovery from recession and worsen the deficit (Elliott, Stone, & Beverley, 2013). The end result includes worsening household finance, increase in poverty and acute mental health issues, and dramatic rise in homelessness. Aftershock of the Big Society project in the UK should serve as a warning to Australian politicians contemplating to adopt a similar approach. Nevertheless on international comparison, Australian economy is performing well compared to other OECD countries. Australia has sustained economic growth for 21 years, and the only developed economies that has avoided worse global financial crisis that sparked off in 2007. This reflects sound Australian macroeconomic policies and strong demand from China. Growth temporally fell in 2010 and 2011 as stimulus was withdrawn and households

became more cautious. Non-mining tradable sectors have struggled with strong exchange rate driven by the mining boom. However, fundamentals remains solid with unemployment rate close to its structural rate and inflation and public debt low. Growth was registered in 2012, with positive outlook, even though there were some negative externalities however, Australia was less vulnerable than many other OECD countries (Junankar, 2013)

Reference
Alesina, Alberto, & Ardagna, Silvia. (2010). Large changes in fiscal policy: taxes versus spending Tax Policy and the Economy, Volume 24 (pp. 35-68): The University of Chicago Press. Blyth, M. (2013b) The austerity delusion: Why a bad idea won over the West, Foreign Affairs, 92.3, May-June. Disapearing jobs and classification downgrades: CPSU Union news 1st October 2013 http://www.cpsu.org.au/members/news/32146.html Elliott, Cameron, Stone, Christopher, & Beverley, Stephen. (2013). Whatever Happened to the Big Society? : Centre for Policy Development. Friedman, Milton. (1957). The permanent income hypothesis A theory of the consumption function (pp. 20-37): Princeton University Press. Junankar, Pramod N. (2013). Australia: The Miracle Economy: IZA Discussion Paper. NSW Government, NSW Government Response to the Final Report of the Commission of Audit (Sydyney, 2012), http://www.nsw.gov.au/sites/default/files/uploads/common/NSWGovtResponsetoFinalRep ort_SD_v01. Peter Costello, Sandra Harding, &Doug McTaggart, Queensland Commisson of Audit: Interim Report June 2012, 2012 http://www.commmissionofaudit.qld.gov.au/reports/interim-report.pdf. Policy approach: fiscal policy http://economics.mrwood.com.au/unit4/fiscal/approach/fapproach10.asp Stonecash, Robin, Gans, Joshua, King, Stephen, & Mankiw, N Gregory. (2009). Principles of Macro Economics. Vote Compass analysis of most important policy issues http://www.abc.net.au/news/2013-08-09/vote-compass-analysis-of-most-important-policyissue/4876178 What are business cycles and how do they affect the economy? http://www.frbsf.org/education/publications/doctor econ/2002/may/business-cycleseconomy Whitfield, D. (2013). Unmasking austerity: Lessons for Australia, Adelaide: Australian workplace innovation and social research centre in association with ESSU, the University if Adelaide. Wolf, M. (2013) How austerity has failed, New York Review of books, 11 Jully Queensland Government, State Budget 2012-13: Budget Measures (Brisbane, Queenlsnd, 2012), http://budget.qld.gov.au/budget-papers/2022-13/bp4-2012-13.pdf.