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What is fiscal policy?

Outline the main items of expenditure and revenue in the 2015-2016

federal budget. Analyse the effects of the 2015-2016 budget on households, firms and the
business cycle.
Fiscal policies are those policies used by the Australian government to influence the level of aggregate
demand in order to achieve economic stability. The government uses fiscal policy to mitigate fluctuations in
the business cycle. Fiscal policy is the manipulation of government expenditure and revenue in order to
achieve its five economic objectives. These are: strong economic growth (3-4% per annum), price stability
(2-3% across the cycle), full employment (at NAIRU), equitable distribution of income and ecologically
sustainable development. The government details the intended changes in an annual Federal Budget, most
recently in the 2015-16 Budget.
The release of the governments federal budget indicates their intentions to produce either a balanced,
surplus or deficit budget which is often reflective of national economic performance. These terms indicate
whether the government intends to keep they revenue and expenditure equal, or if they will inject more
money into the economy or inject less than what they collect in revenue. In the case of the 2015-16 Federal
Budget, the government anticipates a fiscal deficit as total expenditure is expected to exceed revenue,
resulting in a negative balance on the Budget. Therefore, the Australian Government has developed its
budget from an expansionary stance. It aims to increase economic activity through an increase in government
injections. Increasing government expenditure results in increases in economic activity by increasing the
marginal propensity to consume, investment and economic activity levels.

In proposing this years budget, the Australian government has to have considered the economy in relation to
the business cycle where the economy is currently in a low growth period exiting from a post-GFC economic
climate. The government has also looked at economic indicators such as unemployment (6%), GDP growth
(2.3%), inflation (1.3%), falling iron ore price assumed to be US$48 per tonne for next two years and the
ageing population as determinants in the 2015-16 budget. The feature items of this annual budget are reduced
taxation revenue from small business incentives ($5.5 billion over four years), increased revenue from
foreign investment application fees ($735 million over four years) and increasing expenditure through a
childcare package ($3.5 billion over five years).
The 2015-16 Federal budget includes massive tax concessions for small businesses. These include an
immediate tax deduction of all assets under $20,000, a tax cut of 1.5% and a 5% tax discount for smaller,
unincorporated businesses. These tax concessions will lead the push for economic growth and will be an
incentive for businesses to expand and invest. This aims to revive investment from the bottom end of the
economy after other investment programs have failed to offset the fall in mining investment. The Treasure
states that these tax concessions empowers small business to invest, grow and create jobs. It will be
stimulus for small businesses to invest into expansion and create more jobs to lower unemployment whilst
lowering costs associated with production. Lowering unemployment is critical to raising standards of living
and to increase spending through consumer confidence which will push the economy into a sustainable
growth phase of the business cycle.
In terms of increasing revenue for the government, the Treasurer has proposed new application fees for all
foreign investment that will be effective 1 December 2015. The new application stands to produce up to $735
million over four years. The government has also imposed tougher sanctions against those who breach
investment laws which include higher fines and greater civil penalties. The budget also proposes an
additional 3% stamp duty and 0.5% land tax surcharge for foreign investors. These efforts will have mixed
effects in the economy. It has the potential to reduce to redirect foreign investment away from the property

development market which may stymie new the construction industry as it would entail higher real estate
costs. However, it may induce a correction in house prices leading to greater affordability for Australians.
The new foreign investment proposals also have a secondary benefit for the Australian government. The new
application fees means that the administrations costs associated with foreign investment no longer have to be
shouldered by the taxpayer but covered by the application fees payable by the foreign investors. This allows
the government to reallocate resources throughout the budget.
The Australian government also proposes to introduce a $3.5 billion childcare package. The package will
overhaul the benefits system, progressively increase subsidies for those on lower incomes, and extend
subsidies to include nanny services. The objective of this proposal is to move parents into the workforce and
to increase the participation rate. In the longterm, the government is looking to see the package funded from
the increased tax revenue that should offset the cost of the subsidy package. A secondary objective of the
proposal holds that investment into early childhood education and care leads to improved educational
outcomes, better educated, more productive and higher standards of living for citizens. An educated
workforce leads to innovation within the workplace. If the current childcare market does not oversee the
equitable provision of goods and services due to credit constraints for the consumer, then that is a reason for
the government to intervene. A greater workforce now and a more innovative workforce in the future is
critical to ensuring sustainable economic growth over the long term, especially as we transfer into an
increasingly knowledge based economy. It is necessary to ensure the longevity of high standards of living in
Australia. Relevant to today, boosting participation would lead to economic growth and the economic effects
of the subsidy would be distributed throughout the economy as a result of increase in consumer spending.
The package also relates to the economic objective of equitable income distribution and ensuring that those
from lower income families are not disadvantaged and have an equal opportunity to participate in and
contribute to the economy.
With the Australian government recognising the current economic situation of the Australian economy, as
well as acknowledging Australias economic future, they have adopted a measured budget that addresses the
issues within the economy. They have traced back to basic economic reform at the heart of the economy
through small business tax concessions, foreign investment reform and childcare package to simulate the
economy that looks more at incentivising business and consumer spending to move the economy out of the
current low growth phase into more positive yet sustainable growth.