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Exercise 2
Fiscal stance is the intended overall impact of the budget on the level of economic activity. The government’s medium-term fiscal strategy is to maintain budget balance, on average, over the length of course of the business cycle. The reasons for the change in the fiscal stance in the 2009/10 Budget were the result of the global financial crisis and global recession and their impacts upon the Australian economy.
The 2009–10 Budget was expansionary, projecting an underlying cash deficit of $57.6 billion (4.9% of GDP) and a fiscal deficit of $53.1 billion (4.5% of GDP) compared to the estimated deficit of only $32 billion (2.7% of GDP) at the MYEFO in 2009. Through this Budget the Government was attempting to cushion the negative effects of the global recession including recession in Australia and rising unemployment. This was done through discretionary measures such as increased spending on infrastructure and tax cuts, as well as allowing the automatic stabilisers to take their effect.
The move into expansionary fiscal policy is designed to support the incomes of businesses and households by raising aggregate demand. Firstly this would be done by allowing the automatic stabilisers to drive the underlying cash deficit; secondly by increasing expenditure in targeted areas to provide temporary stimulus as well as investing in infrastructure projects to promote longer term growth.
The Budget also contains an ‘exit strategy’ designed to return the Budget to surplus. Firstly this would be done as automatic stabilisers again take effect as the economy grows (ie. spending declines as unemployment falls; tax revenue rises as personal incomes and profits increase during economic recovery); secondly by containing growth in government expenditure to 2% per annum until the Budget returns to surplus.
The Government’s medium term fiscal strategy is to maintain budget surpluses on average over the medium term, to keep taxation as a % of GDP to levels below that of 2007-8, and to improve the Government’s net financial worth (move from a net borrower to net saver). These changes to the fiscal stance are designed to achieve this strategy in the face of the global recession and subsequent fragile recovery.
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