Fiscal Policy (Australia) Essay

1450 WordsJul 23, 20116 Pages
Fiscal policy refers to the use of the Commonwealth budget to achieve the government’s economic objectives – which is to maintain constant economic growth of 2-3%. Economic growth refers to an increase in the quantity of goods and services produced in the economy over a period time. Economic growth is measured by the percentage of annual increase in real Gross Domestic Product (GDP). GDP is defined as “the total market values of goods and services produced by workers and capital within a nation's borders during a given period (usually one year)”. The Federal Government can use fiscal policy to promote economic growth, redistribute income, decease unemployment and assist external stability. Fiscal policy is another macroeconomic policy (the other being monetary policy which is conducted by the Reserve Bank) which involves the government reducing or increasing their spending, taxation and the overall budget outcome to influence resource allocation, redistribute income and minimize the functions of the business cycle. Governments require funds to operate and they acquire these funds through taxation in the form of income/business tax, goods and service tax and various other taxes and levies imposed. Government expenditure refers to any money spent by the government. On the circular flow of income government taxation is a leakage, while government expenditure is an injection. When government expenditure is less than taxation the government experiences a budget surplus and when government expenditure is greater than taxation the economy is in a budget deficit. When they are equal it is called a balanced budget. In a budget surplus the economy will contract (leakage from circular flow) and in a deficit the economy will expand (injection into circular flow). As the government is in a position where they can decide where and how much they will be spending

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