900030 Economics

Economics Assessment Task 4 Research Essay

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Role of Fiscal Policy in the Australian Economy.

The Australian government has macroeconomic objectives such as stability, reduction in unemployment, and controlling inflation (Gross and Leigh, 2022). Fiscal policy, i.e., the use of government spending and taxation to affect economic activity, plays a key role in delivering on these goals (Boug et al., 2023). This essay examines the significance that fiscal policy has played in the Australian context by considering the following: defining important concepts in fiscal policy, considering recent economic trends, and examining the policy's effectiveness.

Macroeconomic Indicators & Economic Fluctuations.

The indicators that are used to measure Macroeconomic performance are Gross Domestic Product (GDP), unemployment rate, Consumer Price Index (CPI) inflation, etc. Australia has had moderate but uneven growth over the past decade, interrupted by global shocks such as the COVID-19 pandemic. During 2020, Australia's GDP fell by 7.0% in the June quarter, and unemployment reached its highest point of 7.5% in July (Reserve Bank of Australia, 2022). The Reserve Bank's targeted goal is inflation of between 2% and 3% per year. This volatility confirms the need for government fiscal policy, particularly during the downturn (Richardson, 2022).

Fiscal Policy and its types

Fiscal policy is broadly of the following nature: expansionary and contractionary measures (Horton and El-Ganainy, 2025). Expansionary fiscal policy means raising spending (or lowering taxation) in the government to stimulate economic demand, specifically for recreation. Conversely, an expansionary fiscal policy aims to reduce the cost of inflation by reducing spending or increasing taxes (Jrgensen and Ravn, 2022). In Australia, these tools are used flexibly according to prevailing economic conditions.

Current Role of Fiscal Policy in Australia

Fiscal interventions by the Australian government have been particularly important during times of crisis. For example, in response to the recession resulting from the emergence of the current pandemic, stimulus measures such as the Job-keeper Payment and increased infrastructure spending were implemented, which injected billions of dollars into the economy, preventing a deeper recession (Hudson et al., 2021). In the meantime, monetary policies, such as specific welfare support & energy bill reductions, have tackled the burdens on the cost of living imposed by rising inflation (Dept, 2024). The above actions indicate how fiscal policy could stabilize output, safeguard jobs, while shielding households from disruptions to the economy.

Evaluation

Fiscal policy is crucial, as monetary policy cannot remedy structural unemployment policies and cannot give social support in specific areas. However, it is subject to certain limitations, including time delays in the implementation process, political constraints, and moral hazard due to increased public debt. However, Australia has potential for counter-cyclical fiscal measures owing to its comparatively low debt-to-GDP ratio when compared with other advanced nations (OECD, 2023). When carefully operated, the implementation of fiscal policy complements the implementation of monetary policy in achieving economic stability.

Conclusion

In conclusion, fiscal policy is an important component in ensuring the stability of the economy and reducing unemployment and inflation in Australia. The federal government has proved to be capable of assisting families, managing crises, and spurring growth by properly allocating revenue and spending. Even though there are still challenges, specifically with financial sustainability and policy lags, fiscal responsibility is still an important instrument for fulfilling Australia's financial objectives.

References

Boug, P., Brasch, T. von, Cappelen, ., Hammersland, R., Hungnes, H., Kolsrud, D., Skretting, J., Strm, B. and Vigtel, T.C. (2023). Fiscal policy, macroeconomic performance and industry structure in a small open economy. Journal of Macroeconomics, 76, p.103524. doi:https://doi.org/10.1016/j.jmacro.2023.103524.
Dept, I.M.F.A. and P. (2024). Australia: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Australia. IMF Staff Country Reports, [online] 2024(011). doi:https://doi.org/10.5089/9798400262364.002.A001.
Gross, I. and Leigh, A. (2022). Assessing Australian Monetary Policy in the Twenty-First Century. SSRN Electronic Journal. doi:https://doi.org/10.2139/ssrn.4235474.
Horton, M. and El-Ganainy, A. (2025). Fiscal policy: Taking and giving away. [online] International Monetary Fund. Available at: https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Fiscal-Policy.
Hudson, C., Watson, B., Baker, A., Arsov, I. and Studio, K. (2021). The Global Fiscal Response to COVID-19. [online] Available at: https://www.rba.gov.au/publications/bulletin/2021/jun/pdf/the-global-fiscal-response-to-covid-19.pdf.
Jrgensen, P.L. and Ravn, S.H. (2022). The inflation response to government spending shocks: A fiscal price puzzle? European Economic Review, 141, p.103982. doi:https://doi.org/10.1016/j.euroecorev.2021.103982.
OECD (2023). OECD Economic Surveys: Australia 2023. [online] OECD. Available at: https://www.oecd.org/en/publications/oecd-economic-surveys-australia-2023_1794a7c9-en.html.
Reserve Bank of Australia (2022). The COVID-19 Pandemic: 2020 to 2021 | Explainer | Education. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/education/resources/explainers/the-covid-19-pandemic-2020-to-2021.html.
Richardson, D. (2022). Reserve Bank Review Submission Adam Smith argued for strict control of banking with strong bank supervision. He knew that a small group of bankers with corrosive moral sentiments could ruin the entire economy. 1. [online] Available at: https://australiainstitute.org.au/wp-content/uploads/2022/12/Reserve-Bank-Review-WEB.pdf.