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Economic Analysis for Business: Assignment

   

Added on  2020-03-28

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Economic analysis for business1Fiscal Policy of Australian Government in last 3 years

Economic analysis for business2Table of ContentsIntroduction......................................................................................................................................3Understanding the meaning of fiscal policy....................................................................................4Objectives or tools of fiscal policy..................................................................................................4Relationship between fiscal policy and macroeconomic variables.................................................5Three year fiscal policy of Australian Government........................................................................7Delivering on the medium term fiscal strategy........................................................................8Budget surpluses over the course of the economic cycle.......................................................11Challenges related to the Fiscal policy of Australia......................................................................13Conclusion.....................................................................................................................................17References......................................................................................................................................18

Economic analysis for business3IntroductionThe focus of this essay on the medium term influences on fiscal policy. It is important for thegovernment of any country that their economy performed well and their balance sheet must bestrong. The essay also explains the sustainability of the economy, a stable economy is importantfor government as well people who are living there. The fiscal policy gives direction to thegovernment to work accordingly and work until financial system shows profit. Industrializationis main factor to raise the economy and helps in generating more jobs if the rate of employmentincreases that means economy is performing good. Moreover, the balance sheet of thegovernment shows goods revenues. This essay is about the fiscal policy of Australia in last threeyears. Government of Australia is struggling to keep the regular pace in their economic growth.The economy of Australia is not performing well and the reason behind that is increase in theunemployment rate. From the last few years, the unemployment rate of Australia has increasedand economy has goes down. The essay describes the meaning of fiscal policy and comparisonbetween fiscal and, monetary policy and their working styles and difference among them.Further, the essay explains the objective of fiscal policy and relationship between fiscal policyand macroeconomics variables. In the next section essay explains the three-year fiscal policy ofAustralia in which medium term strategy explains in details with budget surplus strategy. Theessay explains the last three year estimated and projection investment by graph. Afterwards,essay explains the various challenges, which are faced by the fiscal policy in its implementation.

Economic analysis for business4Understanding the meaning of fiscal policyFiscal policy can be defined as the policy or decision made by the government regarding thecollection of taxes from public and how to spend that money which is collected. The moneywhich is collected by the government is revenue and spending that money is expenditure for thegovernment. So, fiscal policy is the efficient utilization of government revenue and effectiveexpenditure strategy for overall development of the economy (Hansen, 2013). For the growthand development of country government spends money on different sectors such as education,military, health, defense services, infrastructure and trade. In Australia, government spends largemoney on the welfare as federal government expected more than $ 156 billion in the budget forthe year 2016 for welfare spending. Revenue or money for the spending can be generatedthrough taxation, borrowing money from different sources, sale of fixed assets, state ownedenterprises and consumption of reserves (Mertens and Ravn, 2014). Fiscal policy V/S Monetary policyFiscal policy affects the monetary policy but always contrast with the monetary policy of thecountry. Fiscal policy is administered by the government or legislative body under laws where asmonetary policy is administered by the central bank of a country (Burgert and Schmidt, 2014).Fiscal policy determines the taxation strategy and expenditure of government where as monetarypolicy determines the demand and supply of money, deposit rates or interest rates, lending ratesor borrowing rates and exchange rates. In Australia, monetary policy is regulated and controlledby the RBA (Reserve Bank of Australia).

Economic analysis for business5Objectives or tools of fiscal policyThe main objective of fiscal policy is to stabilize and stimulate the economy of nation in theperiod of recession and depression. For example, when Australia was facing financial crisis atglobal level, government announce the ‘stimulus budget’ of more than $42 billion in 2009 for thepurpose of stimulating the economy (Parliament of Australia, 2017). At the time of inflation inthe country, one of the most useful tools is fiscal policy which can be utilized in controlling thesituation with increasing the rate of taxes on income and revenue of companies to reduce theconsumption level. When government expenditure is more than the revenue it is generally calledas budget deficit. In Australia, government used the budget deficit strategy to overcome fromthe situation of downstream of economic growth. Budget surplus is also used by federalgovernment to overcome from inflation by increasing the revenue and decreasing the expenditurein the country. Another purpose of fiscal policy is to stimulate the financial market. Sharemarket of country can be influenced by the different fiscal policies of the government (Arrowand Kruz, 2013). To stimulates the share market government uses the budget deficit strategy andbudget surplus is used when governments wants to decrease the share market of economy. Oneof the main objectives is to make growth and welfare of the economy by supplying goods to thepublic.Relationship between fiscal policy and macroeconomic variablesMacroeconomic policy is also responsible for the development and growth of economy and formaintaining the stable environment in the economy. The macroeconomic policy of any countryhas three main components which are monetary policy to control factors related to money, fiscalpolicy to control factors related to economy and exchange rate policy to control factors related tofinance and currency. So, the different variables of macroeconomic policy are affected due the

Economic analysis for business6changes in the policy of taxation and expenditure by the government such as aggregate demandof the goods, saving and investment of the public, rate of GDP (Gross Domestic Product),inflation, rate of unemployment and commodity prices (Corsetti, et al., 2013). The relationshipbetween macroeconomic variables and fiscal policy can be explained as follows:Growth percentage of real GDP: The aim of the fiscal policy is to make the higher economicgrowth and to enhance the growth and development per person which leads to increase in theliving standard of Australia’s future generation. Growth in the economy is also helpful inincreasing the quality of services like education and health (Parliament of Australia, 2017). InDecember 2015, the percentage of real GDP increased by 0.61 which was higher than theexpectation of government and market. Annual growth rate of real GDP was 3.1% which wasmore than in comparison with 2.76% which was the expected prospective rate of growth inAustralia. The main factors for higher growth rate were dwelling investment, growth in thespending of consumers and public (Borio, 2014).Percentage of Inflation: An increase in the prices of commodities, services and goods in theeconomy of a country can be called as inflation in the economy of that country. Due to increasein the demand of goods and services, supply of goods will decrease and prices will be increasesby the supplier for earning higher profit. Main factor behind the inflation is increase in thepurchasing power of general public which tends to increase in the prices of goods and services(Elmendorf and Sheiner, 2017). In March 2015, the percentage of inflation decreased by 0.10which was lower than the expectation of government and market. In December 2015, Annualrate of inflation reduced to 1.4% from 1.8 % which was due to the cost pressure of domesticproducts.

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