Fiscal Policies: Australian Government Spending and Economic Impact

This report provides an analysis of fiscal policies implemented by the Australian government. It begins by discussing the potential impact of a tax on sugary foods, arguing for its implementation to promote healthier eating habits and generate revenue for subsidies on healthy foods. The report then delves into Keynesian economics, explaining how increased government spending can stimulate national income and employment. It also explores the economic effects of recessions, the role of discretionary changes in fiscal policy, and the potential drawbacks of government spending. Finally, the report examines expansionary monetary policy and its effectiveness compared to fiscal policy in stimulating the economy, considering the Australian government's reliance on external borrowing.

Running Head: Fiscal Policies
The Implementation of Fiscal Policies by the Australian Government
By (Name)
(Tutor)
(University)
(Date)

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The Implementation of Fiscal Policies by the Australian Government
Question 1
Tax on sugary foods may sound as a better idea to stimulate people to turn to healthy
eating. I would argue for tax/subsidy imposition on sugary foods as there is a possibility of
promoting some healthy eating behavior. Various source has given the price elasticity for sugary
foods to be less than one (absolutely). This means that sugary foods demand is relatively
inelastic to prices changes. Approximately, the PED for sugary foods is about -0.3; this again
means that the change in demand after a price increase which will result from the imposition of
the tax will be too small. Consumers will continue consuming nearly the same level of food
stuffs as before the imposition; this will raise greater tax revenue. If this revenue is used to
subsidize the consumption of healthy foods, the price for heathy foods will fall and will be
affordable to many. Sweets and sugary snack are things consumers can do without since they are
not a necessity. Thus, their consumption will be helping many people to afford other healthy
foods after tax imposition. Consumers’ welfare will be raised from purchasing healthy foods at a
lower price.
Fig: Inelastic Demand
Price
P1
P0
D
Q1 Q0 Quantity of Sugary foods
The big rise in price causes only a small fall in demand because of the inelastic nature of
demand.

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Question 2
Part a
According to Keynes, increased government spending will result in an increment in the
national income. The employment level will increase and consumers will have better income for
spending; this therefore with stimulate the consumers’ spending. Increased spending will raise
the demand level for goods and services creating a need for the producers to increase their level
of supply. In the process of producing more to meet the increased demand, the private investors
will become more productive and spend more on their expansion. This increased spending by
private investors will further stimulate the economic growth as it will demand supplementary
labor (more employment)
Part b
During a recession there is less production in the economy as investors’ confidence is
lost. This reduced production lowers the level of goods and services provision. The reduction in
the supply of goods make the price level to rise; the outside economies find it more expensive to
import from the economy under recession. This lowers the economy’s level of exportation. The
increased domestic price creates an increased demand for imports since imports turn out to be
cheaper. This results in a budget deficit. Discretionary changes include raising government
spending and tax cuts to stimulate aggregate demand and hence production of goods and
services. This lowers the budget deficit.
Part c
It is not all the times that the government’s spending is directed to viable investments;
some of the investments made by the policy makers do not derive much benefits to the general
public. Thus this can be considered as a waste of government resources. The government can
analyze all its areas of spending and identify those that are essential and the less essential; then it
can reduce spending on the less essential areas; it can partially or fully avoid spending on these
areas. Reduced government spending will result in lower interest rate and investors will borrow
more and increase the investment level.
Part d
Expansionary monetary policy which may involve a cut in the RBA’s cash rate which
would in turn result in a fall in the interest rate would help in the creation of an economic
stimulus. This is because at a lower interest rate, investors will find it cheaper to borrow and

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invest owing to the fact that there is a fall in the servicing costs of loans. Makin argue that the
monetary policy is more effective compared to fiscal policy because the Australian government
is dependent on external borrowing and thus fiscal policies would raise the risk of loss of its
creditworthiness.