Budgetary Policy operates to address economic problems
Economic problems will occur when the government's goals are not being achieved. For example, the problem of excessive inflation and high unemployment will mean that the government has not achieved its low inflation and full employment goals. Budgetary policy can be used to assist in the achievement of all the government's economic goals that were examined earlier:
Over many years (since the 1980's), this policy was not specifically used to manage or manipulate the business cycle. Whilst 'automatic stabilisers' did work in a counter-cyclical fashion, the budget was rarely used to contract the economy when growth (or inflation) was too high, or contract the economy when growth was too low. This counter-cyclical arm of policy making was left primarily to the RBA and monetary policy.
This approach changed slightly following the election of the Labor government in late 2007. First, Prime Minister Rudd declared that budgetary policy had a real role to assist monetary policy efforts to fight inflation. Accordingly, its first budget adopted a 'contractionary stance' to help ease capacity constraints and dampen inflationary pressures. More profound, however, was the government's response to the onset of the global financial crisis and the global economic downturn in 2008-9. Recognising the need for budgetary policy intervention, the government noted:
In normal times, monetary policy is the main tool for stabilising the economy. But these are not normal times. Extraordinary times call for extraordinary macroeconomic policy measures. In the current circumstances, monetary policy action alone will not be sufficient to restore growth within a reasonable time period……The extraordinary speed and scope of the deterioration in the global economy means that there is a much greater macroeconomic stabilisation role for discretionary fiscal policy than would normally be the case.
Source: Updated Economic and Fiscal Outlook, February 2009 www.budget.gov.au
Accordingly, over 2008-9, the government adopted a much more interventionist or 'Keynesian' approach to budgetary policy, which included the delivery of the $10.4B Economic Security Strategy in October 2008, the $42B Fiscal Stimulus Package in March 2009, followed by large budget deficits since that time. More recently, the government has made it clear that fiscal consolidation is important and the role of manipulating the economy during normal time will once again be the domain of the RBA and monetary policy.
While the focus has been on preventing large falls in economic growth and higher unemployment, budgetary policy has the flexibility to assist with the achievement of all our economic goals. Like all government policies, however, budgetary policy's ultimate goal is to improve the welfare or living standards of all Australians.