Budgetary policy and economic growth
Generally speaking, the delivery of a budget deficit, or an expansionary budget, is expected to assist in the achievement of economic growth because the Government is injecting ‘net’ funds into the economy. This is the typical Keynesian approach used in the past to good effect as additional government spending (G1 and/or G2 or transfer payments) stimulated AD beyond that which would otherwise occur without the deficit. With stronger growth, the demand for labour typically increased, generating employment growth and a reduction in the unemployment rate.
As discussed, the budget has become more active in terms of demand management in light of the global economic slowdown. Given that the fiscal strategy is to achieve surpluses, on average, over the medium term (see medium term fiscal strategy), there is flexibility built in to allow the cyclical component of the budget (i.e. automatic stabilisers) to assist in economic stabilisation. This is one reason why the budget moved into deficit territory during 2008-9 and beyond. These cyclical changes were being supported by substantial structural changes to the Budget, such as cash bonuses and infrastructure spending in order to support economic growth and jobs.
You should recall that the Government may deliver a more expansionary budget even when it hands down a ‘surplus’. This will occur when the size of the ‘structural surplus’ has fallen, or when discretionary stabilisers result in a net injection of funds into the economy over any budget year. This generally means that the Government is attempting to return some of the ‘windfall’ gains that may have resulted from a stronger economy. This type of situation occurred with the budgets in 2006-7 and 2007-8, where the strong economy (and in particular the strong terms of trade) provided massive boosts to company profits and government company tax revenue. Instead of consolidating the additional revenue and allowing the budget surplus to increase further, the government introduced tax and spending measures that were quite expansionary without jeopardising the size of the surplus.
Specific initiatives that can also be introduced to stimulate AD and economic growth include measures such as: