Introduction
The article: "Rates: RBA warns Costello" by Paul Cleary of the Australian Financial Review refers to the use of monetary policy and fiscal policy to stabilise the economy. The article points out that the Commonwealth government has produced lower than expected budget surpluses considering Australia has had economic growth for the past nine years. Such loose fiscal policy is mainly due to Tax Reform. The Reserve Bank of Australia (RBA) warned the government that loose fiscal policy may well result in tightening monetary policy.
The upcoming election may start a tax-cut "bidding war". Fiscal policy works well in theory, but in reality it is also greatly influenced by politics. The warning from the RBA may deter loose fiscal policy in the fear of being blamed for interest rate rises (Mitchell 2000, pp1&6).
The macroeconomic issues in this article are the uses of monetary and fiscal policy in order to stabilise the levels of economic activity. Economic growth, inflation and interest rates are the economic indicators that will be focused
on in relation to these policies.
Fiscal Policy
What is Fiscal Policy?
Fiscal policy is the government's use of its budget to fulfil its economic objectives (Parry & Kemp, 1997, p170). Such objectives would involve dampening the fluctuations that occur during the business cycle (Parry & Kemp 1997, p171). The Government's yearly budget outlines the areas of spending, tax and transfer decisions (McTaggart, Findlay & Parkin 1999, p25.4). The budget referred to in the relevant article is the Commonwealth government's annual budget.
Dampening the business cycle
The business cycle is a fairly regular pattern of business activity. Shown below are the phases of the business cycle (Parry ...