How can the Australian Government use the budget and fiscal policy to stabilise economic activity?

Question

Based on 2008-09 budget and fiscal policy impact inflation.

Answer 1

It can't. For several reasons.

John Maynard Keynes that governments could use a combination of fiscal and monetary policies to keep the economy at close to the full-employment level,

http://en.wikipedia.org/wiki/Keynesian_e...

but in practice, that hasn't worked out.

In addition to some of the theoretical criticisms as to why the theory shouldn't work (outlined in the Wikipedia article), there is also the reality: governments like to stimulate the economy when times are bad, but they don't like to turn off the stimulation when times are good, and when shocks are too big, they just don't have the poser to do much about them.

Let's talk about the first reality first. William McChesney Martin was the 9th Chairman of the Board of Governors of the Federal Reserve. His most famous quote about his central banking philosophy was that the job of the Federal Reserve is "to take away the punch bowl just as the party gets going,"[1] referring to the need to raise interest rates when the economy is at its most active.

http://en.wikipedia.org/wiki/William_McC...

As you can see from the dot-com bubble and then the sub-prime crises in the U.S., subsequent managers of the U.S. economy did not take the punchbowl away early enough. Unfortunately, there is no reason to believe that any government actually can.

After all, everyone wants economic growth. Taking away the punchbowl means that, in the short term, you are getting less growth than you might be. No politician likes to do that even if it is better for the country in the long run.

Think of it this way: the harder you party, the bigger the hangover or the let-down when it is over. So stability really means no parties.

As for the second reality, there really isn't that much the Australian government can do in the face of the economic power of China and the U.S. When the U.S. economy sneezes, everyone suffers (even China). When China gets hungry, it elbows everyone at the table. (And what happens when India and Brazil catch up, which they are rapidly doing?)

One of the implications of globalization is that that when things are good, they are much better, but when things go bad, they have that much further to drop. The larger the role trade plays in your economy, the more vulnerable you are to the rest of the world.

Australia relies heavily on trade, with a GDP of $760 billion, its exports are $142 billion, or more than 18%.

https://www.cia.gov/library/publications...

For the U.S. the numbers are $13.84 trillion and $1.15 trillion or only 8%

https://www.cia.gov/library/publications...