well okay.
Fiscal policy is a government tool which is used as a part of macroeconomic policy to regulate levels of demand within the economy. Discretionary factors such as tax cuts and asset sales (asset sales are 'one offs', and as such are ignored by economists when calculating the fiscal balance (the amount to which the govt is adding to national savings)) and cyclical factors, automatic stabilisers such as progressive income tax and unemployment benefits, both have an effect on the level of government revenue and government tax, for obvious reasons... right? If the economy is growing 'too fast' then progressive income tax revenue will be increasing due to the fact that people will be earning more and more people are employed... but to prevent excess demand fuelling further growth, more tax is taken from income earners. Similarly, when we are in a recession and people are LOSING jobs, unemployment benefits will inflate Gx but at the same time stimulate demand so as to ensure we make it out of the recession alive and well.
Assume we had a netural to accomidating budgetary stance and that the economy was growing strongly at 3.25%. Now if the Commonwealth Bank collapsed in say August and over the following months businesses went with it and then the stock exchange crashed. National income would fall dramatically, and demand would go with it... right? [NB: This is basically what happened in America in the lead-up to the great Depression, so yes... I am right
] The following budget would therefore include more Gx to accomodate for the increase in transfer payments. Consumers therefore have money to spend, and demand is at least supported if not stimulated, however at the same time the govt is recieving much less tax as people have less taxable income.
Hence, Gt<Gx for the purposes of avoiding a potential recession. Therefore it is expansionary fiscal policy thanks to the massive deficit.
Similarly if Australia, in a period of low demand, lowered interest rates with inflation down to an contextually unrealistic 1% and cut tax by huge amounts then Australian demand will skyrocket. Then say Australia felt uncontrolled rates of economic growth and rising inflation due to increased demand pull pressures, the federal government would cut spending and probably increase taxes or interest rates again in an attempt to regulate the rate of economic growth.
Hence Gt>Gx to control inflation and prevent an overheated economy. Therefore it is contractionary fiscal policy due to the surplus.
This is basically Keynesian theory. It doesnt take into account microeconomic reforms, but for the purposes of the HSC... this stuff is still relevant.
