This report will explain why fiscal policy should be used in medium to long run macroeconomic stabilization rather than in the short run. Limitations of fiscal policy is pointed out such as time lag and current goal of Australian government in the short run using monetary policy to counter recession facing by the world. Furthermore, looking back to 1980s and 1990s budget balances, fiscal policy was majorly used in order to eliminate foreign debt and achieving budget balance and surplus. Some data from the Reserve Bank and Australian Government is used in this report to support the statement. In addition, this report also includes one of the current issues in Australian government, which is the future demographic change that would affect the economy. Lastly, a conclusion will summarized every point that explain why fiscal policy should be used in the long run macroeconomic stabilizations and bibliography is also included in order to appreciate the work of the original writer.
Fiscal policy is the macroeconomic policy that is used by the government to achieve macroeconomic stabilization by changing the tax rate and government spending. The macroeconomic stabilizations in Australia are low unemployment rate, low inflation rate, equality in the income distributions and to close the output gap in the long run
This report will explain why fiscal policy should be focused in medium to long-term economic objectives rather than in the short run macroeconomic stabilizations. Firstly, one of the limitations of fiscal policy explained why it should not be focused on the short-term macroeconomic stabilization which is the relatively inflexible of fiscal policy as government spending and taxes are not able to be changed quickly (Bernanke et al., 2008). Secondly, the current government goal in the short run is to fight recession that is experienced by other developed country in the world. For example, the RBA has changed the interest rate from 7.25% to 7% to fight recession that is currently going to be anticipated by the Australia government (RBA, 2008). In addition, fiscal policy is adopted by the government to counter the long run macroeconomic stabilization instead of using monetary policy. For example, fiscal policy is used by Australian government to reduce the foreign debt and improve the current account deficit (CAD) in Australia after World War II (Gruen and Sayegh, 2005b). Furthermore, fiscal policy is used by the government to make adjustments in the economy when demographic change is likely to affect the economy. Therefore, these points show why fiscal policy should not be used in the short run macroeconomic stabilizations but in the long run macroeconomic stabilizations.