Implementation of Fiscal Policies by the Australian Government

Question: Discuss about theImplementation of Fiscal Policies by the Australian Government. Answer: Tax on sugary foods may sound as a better idea to stimulate people to turn to healthy eating. I would argue for tax/subsidy imposition on sugary foods as there is a possibility of promoting some healthy eating behavior. Various source has given the price elasticity for sugary foods to be less than one (absolutely). This means that sugary foods demand is relatively inelastic to prices changes. Approximately, the PED for sugary foods is about -0.3; this again means that the change in demand after a price increase which will result from the imposition of the tax will be too small. Consumers will continue consuming nearly the same level of food stuffs as before the imposition; this will raise greater tax revenue. If this revenue is used to subsidize the consumption of healthy foods, the price for heathy foods will fall and will be affordable to many. Sweets and sugary snack are things consumers can do without since they are not a necessity. Thus, their consumption will be helping many pe ople to afford other healthy foods after tax imposition. Consumers welfare will be raised from purchasing healthy foods at a lower price. Fig: Inelastic Demand The big rise in price causes only a small fall in demand because of the inelastic nature of demand. According to Keynes, increased government spending will result in an increment in the national income. The employment level will increase and consumers will have better income for spending; this therefore with stimulate the consumers spending. Increased spending will raise the demand level for goods and services creating a need for the producers to increase their level of supply. In the process of producing more to meet the increased demand, the private investors will become more productive and spend more on their expansion. This increased spending by private investors will further stimulate the economic growth as it will demand supplementary labor (more employment) During a recession there is less production in the economy as investors confidence is lost. This reduced production lowers the level of goods and services provision. The reduction in the supply of goods make the price level to rise; the outside economies find it more expensive to import from the economy under recession. This lowers the economys level of exportation. The increased domestic price creates an increased demand for imports since imports turn out to be cheaper. This results in a budget deficit. Discretionary changes include raising government spending and tax cuts to stimulate aggregate demand and hence production of goods and services. This lowers the budget deficit. It is not all the times that the governments spending is directed to viable investments; some of the investments made by the policy makers do not derive much benefits to the general public. Thus this can be considered as a waste of government resources. The government can analyze all its areas of spending and identify those that are essential and the less essential; then it can reduce spending on the less essential areas; it can partially or fully avoid spending on these areas. Reduced government spending will result in lower interest rate and investors will borrow more and increase the investment level. Expansionary monetary policy which may involve a cut in the RBAs cash rate which would in turn result in a fall in the interest rate would help in the creation of an economic stimulus. This is because at a lower interest rate, investors will find it cheaper to borrow and invest owing to the fact that there is a fall in the servicing costs of loans. Makin argue that the monetary policy is more effective compared to fiscal policy because the Australian government is dependent on external borrowing and thus fiscal policies would raise the risk of loss of its creditworthiness.