Question

The Australian federal government’s budget was in surplus by almost $20 billion in 2007/08 and in deficit by over $54 billion in 2009/10. What does this information tell us about fiscal policy actions taken by the government during these years

Answer 1

When receipts are greater than expenditure, this may indicate contractionary fiscal policy. However, during the 2000s, up until 2007/08, the Australian economy was booming and the surpluses were largely the result of automatic stabilisers rather than discretionary fiscal policy. The budget deficits from 2008/09 to 2011/12 indicate an expansionary fiscal policy, designed to protect the Australian economy from the impact of the global financial crisis. Part of the deficit was also due to automatic stabilisers reducing tax revenue and increasing government transfer payments during the economic contraction.