Question

Federal governments can use their budget to stabilise their economies during shocks such as Global Financial Crisis of 2008 and COVID19 pandemic. Discuss how the federal budget served as an automatic stabiliser for the Australian economy (or a real world economy of your choice).

Answer 1

Budget is one of the the best fiscal tool that can be used to control economic shocks such as inflation and deflation. Changing the budget balance into surplus, deficit and balanced one the Government can overcome the situation. If there is strong inflationary pressure then the government will decide a contractionary budget which leads to to decrease in money supply and inflationary pressure. If there is deflation then the government use expansionary fiscal policy like deficit budget which helps to increase the money supply and recover the economy. In the Great depression of 1930's government spending helps to recover the shock. So budget is one of the strongest weapon which government use to fight the shocks in the economy.