The government implements its macroeconomic policy using two main tools; fiscal policy and monetary policy. Government macroeconomic management is designed to minimise fluctuations in the business cycle so we can experience good growth, low rates inflation and relatively stable unemployment (Sloman, J. and Norris, K. 2002; . Fiscal policy refers to the government's choices regarding the overall level of government purchases or taxes (Gans, J. et al, 2000; 721). This paper will focus on the government's fiscal policy, namely the 2003-04 Commonwealth Budget, and its effects on Australia's growth, unemployment and inflation.
On May 13th, federal treasurer Peter Costello announced the 2003-04 federal budget, which included policies which came as a surprise to many economists and market analysts. As Saul Eslake, chief economist at ANZ stated;
It contained at least two surprises for market analysts, who had been conditioned by pre-Budget chatter and leaks to believe that the Government was facing a fairly tight financial position; and that, as a result, there was little room for major policy initiatives beyond meeting the need for additional defence spending and funding changes in higher education.
The budget displayed a departure from the pattern seen under the Howard government in recent years. At first glance the most notable change is a reduced budget surplus, which has fallen from 3.9bn AUD in 2002-03 to 2.2bn AUD in the 2003-04, with even smaller surpluses forecast for the next two years.
Source: 2003-04 Budget Review
Figure 1.1 shows the trend of budget surpluses in recent years. Budget surplus peaked in 1999-00 at 13.5bn dollars and running into slight deficit in 2001-02 when domestic and global economic conditions were at their worst (Commonwealth Budget overview, 2003). The federal treasury states that the objective of the budget balance is to ensure that the...