The Effectiveness of Federal Fiscal Policy: A Review
Australia has experienced one of the fastest rises in public debt in the world since the Global Financial Crisis (GFC) and federal budget deficits have persisted for longer than previous fiscal stimulus episodes in the 1980s and 1990s. Subsequent fiscal repair has also been weaker and less than in the United States, United Kingdom, New Zealand and the Euro area.
This paper briefly introduces a range of alternative perspectives on the efficacy of fiscal stimulus as a macroeconomic policy instrument, including the loanable funds, Mundell‑Fleming, dependent economy, Ricardian and intergenerational equity approaches. Each of these perspectives suggest fiscal stimulus has damaging offsetting effects that eventually minimise or neutralise its effectiveness in stabilising national income and employment.
The paper then examines how effective Australia’s fiscal stimulus response to the GFC proved to be given the economy’s robust banking system, floating exchange rate, openness to international trade and capital flows, and dependence on mineral exports to Asia.
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The views expressed in the papers are those of the authors and do not necessarily reflect those of the Australian Treasury or the Australian Government.