Measuring Fiscal Stance in Australia: Theoretical, Empirical and Policy Considerations

Abstract

Cyclical volatility in the rate of economic growth has been a source of concern for economic policy makers since the Keynesian revolution changed governments’ perception of their role in macroeconomic management. While the variables that should be stabilised, and the tools that should be relied upon, are still debated, governments in developed economies rarely eschew responsibility for delivering economic stability, or minimising economic instability. This thesis is primarily concerned with the interrelationship between cyclical volatility in the rate of growth of Gross Domestic Product (GDP) and the Commonwealth budget. The pro-cyclical nature of employment combined with the cyclical sensitivity of tax bases such as personal income tax, company tax and the Goods and Services Tax ensure that government expenditures and revenues are influenced by changes in the level of economic activity.