Determining the fiscal policy time-frame: the dominance of exogenous circumstances.

Fiscal policy is one of the fundamental tools of political management, and ofmacro-economic policy. This paper largely confines itself to the second ofthese functions. It investigates the question of whether there are anycircumstances which justify using fiscal policy in a counter-cyclicalstabilisation role. The economic issues relevant to this question are assessed,on the basis of the literature and empirical evidence, under three headings:1. the objectives to which policy may effectively be directed;2. the economic circumstances and outlook; and3. the varying impacts and lags of the principal policy instruments.This analysis recognises the close inter-relationships between fiscal policyand the other principal macro-economic policy instruments (monetarypolicy and wages policy). The evidence suggests that there is a countercyclical role for fiscal policy in circumstances where there is a significant Keynesian slump in aggregate demand. Such circumstances demand active fiscal response, that is, allowing the automatic stabilisers to perform their "duty" will not be a sufficient enough injection to effective demand to arrest the slump.In periods of growth, and/or in the presence of a high current accountdeficit that is indicative of structural imbalance within the domesticeconomy, however, there are strong grounds for assigning wages policy tothe employment (and growth) objective/s. This allows policy-makers thechoice of switching fiscal policy to the structural issues such as the balanceof payments: a particularly important option for Australia with its relativelyhigh vulnerability to exogenous economic shocks.