Let me now turn to the economic reactions to Australia`s stimulus plans. Discretionary fiscal policy is timely, but it can be difficult to determine when decisions need to be made. While the reasons for the application of fiscal policy may vary, they are often used after depression, recession or periods of economic stagnation (or rising inflation). 11 Ergas and Robson, while pointing out some shortcomings in their calculation, believe that their approach is “the most reasonable starting point for serious consideration of the potential benefits of a countercyclical macro-economic policy from a global perspective of well-being.” Should the government use tax cuts or spending increases or a mix of both to pursue an expansionary fiscal policy? During the Great Recession of 2008-2009 (which actually began at the end of 2007), the U.S. economy suffered a cumulative loss of 3.1% of GDP. It may not sound like much, but it is more than the average GDP growth rate in a year. During this period, the unemployment rate doubled from 5% to 10%. The consensus is that this may be the worst economic downturn in U.S. history since the Great Depression of the 1930s. The choice between tax instruments or spending instruments often has a political touch.
As a general statement, conservatives and Republicans prefer to see an expansionary fiscal policy through tax cuts, while Liberals and Democrats prefer the government to implement an expansionary fiscal policy by increasing spending. In a multi-party attempt to deal with the extreme situation, the Obama administration and Congress adopted an expansionist $830 billion policy in early 2009 that involves both tax cuts and increases in public spending. At the same time, federal stimulus measures were partially offset when state and municipal governments, whose budgets were hard hit by the recession, began to cut back on spending. Conflict over the political instrument to be used can be frustrating for those who want to categorize the economy as “liberal” or “conservative” or use economic models to argue against their political opponents. However, proponents of a smaller government, who want to cut taxes and public spending, can use the AD AS model and supporters of a broader government who want to raise taxes and public spending. Economic studies of specific tax and spending programs can help determine whether and how the government should change taxes or expenditures. Ultimately, the decision to use tax or spending mechanisms to implement macroeconomic policies is a political decision rather than an economic one. The founder of fiscal policy, John Maynard Keynes, argued that nations could use spending and tax policy to stabilize the economic cycle and regulate economic performance. “Under the guise of dynamic evaluation, Republicans are trying to manipulate the system in a way that can be very destructive,” Michigan Democrat Sander Levin said in a 2015 statement. “The proposed amendment would undermine fiscal responsibility and continue to embrace the Republican economy of Trickle Down.” 3 Wilcox (1989) finds that expected increases in income influence consumption when income is collected, not when it is announced.