What’s fiscal policy?

Fiscal policy is influencing growth and productivity by increasing/decreasing tax and government spending. If the government spends a lot, it stimulates growth but growth can awaken the inflation genie and once that’s out of its bottle there’s trouble. The challenge is finding a balance in exercising these influences. Paul Keating used to refer to it as controlling the levers.

One of the biggest challenges facing policymakers is how involved the government should get in the economy. It’s generally accepted that a degree of government involvement is necessary as the alternative is every man for himself, which would be chaos. Across the west the level of government involvement ranges from the socialist approach of the Nordic countries to the more individualist approach of the US. We’re somewhere in the middle.

What’s monetary policy?

Monetary policy is basically what the RBA is operating when it changes rates. Having higher rates makes lending more expensive and hence slows growth, which slows inflation and vice versa. Generally the aim is to have fiscal and monetary policy work in concert with each other to keep inflation low and the economy humming along nicely.

What’s a surplus, what’s a deficit?

Just like a household or a business, the government runs a budget. Just like us it needs to know what it’s earning and what it needs to pay. But unlike us there are domestic political shenanigans, lobby groups, disruptive technologies, the odd war and the imperative of governing for the “greater good” to consider. If after all that Joe spends the same as he collects in taxes we have a balanced budget. If he spends more than he collects we have a budget deficit. If, however, Joe has some money left over we’ve got ourselves a budget surplus.

Hopefully that clears a few things up for you.