In the broader context of the economic ecosystem, one of the most impactful players is the government. Theoretically, everyone operates under the rules established by their government, from individuals, businesses, financial institutions and even other governments. Governments take a macro view of the domestic economy, focusing on large-scale indicators such as national income, unemployment rates, inflation, and economic growth—considerations that are balanced to improve the quality of life for everyone living in the country.

This balancing act coincides with the economic cycle, a continuous progression that experiences expansions, peaks, contractions, and troughs of varying degrees. Depending on where we are in the cycle, the government must adjust their policies to ensure the domestic economy’s sustainability.

Fiscal Policy

Fiscal policy is one of the methods governments use to influence the macroeconomy. By utilizing injections (investments, government spending, and exports) and withdrawals (savings, taxation, and imports), the government acts both pre-emptively and in direct response to changes by adjusting these injections and withdrawals. In an ideal and overly simple world, the government should maintain a sustainable level for each of the macroeconomic indicators.

Injecting money into the economy through projects, programs, tax reductions, promoting domestic commodities, and other incentives stimulates economic growth. Withdrawals through the opposite actions provide an opposing reaction, giving the government an opportunity to save money for future injections, thereby smoothing out the economic cycle. It may be obvious why the government needs to stimulate the economy when indicators such as growth and unemployment are poor, but why would they need to cool it down? Simply put, it is not sustainable to maintain such high levels of growth for an extended period. Inflationary pressures from goods and services, real estate and commodities asset bubbles, labour market pressures, trade imbalances, and social and environmental costs are just some of the major downsides of overheating too quickly and for too long. Without intervention by the government or reserve banks, these issues could spiral out of control, potentially even leading to a sudden recession.

Political Pressures

In Australia, the yearly budget is presented in May. Fiscal movements towards budget surpluses and deficits demonstrate the goals being set. For them to work most effectively, they need to combine the actions of fiscal policy with monetary policy. As previously discussed, reserve banks act as the other powerhouse of economic expansion and contraction by influencing the money supply. Although both are independent pillars, they share the same disadvantage due to the political nature of the systems. Policies are determined by those in power, and when those in power change or are influenced by political motivations, their ideas on how to manage things can be easily swayed. Although it may be prudent to always maintain safe levels of prosperity, it is very easy for individuals to want to make their metrics look better under their authority. Always watch for incoming politicians seeking to make a big splash or upcoming career uncertainties like elections when job renewal is uncertain.