As discussed above, the Australian government is aiming towards achieving a budget surplus by 2024-25. The reduction in the fiscal deficit of 2014-15 from that of 2013-14 is a strong symbol of its commitments towards achieving this goal. The government for achieving this goal is taking up measures to reduce cost and increase revenue in pace that is becoming detrimental to the population at large. The measures like reduction in the unemployment benefits and family benefit tax may enable savings of cost to the state but are sure to crop in a massive unrest to the population at large.
The Keynesian model specifies that whenever there’s a change by the government in the taxation policy and government spending, the aggregate demand and the level of economic activity are prone to change. The Keynesian cross represents the relationship persisting between the aggregate demand and the aggregate supply.
The graph above denotes the aggregate demand on the Y axis and aggregate supply on the horizontal axis i.e. is measured by the output on X axis. The blue line denotes the aggregate expenditure/demand curve and is a rising curve and signifies that the demand is expected to rise with the rise in disposable income of the population, representing an increase in the overall national output. Howsoever, this rise shall be reduced if there are reduced government benefits and lesser tax exemptions.
The practiced unemployment and family benefit tax cut may lead to an effect upon the following microeconomic variables, namely
Aggregate demand and level of economic activity,
Pattern and rate of savings and investment in the economy,
Overall distribution of income.
Few limitations of Keynesian model in evaluating the effects of fiscal model in general are,
Keynes use to state that monetary policy was relatively ineffective and incapable of influencing the aggregate demand. Howsoever, many economists appraise the role of monetary policy in today’s environment.
Fiscal fine – tuning proposed by Keynes is very unrealistic. A criticism of Keynesianism is on the ground that, it is hard to make minor changes in the fiscal policy so as to influence demand which ensures a stable growth. (Heise, 2004)
Keynesian model is heavily criticized on ground that it invariably leads to the growth of the state. This at times is a reason for higher inefficient and corrupt spending.
In 1970s, Keynesianism saw a huge criticism and went out of favor as stagflation crept up represented rise in the rate of unemployment and inflation. The reason attributed was the ignorance of supply side of economics, which now is regarded an important variable in economy. (Wickrey, 1984)