Keynesian theory of postive public policy fiscal stimulus. Additional govt impetus picks up where private sector capital investment falters / tapers off due to perception of reduced demand and excess idle productive capacity on (over)supply side.
So federal budget surplus is allocated towards capital and infrastructural projects in order to sustain otherwise unviable growth and investments (pre-existing). This is contra perfect market economy because redundant opportunities are being artificially kept afloat via regulatory intervention.
Not necessarily ineffective though. Certain strategic assets can benefit from transitory public sector support in order to overcome intermittent solvency issues and ensure long term going concern and viability. The cost of these government instigated fiscal and financial initiatives results in both positive and negative public externalities.
Monetary policy implications are also affected. Fiscal expenditure and spending induced budget deficits carry future tax implications. In the interim, they are commonly financed via federal debt issuances. These incur interest expenses which are usually systemic capital outflows as payments are made to foreign creditors / debtholders.
In addition, public sector stimulus in categories such as infrastructure and construction bloat already inflamed industries such as real estate and legacy entities otherwise of obsolescence under a perfectly competitive market framework. This places synthetic downward pressure on the natural rate of unemployment, causes nominal wage inflation and inadvertently prompts our central bank (RBA) to prematurely hike overnight cash rates.
Ultimately, the consideration for budgetary and fiscal policy making to counter the effects of the GFC relates to an age old adage of cost-benefit reckoning. The potential advantages of mitigating and averting a systematic capitulation of vital industries, otherwise avoidable, are to be reconciled against the probable costs of exogenous disruptions upon the fabric of market force pure play. Irrevocable supply-demand imbalances can be of consequence due to over or under corrections.
The prospect of a paretally efficient outcome, ie. maximum benefit for minimum detriment, is far from certain as neither expectations of market trends nor the equilibration of international commerce towards net growth are guaranteed. The relatively minute attribution of our capitalized asset base in a global context and the unfathomably intricate complexities of international commerce would easily nullify uncoordinated, singular government efforts.
Economic conjecture is by no means characteristic of scientific precision. The undertaking is flawed, haphazard and theoretical discordance between different schools of thoughts often seem beyond recourse. On the balance of reason and probabilities however, we can rationalize the following as being more factually constitutive than fiction:
> The stimilus package is inflationary as it requires the issuing of public debt (certainty) despite equivocation surrounding real productivity gains (possibility but by no means ascertained).
> The public investment is biased and partial towards certain sectors more so than others. Infrastructure, construction and long term fixed assets to receive the majority of benefits.
> The asymmetric distribution will have an impact on market structure and create untenable fundamental imbalances which will result in a new S-D equilibrium. Sustainability is contentious.
> Unemployment will decrease at least in the short to medium term. The opposite effect will be seen in interest rates as wage inflation and velocity of money from fast consumption shift funding gaps from private to public.
> Higher future taxation to pay back public debt issuances and meet interest liabilities. The onus of repayment obligations is publicized. There is no free lunch; user pays.
> The RSPT is one such manifestation. The extractive industry pass some of the tax onto our (Chinese) raw materials customers. Their input costs in mfg increase so pass some of the expenses from value adding onto their customers, ie. the importers of chinese products which is us. Domestic prices go up. Might as well save the runaround and just increase personal income tax outright.
> Real GDP, wage and asset value growth is of key concern. An economy with 10 apples will still only have 10 apples as stock inventory irrespective of whether the govt prints $10 or $20 as fiat legal tender. This the reason why stimulus must be withdraw somewhere down the track, ie. because in the long run 10 apples = 10 apples regardless of how you count it. It's not a zero sum game by any means but monetary injections cum quantitative easing are artificial mechanisms which do not persistent and serve only to create intermittent attenuation in S-D dynamics. Impromptu withdrawal of stimulus = 1990's Japan style stagnancy. Delayed withdrawal = Zimbabwe.
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