4. Economic Policies - Fiscal policy Flashcards
Methods of financing budget deficits
Government can:
1. It can borrow funds from the private sector
2. Borrow from the Reserve Bank of Australia (RBA)
3. Borrow money from overseas
how does gvt. borrow funds from private sector?
Government can issue government securities and sell them: known as deficit, bond or debt financing. Securities must be paid back with interest.
Disadvantage of borrowing funds from private sector
May cause a rise in interest rates and ‘crowding out’ of private investment.
How does gvt. borrow funds from RBA?
Government can instruct the RBA to ‘print money’ to pay the deficit. - monetary financing
Advantage and disadvantage of monetary financing
Advantage: no change in interest rates, no extra public debt
Disadvantage: inflation as a result of an increase in money supply.
How does gvt. borrow money from overseas?
Govt. can do this by getting the RBA to sell new securities in return for foreign currency, which are added to the RBA’s reserves.
Advantage and disadvantages from overseas borrowing
Advantage: No effect on domestic interest rates.
Disadvantages: Government accumulates foreign debt. Affects current account.
Methods of using budget surpluses
- Retiring public debt
- Finance future expenditure
- Repay overseas debt
how does gvt. Retire public debt
Govt. can reduce debt incurred with the private sector by purchasing old government securities previously sold to private sectors
How does gvt. Finance future expenditure
Government can do this or pay for tax cuts in the present. Govt. could also bolster (support, strengthen) existent spending on infrastructure.
advantage of retiring public debt
Interest on government debt is reduced - significant item of recurring expenditure
Advantage of repaying overseas debts
Reduce net foreign debt. Reduce interest payable, thus reducing net primary income deficit on Current Account.
What are the 2 outcomes to the budget?
Structural component (Discretionary Component)
And
The Cyclical component (Non-discretionary Component)
Structural component to the budget outcome
Deliberate changes to government spending/taxation that affect the budget.
Cyclical component to the budget outcome
Changes in the government spending/taxation determined by the level of economic activity.
What is the purpose of the Automatic stabilisers
When the level of unemployment changes, there are automatic changes to the government spending or revenue. - Automatic Stabilisers - help to offset the extremes (booms/recessions) in economic cycle
What are 2 automatic stabilisers
Welfare ; Progressive taxation
Welfare role as an automatic stabiliser
during recession, spending on unemployment benefits increases automatically. Opposite is also true.
Progressive taxation role as an automatic stabiliser
taxpayers pay an increasing proportion of their income in tax as incomes rise during a boom and vice versa. Taxation = leakage, during a boom this helps to constrain economic activity.
What are the 2 economic effects of the budget
Economic activity ; resource allocation
How is economic activity affected by budget outcomes
Changes in the stance of fiscal policy can impact on the level of economic activity
Generally, expansionary fiscal policy → larger budget deficit or lower budget surplus. This will increase the growth in agg. Demand and economic activity.
How is resource allocation affected by budget outcomes
it is Through changes to the taxation system and changes in government spending decisions.
Changes in tax rates or the types of taxes will impact on how resources are allocated between various types of production.
Examples of resource allocation which impacts budget outcomes
Introduction of GST
Reduction in company tax rate
Removal of superannuation tax for 60+ yos
Introduction of carbon tax
