AOS 4a

Question 1

Budgetary policy:

Answer 1

The action by the government in collecting revenue and spending the proceeds. The treasurer delivers a budget that states how revenue will be collected and what it will
be spent on.

Question 2

Aims of budgetary policy

Answer 2

Budgetary policy can be used to promote AD and pursue the government’s economic
goals including:
◦ Low inflation
◦ Strong and sustainable economic growth
◦ Full employment

Question 3

Budget revenue: Direct taxes

Answer 3

Personal income tax
◦ Capital Gains Tax (CGT)
◦ Medicare levy
◦ Withholding tax
◦ Company tax
◦ Fringe Benefits Tax (FBT)
◦ Superannuation fund tax
◦ Petroleum resource rent tax

Question 4

Budget revenue: indirect taxes

Answer 4

Excise duty
◦ Customs duty or tariffs
◦ Goods and services tax (GST)

Question 5

Budget revenue: non-tax revenue

Answer 5

Repayments of loans by states
◦ HECS loan repayments
◦ Licence revenue
◦ Rentals, profits and dividends from GBE’s

Question 6

Budget expenses

Answer 6

Social security or welfare outlays
Health
Defence
Education
Transport and communications
Housing
General public services
Public debt interest
Net payments to other governments

Question 7

Government expenses

Answer 7

Government consumption spending (G1)
◦ Payments of wages and salaries for government employees
◦ Day to day operating expenses for departments such as defence, education and health

Government investment spending (G2)
◦ Spending on building, social and economic infrastructure
◦ Spending on equipment

Government transfer payments
◦ Paid to individuals – mainly welfare benefits
◦ Not considered G1 or G2 as it is the consumer (C) who spends the money

Question 8

Budget outcomes: Balance budget

Answer 8

Revenues are the same as expenses. It is neither expansionary or contractionary.
◦ Has little effect on production, employment and inflation

Question 9

Budget outcomes: Budget deficit

Answer 9

Revenue is less than expenditure ○ It is expansionary ○ It stimulates production, employment and inflation.
○ Financed by:
Borrow from RBA, Borrow from public or financial
sector, Overseas borrowing

Question 10

Budget outcomes: Budget surplus

Answer 10

Revenue exceeds expenditure ○ It is contractionary ○ It slows production, employment
and inflation
○ What to do with the surplus:
Repay debt, Save with the RBA, Add to balances in special savings funds

Question 11

headline balance

Answer 11

Represents the difference between cash outlays and cash revenues.

Question 12

Underlying cash balance

Answer 12

Represents the difference between cash outlays and cash revenues but subtracts the value of one-off items such as asset sales that distort the true position.

Underlying balance gives a truer indication of the budget position and the effects it will have on the economy.

Question 13

Fiscal balance

Answer 13

Fiscal balance is arrived at through an accrual approach — that is, it takes into account the impact of financial transactions even when they are deferred and there is no transfer of cash.
Over the duration of the business cycle, the government aims to have a fiscal balance by running surpluses during booms that are sufficient to pay for deficits that occurs during recessions.

Question 14

Net Operating Outcome

Answer 14

Net operating outcome attempts to distinguish the effects of current and capital spending on the budget outcome. It is calculated by deducting net new capital investment from the underlying outcome (such as spending on infrastructure).
Helps to determine how well the government is meeting its recurrent obligation from annual revenue.

Question 15

Automatic Stabilisers

Answer 15

Built in or cyclical stabilisers. They operate in a countercyclical way without the treasurer deliberately changing their level or introducing new policies.
Tax receipts and welfare payments to the unemployed act as automatic stabilisers.

In a downturn, the level of tax receipts will automatically fall due to higher unemployment, lower company profits and less sales of goods and services. Budget outlays will also automatically increase because of higher unemployment. This will tend to result in an expansionary budget deficit.

In an upswing, the level of tax receipts will automatically rise due to higher employment, higher company profits and more sales of goods and services. Budget outlays will also automatically decrease because of lower
unemployment. This will tend to result in an contractionary budget stance.

Question 16

Discretionary stabilisers

Answer 16

Discretionary stabilisers in the budget are deliberate decisions by the Treasurer to alter tax rates or budget outlays. Sometimes introduced when automatic stabilisers are not enough to deal with prolonged recessions or booms.
e.g 2016 small business tax cut to 27.5%

Question 17

DIFFERENCES BETWEEN ACTUAL AN
ESTIMATED BUDGETS

Answer 17

There are usually differences between the actual and estimated budget outcomes usually, because forecasts for economic activity are never entirely accurate. Included in each year’s budget documents are the forecasts for the performance of the economy upon which the budget outcome is based.

Question 18

FINANCING A DEFICIT

Answer 18

When the budget runs at a deficit, the government needs to raise funds to cover the shortfall between receipts and outlays. To do this, the Treasury will issue bonds
and the purchasers of these bonds or notes essentially become lenders to the government.
They do this by:
Selling Bonds to the RBA
Selling Bonds to Australian investors
Selling Bonds to overseas investors

Question 19

SELLING BONDS TO THE RBA

Answer 19

This is the most expansionary way of financing a budget deficit because that was not previously in circulation in the economy has now been released.

Question 20

SELLING BONDS TO AUSTRALIAN
INVESTORS

Answer 20

Least expansionary method of financing a deficit because it results in crowding out the private sector.
An increase in bond sales puts upward pressure on on interest rates as demand for money in financial markets increases.
Consumption and Investment falls with higher interest rates, negating expansionary impact of a deficit.

Question 21

SELLING BONDS TO OVERSEAS
INVESTORS

Answer 21

Selling bonds to overseas investors is borrowing from overseas to financial deficit.
Results in capital inflow which puts upward pressure on the value of the AUD and has a negative impact on net exports and AD, negating the expansionary impact of a deficit.

Question 22

PROBLEMS WITH A DEFICIT

Answer 22

Budget deficits can lead to a build up of public debt over time. This can impact on Australia’s credit rating, borrowing costs and even larger deficits.
The government needs to balance running deficits to achieve it’s goals without the burden on future generations to repay what is a growing debt.

Question 23

DEALING WITH A SURPLUS

Answer 23

A surplus can be used to:
Invest in financial markets
Repay existing debt
Develop future funds with a specific purpose (eg Education Investment Fun)

Surpluses can result in crowding in of the private sector. This is where the government becomes a net lender, creating a surplus of finds in financial markets and putting
downwards pressure on interest rates. This can increase consumption and investment and upward pressure on AD.

Question 24

FISCAL CONSOLIDATION

Answer 24

Fiscal consolidation refers to a government reduces is expenses or raising its revenue in order to reduce a deficit or return a budget to surplus.

Question 25

Strengths of budgetary policy

Answer 25

Can target specific sectors of the economy
Effective in stimulating AD during a downturn
Target a greater range of economic goals than monetary policy
Automatic stabilisers are effective
Responsive to the needs of the electorate
Impact lag is relatively short
Includes ‘checks and balances’ by parliament
Open to public scrutiny

Question 26

Weaknesses of budgetary policy

Answer 26

SUBJECT TO POLITICAL PRONE TO POLITICAL BIAS IMPLEMENTATION LAG HURDLES
RELATIVELY INFLEXIBLE
LESS EFFECTIVE THAN MONETARY POLICY AT RESTRICTING AD DURING A BOOM

Question 27

Links to domestic economic growth
strong and sustainable growth

Answer 27

Australia’s real GDP growth rate is rising, with the year er
Dec 21 growth rate reaching 4.25%. (However 1.5% of th
growth came from government spending and consumptü
investment growth has been supported by government c
and incentives).
The spending outlined in the budget is likely to contribut
continued strong growth rates.

Question 28

Links to domestic economic growth
Low inflation

Answer 28

We currently have a higher than desireable CPI growth rate as a result of adverse supply side conditions (Eg: War in Ukraine and disruptions to supply chains).
The RBA target of 3-4% over the business cycle (medium term) is still achievable, particularly as some of the inflation pressures are likely to be temporary.
Higher inflation can mean more income for the budget (For example, though increased GST receipts). This can improve the budget outcome and reduce the need to take on debt. However inflation can impact confidence and AD may fall, impacting growth and employment.

Question 29

Links to domestic economic growth
Full employment

Answer 29

The current unemployment rate of $5 relative the NAIRU suggests that the Australian economy is performing well concerning the goal of full employment and the target is being achieved.
The current budget holds initiatives such as training and incentives for small businesses that should keep the labour market strong.
Reaching full employment may mean that the budget outcome is improved and growth in public debt may slow.

Question 30

Links to domestic economic growth
Budget impact on debt

Answer 30

Gross debt is expected to peak at 44.9% of GDP of $1 169 billion by 30 June 2025, four years earlier than previously forecasted.
For perspective, the US federal debt was around 123% of GDP by 2021.
We expect the structural debt to continue, so public debt is likely to continue to rise.

Question 31

2022-2023 Budget

Answer 31

Helping small businesses by giving a $21 billion in tax cuts. This can improve the incentive on capital expenditure, to see business interest in capital, equipment or technology.

Cost of living tax offset- over 10 million individuals will
receive a one off $420. This will increase disposable income for middle to low earners. This means continual growth in consumption and increase in AD.

Fuel excise relief- for 6 months government to reduce excise by 50%. Will see price of diesel cut from 44.2c per litre to 22.1c per litre. Improved consumption as consumers will pay less for fuel giving them larger disposable income to spend on other things. Will also improve business investment as cost of buying materials in Australia will be cheaper like postage and customs duty.

More affordable childcare- $10.3 billion spent to save on average $2260 per year for families. Improves AD by improving consumption can spend that money on other things. (Disposable income).