Assessment task 3

Question 1

Tax income bracket stats

Answer 1

(discretionary/ structural change /long term structural reform)
$158bn tax relief over decade
10m ppl benefit
lowering 32.5% tax bracket to 30% by 2034 for taxpayers earning between $45,000 and $200,000)
94% of taxpayers pay no more than 30c per dollar
Up to $1,080 for low-middle income workers(37,000 - 126,000)
Dual income $2160 per year
FInancial analyst, Ross Greenwood “the economy has got to be strong enough to withstand these surpluses to withstand the tax cut”
Liberal Treasurer Josh Frydenberg, “tax relief would increase household incomes, ease cost of living and expenses and boost spending at local businesses.”
**AD graph
**$950 cash bonuses taxpayers earning less than $80,000 to counter GFC (2009)
gradually dropped to 6.8% (2002-2008) due to strong eco growth due to resource boom (strong demand from china) = created many employment opportunities

***Gini Coefficient from 0.34 to 0.334 in 2009 during GFC

Question 2

Tax income bracket Effect on Distribution Income and Wealth

Answer 2

The progressive tax system is an important and effective automatic stabiliser in ….

Move towards flatter, less progressive income structure → worsen distribution of income → ^Gini Coefficient”

Australia’s Gini coefficient of 0.34 as of 2018 indicates some inequality, which the Organisation for Economic Cooperation and Development (OECD) reports ‘hurts economic growth’ due to less access to education; therefore the proposed tax system is less progressive and in the long term may lead to slowed growth.

Automatic stabilisers - non discretionary (cyclical)
Automatic stabilizers ensure that the budget can always directly respond to changing economic circumstances response to shift and aggregate demand
Detracts money from economy in times of boom - improve income and wealth distribution by taking money from the wealthy in times of boom through the progressive income tax system
Improving welfare spending in times of recession through unemployment
when economy is below trend growth the rise in unemployment = higher government expenditure on unemployment benefits curtailing the negative fluncatation increase spending
Can also worsen cuz eco growth
***Gini Coefficient from 0.34 to 0.334 in 2009 during GFC

Question 3

Tax income bracket Effect on Economic Growth

Answer 3

This discretionary change increases the disposable income for lower income earners (who have higher marginal propensity to consume) to increase the consumption level as well as increase the aggregate demand necessary to stimulate economic growth.

Expansionary impact
Trajectory household spending

Lower taxes → increase household income / disposable spending (makes up of majority of aggregate demand) of lower income earners (whom higher marginal propensity to consume) → ^ consumption/ spending **keynesian economics (AD = C + I + G + ( X - M)) = ^economic growth
Supply side economics → higher income brackets = higher marginal propensity to save can still imrpove economic growth

Automatic stabilisers - helps reduce the volatility of the economic cycle by up to 20% (OECD 1999)

Automatic stabilizers ensure that the budget can always directly respond to changing economic circumstances response to shift and aggregate demand
when economy is below trend growth the rise in unemployment = higher government expenditure on unemployment benefits curtailing the negative fluncatation increase spending

Progressive tax system entails people on higher income = dampens economic growth
***$950 cash bonuses taxpayers earning less than $80,000 to counter GFC (2009)

Question 4

Tax income bracket Effect on Employment

Answer 4

Fiscal policy can play a very significant role to the achievement of employment to the non-accelerating inflation rate of unemployment (NAIRU) point (around 5%).
refers to the rate of unemployment that is consistent with a constant inflation rate

The ^consumption increases aggregate demand = ^ demand for labour (dervied demand) = achieve employment
Unemployment has declined (5% for past 6 months (no longer good enough), probs need to come down to 4% before inflation happening on other advanced economies like Aus)

Question 5

Tax income bracket Effect on Price Stability

Answer 5

To reduce inflation, government have to make discretionary changes in fiscal policy eg reducing spending or changing taxation rates. Increasing tax rates to constrain inflation in short term is unfeasible and time consuming.
Inflation is targeted at 2-3% by the RBA and currently at 1.3%, fiscal policy influences it through discretionary spending. The income tax cuts for over 10 million taxpayers are likely to result in demand pull inflation due to an increased availability of consumer funds that should lead to higher consumption, further encouraged by historically low cash rate of 1.5%. The increase in the consumption component of aggregate demand (AD = C + I + G + X - M) should consequently contribute to demand pull inflation.i.e. more demand for limited supply -> consumers bid up prices of G/S = inflation
Increase disposable incomes –> Increase consumption (C)→ Increase aggregate demand (AD = C + I + G + X - M) → Causes demand-pull inflation i.e. more demand for limited supply -> consumers bid up prices of G/S = inflation

Question 6

Skills package stats

Answer 6

$525m skills package
$4,000 - $8,000 incentive payment to employer
Youth Jobs PaTh programme (2016-2017) $725m
Wage growth 2.75% to 3.25% (higher than rate of inflation)
Unemployment around 5 (2019)
Phillips curve -link w inflation and unemployment is happening fast enough (key assumptions - workers have bargaining power and if it is a monopolistic competition)
Phillips curve possibly become flatter
gradually dropped to 6.8% (2002-2008) due to strong eco growth due to resource boom (strong demand from china) = created many employment opportunities

Question 7

Skills package Effect on Employment

Answer 7

Fiscal policy can play a very significant role to the achievement of employment to the non-accelerating inflation rate of unemployment (NAIRU) point (around 5%).
refers to the rate of unemployment that is consistent with a constant inflation rate

Increase quality of labour → better allocation of resources, achieving economies of scale, and enhancing national competitiveness = ^ standards of living
when people enter the workforce they are
retrain is a strategy of reallocation of reources to boost long term employment
competing for same job = short term unemployment
Reducing cyclical/ structural unemployment = reduce amount of welfare payments = ^quality of life / well being of households
***Youth Jobs PaTh programme (2016-2017) $725m
Unemployment has declined (5% for past 6 months (no longer good enough), probs need to come down to 4% before inflation happening on other advanced economies like Aus)
Okuns Law: to reduce unemployment, the annual rate of economic growth must exceed the same of the rate of productivity growth and labour force increases.

Question 8

Skills package Effect on Distribution of income and Wealth

Answer 8

Reduce unemployment rate → reduce income inequality

Automatic stabiliser- transfer payments

Question 9

Skills package Effect on Price Stability

Answer 9

Indirect measure
This will lead to the Keynesian theory suggests government spending (G) will result in increased employment and higher wages that lead to increased prices of goods and services and thus inflation, presenting one way in which fiscal policy can affect inflation.
However unsustainable inflation will likely result in the decreasing real wages and purchasing power parity as well as international competitiveness due to the high cost of goods and services relative to other countries, potentially slowing economic growth.

Question 10

Business Extended Write off stat

Answer 10

Extended instant asset write off increased to $30,000 (from the $25,000 last year)
Deputy prime minister “Cover an additional 22,000 businesses, employing 1.7 million Australians.”
gradually dropped to 6.8% (2002-2008) due to strong eco growth due to resource boom (strong demand from china) = created many employment opportunities
Cutting comapny tax 27.5% –> 25%

Question 11

Business Extended Write off Effect on Economic Growth

Answer 11

Extending write off → incentivise business investment → ^ aggregate supply/ aggregate demand → long term sustainable eco growth
Greater incentive to businesses to buy capital = long term production capabilities = achieve internal economies of scale (through greater factors of production) = profits over financial years = greater investment in the Australian economy =restore confidence with upward consumer expenditure
The tax cuts and instant asset write off will likely lead to increased competition that encourage firms to become more efficient in production where the allocation of resources can satisfy increased aggregate demand with the same level of aggregate supply
The world bank has recommended investment and capital works and infrastructure as best method to increase economic growth

Question 12

Business Extended Write off Effect on Employment

Answer 12

Fiscal policy can play a very significant role to the achievement of employment to the non-accelerating inflation rate of unemployment (NAIRU) point (around 5%).
refers to the rate of unemployment that is consistent with a constant inflation rate

Trickle down economics: taxes on businesses and the wealthy in society should be reduced as a means to stimulate business investment in the short term and benefit society at large in the long term (part of supply side economics )
WIth currently worsening global economic uncertainty from events like the Trump administrations threat of a trade war and china’s economic slowdown - it is expected that australian firms will likely either hold the tax cuts as cotinugenry reserves or paid as dividends to maintain shareholders.
Unemployment has declined (5% for past 6 months (no longer good enough), probs need to come down to 4% before inflation happening on other advanced economies like Aus)

Okuns Law: to reduce unemployment, the annual rate of economic growth must exceed the same of the rate of productivity growth and labour force increases.

Question 13

Business Extended Write off Economic growth / unemployment

Answer 13

higher productivity means that firms don’t need to hire as many people to produce the same output. hence higher productivity leads to short term unemployment
high eco growth = more g&s demanded –> increase demand for labour and lower unemployment (as formerly discouraged job seekers return to job market to seek work because they believe there are improved opportunities for employment)

Question 14

Skills package Economic growth / unemployment

Answer 14

high eco growth = more g&s demanded –> increase demand for labour and lower unemployment (as formerly discouraged job seekers return to job market to seek work because they believe there are improved opportunities for employment)

Question 15

Business Extended Write off Effect on External Stability

Answer 15

Increase in firms to maximise profits = ^ business tax revenue
Government relies on net foreign exports and business investments and injections into the circular flow of income of the economy

Question 16

Business Extended Write off Effect on Price Stability

Answer 16

Increase revenue from lowered business costs + capacity to invest
Increase investment (I)
Increase aggregate demand (AD = C + I + G + X - M) 
Causes demand-pull inflation i.e. more demand for limited supply -> consumers bid up prices of G/S = inflation

Question 17

Infrastructure stat

Answer 17

$100 bn over decade
GFC $77bn → 2% in eco growth in 2010
**gfc not completely responsible - well regulated financial system asian driven commodity demand and savings of prior governments allowing effective monetary policy were equally contribulatory
**aggregate supply (figure as AS1 → AS2) which lowers costs (P1 → P2) and create and increase in growth (Q1 → Q2)
gradually dropped to 6.8% (2002-2008) due to strong eco growth due to resource boom (strong demand from china) = created many employment opportunities

Consider growing population → increase in demand for infrastructure
Public goods and services (non rival and nonexcludable)

Question 18

Infrastructure Effect on Economic Growth - Multiplier effect

Answer 18

***^ aggregare demand injected into the circular flow of income thus multiplier effect

through the increase in infrastructure spending in the economy, a large portion of money will be used as wages for construction workers providing them incomes. These construction workers will use their incomes to purchase g&s providing profit/revenue for firms in other sectors. these firms will then have the money they need to pay their workers and so income is re=spent in the economy and aggregate demand increases.
Another portion of the $100bn can be spend on purchasing capital equipment which needs to be bio;t. the demand for capital equipment = more workers to build capital equipment. workers use money to incest = spend on consumption.
Therefore, Infrastructure spending lead to money being continually re spent.

Question 19

Infrastructure Effect on Economic Growth

Answer 19

Should increase aggregate supply from the eliminations of congestion bottlenecks (from the improved efficiency), resulting in greater productivity capacity stimulating sustainable economic growth and employment without the inflationary pressures.

Spending = reduce traffic congestions / removing Australia’s capacity constraints on congested roads /reducing production/transport bottlenecks → ^ AS (^ efficiency + productivity through elimination of congestion bottlenecks = reduce constrain of output) = less inflationary pressures
Lower congestions also means lower costs to firms by and hence greater production capacity → ^efficiency,

Question 20

Infrastructure Effect on Employment

Answer 20

Relevant construction projects will see an increasing need for employment in skilled labour
Hiring of construction labor = ^ demand for labour = ^ wages
increase the dynamic efficiency fo the australian workforce
The world bank has recommended investment and capital works and infrastructure as best method to increase economic growth
Infrastructure spending → more demand for labour → employment increases → tighter labour market → higher wages → $ of g&s → increased inflation
Unemployment has declined (5% for past 6 months (no longer good enough), probs need to come down to 4% before inflation happening on other advanced economies like Aus)
Okuns Law: to reduce unemployment, the annual rate of economic growth must exceed the same of the rate of productivity growth and labour force increases.

Question 21

Infrastructure Economic growth / unemployment

Answer 21

(infrastructure short term effects)
higher productivity means that firms don’t need to hire as many people to produce the same output. hence higher productivity leads to short term unemployment

Question 22

Infrastructure Effect on price stability

Answer 22

eliminate bottlenecks → ^ productivity → ^ AS (without inflationary pressures)
Price stability remains a key economic objective of the government to prevent the detrimental effect of both hyperinflation and deflation.
Limited in effectiveness in achieving economic objectives such as constraining inflation
To reduce inflation, government have to make discretionary changes in fiscal policy eg reducing spending or changing taxation rates. Increasing tax rates to constrain inflation in short term is unfeasible and time consuming.
Budget can decrease inflation by reducing expenditure to decrease cash flow in the economy.
It cannot however, increase taxation as this may increase cost inflation.
By reducing family payments or expenditure, the budget can bring about a decrease in demand inflation.
This will lead to the Keynesian theory suggests government spending (G) will result in increased employment and higher wages that lead to increased prices of goods and services and thus inflation, presenting one way in which fiscal policy can affect inflation.
However unsustainable inflation will likely result in the decreasing real wages and purchasing power parity as well as international competitiveness due to the high cost of goods and services relative to other countries, potentially slowing economic growth.
Haven’t reached target of 2-3% inflation for past 3 years, longest period w this low inflation → creates uncertainty (from trade tension)
The budget can decrease inflation by reducing exponential to decrease cash flow and the economy it cannot however increase taxation as this may increase cost inflation by reducing family payments for exponential but you can bring out about a decrease in demand inflation.
v standards of living
v PPP
v AD
V international competitiveness

Question 23

Infrastructure Effect on price stability

Answer 23

Inflation- 1.9% (2019) rba 2-3%
Infrastructure spending → more demand for labour → employment increases → tighter labour market → higher wages → $ of g&s → increased inflation
High levels of inflation → reduce competitiveness, depreciate - investors lose confidence
Global economy is slowing (Brexit, China, emerging markets and the US )

Due to recognition, decision and impact lag fiscal policy takes a substantial amount of time to implement thus infrastructure stimulated growth cannot constrain inflation as well as monetary policy.

Question 24

External stability

Answer 24

Can improve external stability (paying off debt) through contractionary stance (less spending)
**pay off debt = V international competitiveness and improve BOP
As external stability hinder eco growth thus aggregate demand will cause cyclical unemployment
2000s surplus helped reduce 5% of net foreign debt
***pitchford thesis → large CAD is not a problem as funds from overseaas will supplement domestic funds to neable higher incesment,
205.5% of private debt to gdp (2017, OECD)
40.7% og government debt to gdp (2018, ADFM)
Therfore not harmful
The government can restrict Imports to improve account deficit have a current but government prefers freer trade
ToT- drop in export price - lower revenue
USe of surprise
Depositing it to RBA
Repaying public/ overseas debt (eliminate net debt by 2030)
Finance future expenditure
Increase national savings
Since net debt doubled between 2013-2017
increase taxation or decrease expenditure (tightening) creating smaller deficit or larger surplus (targeting CAD)
stabilize and shift aggregate demand
counter cyclical instrument to smooth out movements in aggregate demand
increase unemployment

Question 25

Budget Other facts

Answer 25

Australian economy slowing (two major trading partners - China and the US – suffering growth setbacks)
Frydenberg: “The fundamentals of the Australian economy are sound but there are genuine and clear risks emerging both at home and abroad.”
The infrequent nature prevents it from immediately responding to crises is
slow and difficult to implement -significant time lag
“too optimistic” (ross gittins) predictions (big spending with big tax cuts)
Largely influenced by political considerations
Effective **during times of crisis

Question 26

Economic growth

Answer 26

is an increase in the value of goods and services produced by an economy over a period of time. it is measured by a percentage change in real GDP (gdp adjusted for inflation. 2.3% (2019)

Question 27

Keynesian aggregate demand theory

Answer 27

GDP/ Y (national income)/ AD = C + I + G + (X-M)

Question 28

Aggregate supply

Answer 28

(C + S + T)

Question 29

Skills package Effect on Price Stability

Answer 29

Indirect measure
Full employment → efficient allocation of resources → ^ quality of life → ^ wages → ^ g&s → cost push inflation + demand pull inflation
This will lead to the Keynesian theory suggests government spending (G) will result in increased employment and higher wages that lead to increased prices of goods and services and thus inflation, presenting one way in which fiscal policy can affect inflation.
However unsustainable inflation will likely result in the decreasing real wages and purchasing power parity as well as international competitiveness due to the high cost of goods and services relative to other countries, potentially slowing economic growth.

Question 30

Graph

Answer 30

**as shifts to _ to _ it can be seen ..

Question 31

Intro

Answer 31

The government’s federal budget is a countercyclical fiscal policy tool in which outlines the allocation of resources within the economy in the future years.
This year’s budget is expected to have a surplusBlNCE ( taxation > government expenditure) with a mildly contractionary stance (reducing government expenditure for a larger surplus) of $7.1 billion which makes up 0.4% of GDP with the aim of achieving the economic objectives of economic growth, full employment and price stability.
The government’s discretionary and non-discretionary spending on income tax cuts, skills package, business write-offs and infrastructure will likely counter the effects during a current global economic downturn (according to IMF) for a sustained growth in the Australian economy.

Question 32

Income Tax paragraph

Answer 32

To achieve the economic objective of economic growth, the liberal treasurer Josh Frydenberg presents adjustments to the progressive tax system from 32.5% tax bracket to 30% by 2034 for taxpayers between $45,000 and $200,000 and $158 billion tax relief to “increase household incomes, ease cost of living and expenses and boost spending at local businesses”.

Hence, this discretionary change can increase the the disposable income for middle to low income earners, who have a higher marginal propensity to consume, to increase the consumption level as well as increase the aggregate demand necessary to stimulate economic growth (keynesian theory) and overall increase in living standards.

Demonstrated in figure one as the changes in the taxation rates causes AD0 to shift to AD1 (from Y0 to Y1) increasing the real national output.

However, it is also important to consider that the new flatter, less progressive structure may worsen the distribution of income since the progressive income tax system usually acts as an effective automatic stabiliser in times of volatile economic cycles.

Regardless the tax relief may indirectly achieve other economic objectives of full employment that increases the derived demand for labour and prevents deflation through demand-pull inflation.

Question 33

Skills package paragraph

Answer 33

Fiscal policy also aims to achieve employment to the non-accelerating inflation rate of unemployment (NAIRU) point (around 5%).

Though the current rate of unemployment is situated at 5.2% (TE, 2019) but as Okun’s Law suggests, with Australia’s annual rate of economic growth of 2.3% not exceeding productivity growth and labour force increases, it cannot help eliminate all cyclical unemployment.
Next financial year’s budget plans a $525million spending on skills package and a $4,000 - $8,000 incentive payment to employers to help achieve the economic objective of full employment.

This direct intervention of the government was proven effective as during the global downturn in 2016-2017, the Youth Jobs PaTH Programme allowed Australia’s unemployment rate to only increased by 1.8% (compared to United State’s 3-6%).

Furthermore, the skills package increases in the quality of labour that results in better allocation of resources (achieving economies of scale and specialisation) which can enhance Australia’s national competitiveness, and reducing structural unemployment.
This may also result in higher standards of living, improving not only Australia’s economic growth but also economic development.

Question 34

Business and Infrastructure paragraph

Answer 34

The best methods to increase economic growth is to have infrasturcture and capital spending (world bank).
The extended instant asset write-off increased to $30,000 (from $25,000) and cutting of company tax to 25% (from 27.5%) for incentivise small to medium businesses (SME’s) investment to buy capital. Which can allow firms to achieve internal economies of scale thus increase long term productive capabilities and generate long term sustainable economic growth.

Whereas, the $100 billion infrastructure expenditure over the next decade is likely to not only stimulate economic growth but full employment and somewhat long term price stability.
Similar to the $77 billion commitment to infrastructure in 2010 that contributed to 2% more in economic growth, the 10-year infrastructure investment should increase aggregate supply from the eliminations of congestion bottlenecks (from the improved efficiency), resulting in greater productivity capacity stimulating sustainable economic growth and employment without the inflationary pressures (multiplier effect).

However, it is important to keep in mind that fiscal policy takes a substantial amount of implementation time due to the decision and impact lag and the infrastructure multiplier effect cannot control inflation as well as the independently regulated monetary policy.

Regardless, the infrastructure spending may likely help achieve the economic objectives of full employment, price stability and sustain short term and long term economic growth.

Question 35

Conclusion

Answer 35

Overall, the 2019-2020 fiscal budget of the $7.1 billion in underlying cash balance terms, will likely have expansionary impacts on the Australian economy achieving the economic objectives of economic growth, full employment and long-term price stability to ensure a strong and prosperous economic future for Australia.