Budgetary policy

Question 1

Government revenues:

Answer 1

• Personal income tax, tax levied primarily on wage and salary income earners.
• Company tax - Flat tax levied on company profits.

Question 2

Government expenditures:

Answer 2

• Current expenditure - A component of AD that represents payments for goods and services that are consumed in the current budget period and which will result in no ongoing benefits in the future. E.g Cleaning services.
• Capital expenditure - A component of AD involving the purchase of capital assets that will have ongoing benefits into the future.

Question 3

Budgetary policy initiatives:

Answer 3

-Personal income tax plan - Significant reductions in individual income tax rates in a number of stages, with the third and final stage to be implemented in 2022-23.
Disposable incomes for the average full-time wage earner in Australia will rise, helping to stimulate consumption and AD, which will in turn help to increase the rate of economic growth,
-Monash freeway upgrade - Higher level of G2 will stimulate AD, economic growth and help to reduce the rate of unemployment as workers are required to work on infrastructure projects. The investment will indeed contribute to inflation, but over time should be reversed as the supply side benefits result in a longer term reduction in inflation and the associated boost to economic growth.

Question 4

Strengths of budgetary policy:

Answer 4

• The impact lag is relatively short compared to monetary policy, meaning it has a greater ability to stimulate economic growth from very low levels given its direct control over taxation and government spending.
• Can target a greater range of economic goals better than monetary policy.

Question 5

Weaknesses of budgetary policy:

Answer 5

• Prone to political bias, especially around election time as policy decisions can made to ‘buy votes’.
• Most budgetary policies are announced in May and only in exceptional circumstances will mini budgets be used.