Budgetary policy & 'mon pol'? Flashcards
Budgetary Policy
Relates to the anticipated changes in the Federal Governments Revenue (Receipts) and expenses (Outlays) for the year ahead.
Budget Outcomes
refers to the overall type of budget as determined by whether it is a deficit (where receipts are less than outlays) or surplus (where receipts are more than outlays)
Types of Revenue - personal income Tax **
A direct tax paid by individuals who earn incomes from wages, salaries, rent; interest and dividends. Income tax is usually deducted by firms from the pay packets of employees before they are paid.
Raises 43% of federal Gov Revenues
Types of Revenue - Capital Gains Tax **
Levied on real profits made form the sale of capital assets such as land and shares.
Types of Revenue - Company Tax **
a flat or proportional tax levied directly on business profits.
Raises 20% of Budget revenues
Types of expenditure - Social and Welfare Outlays **
Government means and assets-tested cash transfer payments to neediest groups. Benefits include those to aged, unemployed job seekers etc. Aiming to redistribute final incomes more equitably.
Claims 35% of budget expenses
Types of expenditure - Health spending **
Provision of medical attention and incorporates consumption outlays on running expenses and capital infrastructure within the public health system
claims 16% of Budget outlays
Bracket Creep
occurs when recipients of rising income gradually move into higher income tax brackets, which raise their tax burden
Automatic Stabilisers
The changes in tax revenues collected and welfare outlays that are built into the budget and operate correctly in a countercyclical way to help stabilise AD, without the treasurer deliberately changing their level or announcing new policies. Thus are programmed to change as a result of the ups and downs in level of economic activity.
Discretionary Stabilisers
In the budget that are the deliberate changes in tax rates, the tax mix and direction and composition of budget outlays specifically announced by the Treasurer to steady economic activity in response to developments.
Headline balance
Def:
refers to the difference between the total cash value of budget receipts minus the cash value of total outlays from all sources, without the removal of items that are affected by once-off events such as asset sales and debt repayments.
The budget outcome will look more impressive that it is, adding on anticipated value of once-off events. The figurer is then not useful for determining the impact of the budget on gov borrowing or national savings levels.
Underlying Balance
Def:
represents the headline balance after subtracting the value of once-off volatile items, such as asset sales, special loans to state governments or debt repayments by other governments.
this more clearly reflects gov financial position with less scope for political position. Indicating how much money is being drained or pumped into the economy. used to determine if the Gov is running a a overall down or adding to national savings debt
the effect of terms of Trade on the budget outcome
A downturn in terms of Trade will cause Prices of exports to decrease relative to Imports. This will then decrease the price of what companies exports. this decreases profits, decreasing company taxes, and decreasing Government Revenue. to ultimately decrease surplus and increase deficit.
Fiscal outcome
Fiscal balance refers to the strong and sustainable financial position for the Government budget where, over the medium term (such as the duration of the business cycle), the budget surpluses generated in booms are more than sufficient to pay for or cover the budget deficit in recessions without the need to borrow or commit future generations to heavy debt repayments.
Direct tax
Levied as a proportion of income received by individuals or companies
- personal income taxes
- capital gains taxes
Indirect Tax
Added onto the price of a good or service at the point of sale, making the item more expensive
- GST
- Excise duty
- Customs duties or tariffs
- Carbon tax
Regressive tax
a tax that tends to exaggerate income inequalities because low incomes are taxed at higher rates than high incomes. Indirect taxes on necessities (such as excise on tobacco, alcohol and petrol) are generally regarded as as regressive
Progressive tax
designed to redistribute income more evenly. The tax rate increases as personal income levels increase; e.g.. personal income tax and capital gains tax. Opposite to regressive tax.
Dirty Float
Occurs in the foreign exchange market when the RBA becomes a net buyer or net seller of the Australian dollar with the intention of lifting or depressing the exchange rate. Served for times where the dollar changes erratically and uninformed, leading to uncertainty in international transactions
Dirty Float and lifting the Exchange rate
If the dollar falls at an erratic and misinformed way, the RBA intervenes to lift the exchange rate, increasing net purchases, reducing sales.
RBA increases it demand raising the exchange rate, causing appreciation as currency becomes scarcer. smoothing the dollar and arresting the fall.
Dirty Float and lowering the Exchange rate
If the dollar rises at an erratic and misinformed way, the RBA intervenes to increase net sales of the currency. Creating downwards pressure, weakening the dollar and making exports and capital inflow more attractive against imports and capital outflow. AD increases and CAD reduces.
Risk of igniting inflationary pressures
Monetary Policy
An AD policy operated by the RBA, designed to regulate Business activity and does this by changes to the official Cash Rate which in turn impacts the cost, Availability and demand for borrowed funds.
Persuasion
the third instrument of the monetary policy involving the RBA influencing AD via statements that indicate future movements in the Official cash rate. Such as talking up or down the level of borrowing, spending and economic activity.
eg. With out actually moving Interest rates:
RBA saying interest rates with increase will have contractionary effects
The RBA saying interest rates with decrease will have expansionary effects.
Aims of Monetary policy
- Stability of the currency (low inflation)
- Strong and sustainable eco growth
- Full employment
Aim of the Monetary policy - Stability of the currency (low inflation)
Inflation targeting: means that the RBA’s operational goal is to apply monetary policy to achieve an annual average inflation rate between 2-3% over the duration of the business cycle.
Aim of the Monetary policy - Strong and sustainable eco growth and full employment
Only brought to attention when goal of Low inflation is being achieved/ under control. As low inflation is seen as a prediction for achieving the other goals. Limiting inflation is the best way to create conditions that maximise sustainable eco growth and minimise cyclical unmep.
Transmittion Mechanisms/ Channels
Ways that higher interest rates work to restrain inflation:
- high interest rates slow spending:
- higher interest rates push up the Aus dollar :
- Higher interest rates depress inflationary expectations:
Process of Changing the Cash rate - contractionary stance
- RBA announces increase in official cash rate
- RBA begins Open Market operations by becoming a net seller of Government Bonds and securities in Short term money market (overnight Money market)
- shortage of cash in OMM drives up interest rates
- higher cash rate spreads to other retail interest rates via “ripple effect”. high costs passed on
- Higher interest rates impact Economy via transition Mechanisms/channels
Process of Changing the Cash rate - Expansionary stance edit**
- RBA announces decrease in official cash rate
- RBA begins Open Market operations by becoming a net buyer of Government Bonds and securities in Short term money market (overnight Money market)
- surplus of cash in OMM drives down interest rates
- lower cash rate spreads to other retail interest rates via “ripple effect”.
- Higher interest rates impact Economy via transition Mechanisms/channels
Automatic Stabilisers examples edit
- most tax receipts such as revenues from PAYG, GST, excise, CGT, company tax,
- expenses such as welfare benefits
Discretionary Stabilisers examples edit
The treasurer could alter existing tax rates on - incomes - company profits - introduce brand new taxes - abolish taxes Or alter basis/levels of Gov outlays in areas of e.g.: - health - welfare - infrastructure - defence
Crowding out
Suggests that there may be a clash during a recession or slowdown between large, expansionary budget deficits financed locally to increase AD, and an expansionary mon pol designed to bring down interest rates to raise AD.
Ways to finance a deficit
- Overseas borrowing
- borrow from the RBA
- borrow from the Australian Public or Private sector
Transmittion Mechanism - high interest rates slow spending
they slow eco activity as saving increases and reduced level of credit-sensitive spending. Slowing AD, reduced demand inflation and ease G and S shortages
Transmittion Mechanism - higher interest rates push up the Aus dollar
higher domestic interest rates cases appreciation in the AUD. As Australia has become more price attractive to foreigners who seek better interest returns. The increased demand relative to supply in the foreign exchange market causes appreciation of the currency
Transmittion Mechanism - higher interest depress inflationary expectations
higher interest rates slow inflation by reducing inflationary expectations. As people become confident the RBA will not let inflation take hold, overall improving domestic economic stability.
contractionary monetary policy
used to slow or reduce AD, eco activity and volume of money
Contractionary budget
a budget where the government deliberately slows AD by a fall in the value of its proposed outlays relative to its receipts
Expansionary monetary policy
When the RBA attempts to expand AD through cuts in interest rates, the buying back of government securities, or moves to bring about a depreciation of the exchange rate
Expansionary budget
a budget where the government increases AD by a rise in the value of outlays relative to its receipts. It will be especially expansionary if any deficit is financed by borrowing from the RBA and there is a reduction of outlays on imports.
Compatibility of MonPol and BudPol
- current setting for mon pol is expansionary and has the historic lowest Official cash rate
- 2016-17 budget Deficit is 37.1 billion, 39.9 billion was 2015-16
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Cash rate
Edit
countercyclical
application of monetary policy means that during a slowdown, the RBA will cut interest rates to increase AD and lift eco activity, but raise interest rates during an inflationary upturn or boom to slow AD and control inflation
