Chapter 10 - The nature and operation of budgetary policy Flashcards
What is the definition of Budgetary Policy?
Budgetary Policy (Fiscal Policy): is the manipulation of the level and composition of Federal Government receipts and outlays in order to assist in the achievement of its economic and social goals for Australia.
What are the longer term goals of budgetary policy?
- Strong and Sustainable Economic Growth
- Low Inflation
- Full Employment
- External Stability
- Greater equity in the distribution of Income
“The government’s fiscal policy is to be directed at maintaining the ongoing economic prosperity and welfare of the people of Australia and is therefore to be set in a sustainable medium-term framework”
What is the composition of the Budgets Receipts?
Receipts
What is the composition of the budgets outlays?
Outlays
What are the 3 Budget Outcomes?
Budget Balance: income (receipts) = expenditure (outlays)
Budget Deficit: income (receipts) < expenditure (outlays)
Budget Surplus: income (receipts) > expenditure (outlays)
What is the Headline Cash Outcome?
Headline Cash Outcome: is the total cash received by the federal government less the total cash paid, however, this outcome can provide a misleading picture about the stance or impact of budgetary policy because it includes cash flows that do not directly impact on the economy.
What is the Underlying Cash outcome?
Underlying cash outcome: seeks to exclude the cash flows that are included in the headline cash outcome but that do not directly impact on the economy.
Excludes the following;
- Future Fund Earnings
- Net Cash flows from investment in financial assets (includes the sale of GBEs)
What is ‘The Fiscal Outcome’?
The Fiscal Outcome: relates to revenue that has been earned over the relevant period less expenses that have been incurred over the period. It provides the most accurate picture of the Government’s Financial performance.
What are Discretionary Stabilisers?
Structural components of the budget and changes of this nature are often referred to as ‘discretionary stabilisers’.
“Discretionary Stabilisers are deliberate policy decisions designed to change receipts or outlays in an effort to influence economic activity.”
e.g. a decision to raise company tax rates
What are Automatic Stabilisers?
Cyclical components of the budget are sometimes referred to as automatic stabilisers.
“Automatic Stabilisers are changes to the budget that occur automatically with changes in the level of economic activity.”
e.g. lower levels of economic activity equals less revenue for the government due to lower amounts of tax collected and more expenditure on things such as welfare.
What is Fiscal Drag?
Fiscal Drag (bracket creep): occurs during times fo inflation for countries with a progressive tax system, When inflation occurs it results in a decrease in real wages and thus workers seek to protect their ‘real wages’ by seeking to increase their nominal wages, thus pushing some workers into a higher tax bracket.
Explain Actual vs estimated budget outcomes.
There will typically be a difference between the estimate budget outcome (release at the time of budget speech in May) and the actual budget outcome , for any given year, because the estimated outcome depends heavily on forecasts for economic growth, that are never 100% accurate.
What are the differences between an expansionary budget and a contractionary budget?
- Balanced Budget is neither contractionary nor expansionary in terms of its impact on the economy
- Budget Deficit is generally expansionary in terms of its impact on the economy
- Budget Surplus is generally contractionary in terms of its impact on the economy
If the government delivers a bigger surplus than the year before, then it is likely to be considered a more contractionary budgetary policy than a smaller surplus. In contrast, a bigger deficit is likely to be more expansionary and a smaller deficit less expansionary.
How does the government finance a deficit?
When the budget is in deficit it means that the government needs to raise funds to finance the difference between receipts and outlays.
- Selling bonds to the RBA (most inflationary)
- Selling bonds to Australian Investors (least expansionary)
- Selling bonds to overseas investors (exerts upward pressure on the price of the AUD)
What are the problems associated with a budget deficit?
- Impact on Government Credit ratings
- Higher borrowing cost leads to a larger deficit
- In order to fund an increasing deficit, contractionary budget measures lead to negative consequences for economic and employment growth.
