Chapter 11 - Budgetary policy in action Flashcards
How does the budget address economic problems?
Between the years 1990 and 2007-8, budgetary policy was not specifically used to manage or manipulate the ‘business cycle’. While automatic stabilisers did work in a counter-cyclical fashion, the budget was rarely used to contract the economy when growth (or inflation) was too high, nor expand the economy when growth was too low. This counter-cyclical arm of policy was left to the RBA and monetary policy. However, this macroeconomic policy approach has changed in light of economic developments since 2008.
Accordingly, over 2008-9, the government adopted a much more interventionist or Keynesian approach to budgetary policy.
What is the current government’s Fiscal Strategy?
The current government’s medium term fiscal strategy is to achieve budget surpluses, on average, over the course of the economic cycle. Key Goals:
- Invest in a stronger economy by redirecting government spending to quality investments that help boost productivity and workforce participation.
- maintain strong fiscal discipline to reduce the Government’s share of the economy over time in order to free up resources for private investment to create employment and boost economic growth
- strengthen the Governments balance sheet by improving net financial worth over time
What is the Government’s Budget Repair Strategy?
Budget Repair Strategy that is designed to assist with the achievement of its goal to achieve budget surplus on average over the course of the business cycle. The ‘Budget Repair Strategy’ involves the creation of budget surpluses to the point where they reach 1% of GDP by 2023-24, also;
- any new spending initiatives will be more than offset by spending reductions elsewhere in the budget
- any cyclical improvement in the budget outcome will be ‘banked’ rather than spent
- a clear path back to surplus is underpinned by decisions that build overtime
How does budgetary policy relate to low inflation?
The problem of high inflation is primarily tackled by the RBA, however, budgetary policies that can assist the RBA are;
- The government can decide to increase the size of the structural surplus or reduce the size of the structural deficit relative to the previous year. - discretionary policy decisions
- If inflation is largely demand driven, the government can implement policies that are designed to restrain growth in AD.
- If inflation is largely supply-driven, the government can implement supply-side initiatives designed to alleviate cost pressures
- To reduce inflation over the longer term, the government could boost investment spending on infrastructure or capital works, to assist in boosting the nation’s productive capacity
Explain how budgetary policy can influence strong and sustainable economic growth.
The delivery of a budget deficit (expansionary) is expected to assist in the achievement of economic growth as the Government is injecting net funds into the economy.
The initial budget stimulus has the potential to multiply its impact throughout the economy.
Specific initiative that were introduced to stimulate AD and economic growth:
- Increased transfer payments (pensions & family payments 2012-13)
- Personal tax cuts (tax free threshold to $18,200 from $6000 in 2012-13)
- Reductions in company tax rate (30% to 29% proposed)
- Accelerated depreciation allowances (investment in R&D or capital equipment 2012-13)
Explain budgetary policy and full employment.
Budgetary Policy is the primary policy weapon used to tackle the problem of Unemployment. The Government can deliver more expansionary budgets to stimulate AD and thus employment as well as implementing specific initiatives such as:
- a work for the dole scheme
- increased funding for better job placement
- funding for the unemployed to start a business
- increased expenditure on training and education
- increased business tax concessions
Explain the relationship between external stability and budgetary policy
External Instability manifests itself in the form of a very high and unsustainable level for the current deficit account (CAD) and increasingly unsustainable levels of Net Foreign Debt (NFD). There are two ways to reduce pressure on the CAD and NFD:
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Increase National Savings
- Increased incentives to invest in Superannuation (2012-13)
- Tax concessions on savings
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Increasing Australia’s share of world income
- favourable tax arrangements for exporters
- export development grants
- supply side measures that reduce productions costs
Explain budgetary policy and its influence on equity in the distribution of personal income
Budgetary policy plays a primary role in government efforts to achieve;
- ensure all Australians have sufficient income to purchase goods and services that enable them to have a dignified standard of living
- to ensure no persons or households in Australia are experiencing absolute poverty
- to ensure that huge or obscene inequalities in incomes are avoided
Initiatives;
- means testing transfer payments
- an increase in the luxury car tax from 25% to 33%
- increase the progressivity of the tax system
- temporary budget repair tax or levy of 2% on those earning over $180,000 a year (2014-15)
Define Private Household Income
Private Household Income: primarily the wages, salaries, profits and interest that people earn for their contribution to production (highest gini coefficient)
Define Gross Household Income
Gross Household Income: this is private household income + direct cash benefits and allowance (government). The government uses tax and transfer system to further manipulate incomes in an effort to achieve greater equity.
Define disposable household income
Disposable Household Income: defined as Gross Household Income less direct taxes. These direct taxes are the single biggest revenue item for the Federal Government and they are specifically designed to force higher income earners to accept a relatively bigger tax burden than lower income earners.
Define Social Wage Income
Social Wage Income: defined as disposable household income + indirect government benefits or concessions. (lowest Gini coefficient)
Define Final Income
Final Income: social wage income less indirect taxes
Explain the relationship between budgetary policies and living standards
Many instruments are used to rectify market failures and are delivered through the budget and therefore form a key component of budgetary policy;
- the provision of public goods (e.g. defence)
- the provision (or support) of goods with positive externalities in consumption (education and healthcare)
- the provision (or support) of goods with positive externalities in production (tax concessions for R&D expenditure)
- taxes on goods with negative externalities in consumption (tobacco and alcohol)
- taxes on goods with negative externalities in production (carbon tax - repealed)
Every one of these measures will result in the nation’s resources moving around from one activity to another so that our living standards or national welfare are ultimately enhance./
Specific budgetary policy measures from the 2016-17 budget:
- External Stability: the $1.2 Billion white paper on developing Northen Australia that includes a $100 Million roads programme to ensure farmers can get their cattle to markets
- Full Employment: the Youth Jobs PaTH programme comprising three stages; Employability skills training (6 weeks), Internship placement (4-12 weeks) and Employer wage subsidies of up to $10,000 paid over 6 months
- Economic Growth: the reduction in the company tax rate to 27.5% for companies with turnover less than $10M as well as tax reductions for unincorporated smaller businesses (as well as tax cuts for middle income earners)
- Low Inflation: the $1.1 Billion National Innovation and Science Agenda and its ability to improve productivity and reduce cost pressures over time.
- Distribution of Income: reduction in superannuation tax concessions for higher income earners with a maintenance of generous tax concession for middle income earners.
