Chapter 4: AD Policies and Domestic Economic Stability Flashcards
What is domestic economic stability?
ideal level of economic activity where simultaneously there is low inflation, a strong and sustainable eco growth and low unemployment.
How are AD policies used?
Aggregate demand policies are used countercyclically to help regulate the level of national spending. This helps achieve Australia’s domestic macroeconomic goals.
What is budgetary policy?
is an AD measure of the government using its forecast level and composition of receipts and outlays for the coming financial year to achieve its economic goals
What are budget revenues?
Involve income gained through direct taxes (e.g. income, company tax) , indirect taxes (e.g. excise, tariffs) and non-tax revenue (e.g. electricity, police services)
What are budget expenses?
Gov. outlays dedicated towards the provision of goods, services and incomes to influence AD and economic activity - mainly by changing levels of C and I.
What is budget outcome?
difference between the government’s total receipts and outlays.
It can be a surplus (receipts exceed outlays) or a deficit (receipts are less than outlays) or balance (receipts and outlays are equal)
What is a budget deficit?
receipts are less than outlays
budget outcome is negative
revenues less than expenses
What is a budget surplus?
receipts exceed outlays
revenues exceed expenses
What is an aggregate demand management policy?
budgetary and monetary policy used to influence spending, economic activity and achievement of key domestic macroeconomic goals.
Why is budgetary policy considered an aggregate demand management policy?
applied counter-cyclically by the gov. to regulate levels of national spending and economic activity
Explain the domestic macroeconomic aims of budgetary policy
Medium-term operational aim: gradually return to a budget surplus with thought and care for the future.
This avoids a rise in public sector debt/borrowing (receipts>expenses → surplus → government doesn’t need to borrow/can pay off debt)
Recently → Australian economy weaker → budgetary policy aiming to promote achievement of key macroeconomic goals + improve living standards
Identify the sources of government budget revenue
Direct taxes
Indirect taxes
Non-tax revenue
What are direct taxes?
Levies on income received by individuals and companies e.g. from wages, salaries, profits, interest, dividends and rent
What percentage of all budget receipts do direct taxes account for?
70%
Provide examples of direct taxes
- personal income tax – paid by individuals who earn income in the form of wages, salaries, rent, interest and dividends
- capital gains tax (CGT) – levied on real profits made from sale of capital assets like land and shared purchased after 1985
- medicare levy - direct tax designed to provide medical insurance than covers basic costs of family health care (about 2% of personal taxable incomes)
- withholding tax - paid by individuals who fail to register their tax file number when receiving income (currently levied at top marginal tax rate of 45%)
- company tax - flat/proportional tax levied on business profits (raises around 20% of all budget revenue)
- fringe benefits tax (FBT) - paid by firms on the value of the ‘perks’ they provide to their employees (47% of taxable benefit)
- petroleum resource rent tax (PRRT) - levied at 40% of profits made from offshore petroleum operations
- superannuation fund - levied at 15% of most premiums, as well as on the interest from fund investments.
Does Australia use progressive rates for personal income tax?
Yes.
Marginal tax rate increases as income rises.
What are indirect taxes?
levies added onto the price of some goods and services at the point of sale
What percentage of all budget receipts do indirect taxes account for?
25%
Provide examples of indirect taxes
- excise duty - an flat rate of tax imposed on selected, locally produced goods e.g. petrol, alcohol, tobacco on a per unit basis (raise about 5% of gov. revenue)
- customs duties or tariffs - levied on certain imported goods to raise revenue and protect local producers from overseas competition (has been significantly reduced since 1970s from about 40% to about 5%)
- goods and services tax (GST) - broad-based indirect tax added to the price of goods and services at the point of sale
Is GST a regressive tax?
Yes.
Tax burden or rate (expressed as a percentage of income level) is greater for low-income earners in comparison to high-income earners.
That’s why ‘necessary’ g/s (e.g. water, childcare, women’s sanitary products etc.) are exempt from GST.
What is non-tax revenue?
comes from sources other than taxation such as profits from operation of government, businesses, fines and interest on loans
What percentage of all budget receipts does non-tax revenue account for?
7%
What are the main sources of non-tax revenue?
- profits gained through government businesses enterprises (e.g. Australia post) that sell g/s
- receipts for asset sales when government business assets are privatised (e.g. Medibank Private in 2014) - only included in headline budget outcome, not underlying budget outcome
- interest, petroleum royalties, the repayment of loans by state and local governments, HECS loan repayment by students, GST administration costs and property rentals
Identify other important features of the budget’s tax system
tax mix
tax base
tax burden