Chapter 4 - Budgetary + Monetary policy

Question 1

What are the aggregate demand policies and what is their purpose

Answer 1

Aggregate demand policies relate to budgetary and monetary policies. They are used countercyclically to help regulate the level of national spending. This helps achieve Australia’s domestic macroeconomic goals.

Question 2

Budgetary Policy (fiscal policy)

Answer 2

relates to changes in federal government receipts and outlays and aims to influence spending, economic activity and the achievement of key macroeconomic goals.

Question 3

Aims of budgetary policy

Answer 3

1. Medium- term operational aim: gradually return to a budget surplus at a prudent (thought and care for future) state.
2. The goal of low inflation: inflation rising slowly by 2-3% per year.
3. The goal of strong and sustainable economic growth: GDP rises by 3% each year.
4. Th goal of full employment: the unemployment rate id 4.5 - 5%/

Question 4

QUESTION: In what ways can the budgetary policy be regarded as an aggregate demand policy? (2 marks)

Question 5

QUESTION: What is the medium-term operational goal of budgetary policy? (2 marks)

Question 6

QUESTION: Define budgetary policy (2 marks)

Question 7

QUESTION: What are the aims of budgetary policy?

Question 8

Budget revenues

Answer 8

relate to the federal government’s incoming receipts of money which are used to pay for budget outlays.

Question 9

Sources of government revenue

Answer 9

Direct taxes: Taxes levied on those receiving incomes (approx 70% of budget receipts)

Indirect taxes: Taxes added onto the price of goods and services (approx 25% of budget receipts)

Non - tax revenue: Profit gained by the government through non-tax source. (approx 7% of budget receipts)

Question 10

Types of Direct Taxation

Answer 10

Personal income tax: tax paid by individuals who earn income in the form of wags, salaries, rent, dividends and interest.

Capital gains tax (CGT): tax levied onto real profits made from the sale of capital assets (items owned for personal purposes or investments ) such as land and shares purchased after 1985.

Medicare levy: 2% tax levied on income designed to finance medicare and NDIS

Company tax: flat tax levied on business profits

Withholding tax: applied on those who fail to registered a tax-file number when receiving income such as dividends and interest. Levied at 45%.

Fringe Benefits tax: direct taxes paid by firms on ‘perks’ given to employers such as housing or vehicles.

Petroleum resources rent tax (PRRT): levied at 40% on offshore profits made by petroleum operations.

Superannuation fund tax: levied at 15% on interest and funds investments. however people aged 60+ can withdraw superannuation funds tax-free.

Question 11

Types of Indirect taxation

Answer 11

Excise duty: flat amount tax imposed of locally produced goods and services such as petrol, alcohol and tobacco. Eg- a excise of a litre of petrol is 30% of its price. (approx 5% of budget revenue)

Customs duties tariffs: tax levied on certain imported goods to raise revenue and protect local producers form foreign competition.

Good and services tax (GST): tax levied at 10% when purchasing goods and services. GST is a regressive tax rate as the burden is heavier on low-income earners than high income.

Question 12

Types of Non-tax revenue

Answer 12

Government business enterprises: profits gained operation of government operations that sell goods and service (Eg Australia Post)

Receipts from assets are privatised (Eg Medibank)

Repayment of loans by students, GST administration costs and property rentals.

Question 13

Other features of the Tax system

Answer 13

Tax Mix

Tax Base

Tax Burden

Question 14

Tax Mix

Answer 14

refers to the balance between direct and indirect taxes as sources of revenue. Majority of revenue is sourced from direct taxation (69%) indirect taxation makes up 24% where as non-tax revenue equates to only 7%.

Question 15

Tax Base

Answer 15

Refers to how broadly the tax is applied. Eg - GST exempts most necessities therefore is not applied that broadly. Tax widened = more revenue.

Question 16

Tax Burden

Answer 16

Relates to the rate of direct and indirect tax. In terms of progressive personal income tax, tax burden marginally increases adjusting to higher incomes and inflation (Bracket creep). This can only be avoided by tax cuts, rates and changes in tax brackets.

Question 17

QUESTION: Define Budget receipts (1 mark)

Question 18

QUESTION: What does a bracket creep and how does it affect the level of budget revenues overtime? (2 marks)

Question 19

QUESTION: How does an increase in an increase in capital gains income tax affect AD? (2 marks)

Question 20

QUESTION: How does a reduction in marginal tax rate of personal income impact AD? (2 marks)

Question 21

QUESTION: Distinguish between personal and company tax. (2 marks)

Question 22

Government outlays (expenses)

Answer 22

Budget expenses relate to how the government uses their collected revenue to provide different sectors (households, businesses) with goods, services and incomes. Hence outlays have an impact of AD (mainly C & I) and economic activity.

They are classified in 2 ways:

1. the specific functions they serve
2. their general nature and type

Question 23

Classification of budget expenses by their function – Part 1

Answer 23

• Social security or welfare outlays government payments to neediest
  groups who meet means and asset test (represents over 36% of
  expenses). Examples- job seeker, war veteran payments
• Health Spending: money spent on the provision of medical attention.
  Includes medication, staff salaries, infrastructure expenses. (accounts for approx 16% of budget outlays)
• Defence: involves outlays for staff payments day-to-day running expenses, border protection, surveillance, war, and terrorism. (accounts for 6% of budget outlays)
• Education: money spent on public education through payment of staff, school buildings, and provision of ordinary spending. (7% of budget outlays)
• Transport and communications: cover capital spending on government infrastructure such as roads, railways, and aviation. It also involves improvements in broadband network etc.

Question 24

Classification of budget expenses by their function — Part 2

Question 25

Classifying budget outlays by their general type

GOVERNMENT CURRENT SPENDING

Answer 25

1. Government current spending (G1): Government current spending (or consumption). Includes salaries paid to federal government employees in the public sector (staff in public health, education, defence, housing, transport, welfare and also include day-to-day operating services). These government departments are also required to purchase goods and services from private sectors eg. medication, resources for school etc. (represents 90% of all government spending)

Question 26

Classifying budget outlays by their general type

GOVERNMENT CAPITAL SPENDING (G 2)

Answer 26

involves expenses for investments. Example- social/economic infrastructure (schools, hospitals buildings, airports, NBN network, pipelines, equipment for hospitals). G2 helps grow economy’s productive capacity hence makes conditions more favourable for businesses to operate and improve daily lives. (10 percent of government spending.)

Question 27

Classifying budget outlays by their general type

GOVERNMENT TRANSFER PAYMENTS

Answer 27

Involves welfare benefits along with grants and industry assistance. This helps reduce poverty and improve general living standards. (36% of budget outlays) It is not regarded as G1 OR G2 because the receiptant receiving the money actually spends it.

Question 28

QUESTION: What are three most important areas of federal government outlays by function? (3 marks)

Question 29

QUESTION: Distinguish between G1 AND G2 (as a part of budget outlays) (2 marks)