Fiscal policy Flashcards
Intro
Implemented once a year in the federal budget. (eg. jobseeker/jobkeeper not in the budget)
Objectives
* Income distribution
* Resource allocation
* Level of economic activity
Automatic stabilisers - policy instruments in the budget that counterbalance economic activity. (ie. in a boom, they decrease economic activity)
* Unemployment benefits - level of economic activity falls, increase unemployment → more expenditure on unemployment benefits
* Progressive income tax - boom, more people on higher incomes paying more tax, previously unemployed people pay tax → increase in T
Advantages
Economic Stabilization: Fiscal policy can be used to stabilize the economy during business cycles. In a recession, increased government spending and tax cuts can stimulate economic activity. Conversely, in an economic boom, reduced spending and increased taxes can help cool down the economy.
Redistributing Income: Through its taxation and spending policies, the government can redistribute wealth and reduce income inequality. Progressive taxes and social welfare programs are examples of this.
Public Goods and Services: Fiscal policy enables the government to provide public goods and services like roads, schools, and healthcare, which might not be adequately provided by the private sector.
Direct Impact: Fiscal policy can have a direct and immediate impact on the economy, especially during a downturn when the private sector is reluctant to spend.
Disadvantages
- Time Lags: There can be significant time lags in implementing fiscal policy. It takes time to identify economic trends, enact policies, and for those policies to take effect.
- Political Considerations: Fiscal policy can be influenced by political considerations, which might not always align with economic needs.
- Crowding Out: Increased government spending can lead to higher interest rates, which can reduce private investment.
- Public Debt: If the government consistently spends more than it collects in taxes, it can lead to a buildup of public debt, which could be burdensome for future generations.
P1 - external stability (2016-2019)
- Pre-covid!
- Fiscal consolidation -> involved a move to budget surplus and reduce NFD as % of GDP
- With surplus, govt could repay debt and decrease NFD and CAD as % of GDP.
- ^^ twin deficit theorem! This states that a CAD is related to budget deficit.
- Limitations! Covid (global influences) pushed 6.2bn surplus expectation to 92.3bn deficit. Cuz decreased Y tax and increased u/e benefits
- Policy: 39.6bn deficit in 2016 to the expected 6.2bn surplus!
P2 - economic growth (2020-21)
- Focus on automatic stabilisers here!
- Onset of covid 19 recession led to increased u/e benefits because of increased cyclical u/e and reduced Y tax because of reduced output/profits from firms to push up growth.
- On top of this, govt discretionary policy via 34.1bn in temporary corona supplement (2020-21).
- To increase C, AD and e/g.
- Despite -6% in June 2020, there was a large 10.3% recovery in June 2021. Highlights effectiveness.
- DIAGRAM: RECESSIONARY GAP FOR RATIONALE FOR EXPANSIONARY FISCAL POL
- Stimulus: more recently, budget is contractionary, aiming to slow growth. Budget is expected to “slow household consumption […]” etc from stimulus
- Indicated by 4.2bn surplus (2022-23)
P3 - u/e
2020-21
* Cyclical u/e -> jobkeeper.
* 3.5million individuals, 89bn input cost. 900k firms.
* Reduced cost of labour, increased in demand for labour to counteract the recessionary gap/increase in cyclical u/e.
* 7.5% u/e peak but OECD average 8.75% (april 2020). Govt was also expecting u/e to go above 10%
* Moderate effectiveness.
2021-22
* Jobtrainer (low fee retraining) (1 billion input) and jobmaker (hiring credit for young people) (4 billion expected input)
* Structural u/e and youth unemployment.
* From july 7.5% 2020 to 3.5% in march 2023. (alongside strong decrease in cyclical u/e post-covid)
* Also talk about nairu estimate and us surpassing it.
* STIMULUS: despite these policies u/e is forecast to climb over next 12-18 months because contractionary FP (4.2billion surplus 2022-23)
P4 - environment
- Can also make the paragraph about lack of policy.
- LIMITED EXPENDITURE. AND LACK OF POLICY.
- Hydrogen head start program: 2bn to establish aus as a leading hydrogen producer
- And 83.2bn into net zero authority. Govt organisation which coordinates with firms to cut emissions over time.
- 40bn total investment of this budget into eco-sus.
- BUT still “insufficient” according to paris climate action tracker with many criticisms and calls for emissions target to be raised to 50-74% reduction.
P5 - inflation
- Inflation is not a primary focus, so fiscal policy focuses on cost of living relief.
- Fuel excise from 44.2 to 22.1c per litre to reduce price of transport (2022-23) BUT this led to increased d-pull inflation. 3% in september 21 to 7.8% in dec 2022.
- Because this wasn’t that effective the govt decided to focus on energy bill relief (6bn, which works with utility providers to decrease autonomous consumption AT SOURCE.) less likely to promote consumption.
- STIMULUS: inflation is thus expected to fall. Potential effectiveness.
P7 - DOI
- Recent budget: LMITO. 7.8billion for 10.2 million individuals in 2021-22. Alongside increases of 40/fortnight to jobseeker, youth allowance and austudy.
- Will increase Y for lower quintiles, effectiveness not seen yet as post-covid GINI has not been release.
- Indirectly: social wage
- Childcare subsidies
- 1.6bn into PBS
- 3.5bn into tripling bulk billing incentive
- All will reduce autonomous consumption for LYE and increase disposable income (benefit)
P7 - distribution of wealth
- 2016-17 $500k lifetime non-concessional super cap, tax offset of 500$. Decreased cap
- Limits accumulation of super from HWO: improved DOW. gini: 17-18 had 0.621, 19-20 had 0.611
- 2023-24 first home guarantee scheme increased eligibility for any 2 borrowers
- increased wealth creation for lower quintiles = future improved DOW
