Fiscal Policy

Question 1

What is fiscal policy

Answer 1

Fiscal policy refers to government revenue and spending in order to influence the level of economic activity, income distribution and allocation of resources. The main tool of fiscal policy is the budget.

Question 2

What is the budget

Answer 2

The budget is a prediction of expected government revenue and expenditure for the coming year. It is delivered by the treasurer in May

Question 3

What are the three budget outcomes

Answer 3

• Stabilisation
• Redistribution
• Allocation

Question 4

Major initiatives announced in the 2017-18 budget included:

Answer 4

Stabilisation:                                                                                       
•	Adjusting cash rates 
•	Spending on infrastructure
•	Normal economic maintenance 
Redistribution of income: 
•	Lower income taxes 
Allocation of resources:
•	Hospital funding 
•	Backing Gonski plan 
•	Improving national security architecture

Question 5

what the 2017/2018 budget will impact on:

Answer 5

High income earners 
•	Tackling bracket creep
Low to muddle income earner/families 
•	Simplification of the tax brackets
•	Bracket creep
•	Lowering personal income tax 
Welfare recipients 
•	Lower income tax could lead to less welfare payments 
•	Fully funded batuonal disability welfare 
The nation’s supply capacity 
•	Developing infrastructure
•	Lower business taxes
•	Lower energy bills (indirectly)

Question 6

The budget contains information on:

Answer 6

• Government expenditure and revenue
• The performance of the previous year
• Current economic problems
• New measure and predicted effects

Question 7

what is a progressive tax

Answer 7

– a progressive tax is a tax where the marginal rate of tax increases as one’s income rises.

Question 8

what is a regressive tax

Answer 8

A regressive tax is a tax where the impact of the tax is greater on low income earners when compared with high income earners. This is because the amount of tax paid is the same irrespective of your income.

Question 9

what is a proportional tax

Answer 9

Takes a constant proportion of income no matter what the income is.

Question 10

what is a direct tax

Answer 10

• a tax, such as income tax, which is levied on the income or profits of the person who pays it, rather than on goods or services.

Question 11

what is an indirect tax

Answer 11

a tax levied on goods and services rather than on income or profits.

Question 12

what is a Balanced budget?

Answer 12

G=T the aim is to achieve balanced budgets over the course of the business cycle which means surpluses during growth offset deficits during the recession

Question 13

what is a deficit budget

Answer 13

Deficit Budget: G>T

Question 14

what is a surplus budget

Answer 14

Surplus Budget: T>G

Question 15

If G=T to begin with then the government can budget for a deficit with which five possible ways.

Answer 15

1. G increases more than T
2. G increases; T is constant
3. G increases; T falls
4. G in constant; T falls
5. T falling faster than G

Question 16

what is fiscal consolidation

Answer 16

Government medium term fiscal policy of maintaining balanced or surplus budgets over the course of the economic cycle.

Question 17

What is the distinction between the planned and actual budget outcome.

Answer 17

• The term ‘budget stance’ refers to the intended impact of fiscal policy on the level of economic activity.
• The budget stance, therefore, refers to changes in the structural budget balance.
• It is not the same as the overall budget balance which includes cyclical effects.
• Cyclical balances cancel each other out during an economic cycle.

Question 18

What is the difference between the cyclical and the structural balance?

Answer 18

The structural (discretionary) component are deliberate changes in G and T that effect budget outcome.

The cyclical (non-discretionary) component are changes in G and T caused by economic activity that affect the budget outcome.

Question 19

what are the automatic stabilisers

Answer 19

1. progressive income tax system
2. expenditure on welfare payments
3. Other taxes (GST)
4. Company Tax

Question 20

what are the other stabilisers (non-fiscal)

Answer 20

1. Spending on imports
2. Flexible exchange rate
3. Savings

Question 21

what are the main determinants of the structural balance

Answer 21

economic activity

resource allocation

income distribution

Question 22

Will a change in government spending have the same multiplier effect as an equivalent change in taxes?

Answer 22

No, government spending has a greater impact on GDP… So, an increase in government spending of $10bn creates an extra $25bn GDP, where as a cut on tax of $10bn will only create an additional $15bn GDP.

Question 23

What fiscal stance is taken in a boom

Answer 23

• Keynesian economists support a contractionary fiscal stance when the economy is in a boom

So increased taxation and decreased government spending.

Question 24

What fiscal stance is taken in a trough

Answer 24

An expansionary fiscal stance.

Decreased taxation and increased government spending is used to stimulate the economy.

Question 25

Positive unforeseen effects that could lead the actual budget outcome to be different to the planned budget outcome.

Answer 25

• Economic upturn
• Increase in TOT
• Increase in productivity due to technological advances

Question 26

Negative unforeseen effects that could lead to the actual budget outcome be different to the planned budget outcome.

Answer 26

• Economic downturn
• Decrease in TOT
• Domestic drought/overseas aid (tsunami japan)
• GFC
• Decline in commodity prices e.g. iron ore

Question 27

How does the government finance a budget deficit?

Answer 27

1. By selling government bonds:
2. Borrowing from the reserve bank
3. Borrowing from overseas
4. Printing more money

Question 28

What does the government do with a budget surplus?

Answer 28

1. Pay off (or retire) some its public or sovereign debt
2. Fund Tax cuts in present
3. fund future projects e.g. infrastructure developments

Question 29

Strengths of Fiscal Policy:

Answer 29

Short effect lag – spending closes deflationary gap quickly
• Can be targeted to specific industries or regions
• Automatic stabilisers

Question 30

weaknesses of Fiscal Policy

Answer 30

• The action lag and implementation lag is long - Indication often lag economic activity and budget is delivered once a year
• Inflexible – school buildings program – once started difficult to stop half way through program.
• Political constraints
• Crowding in/out