Fiscal Policy Flashcards
What is the fiscal policy
The use of the govt. spending and taxation to affect economic activity, resource allocation and income distribution
What does changes in the Fiscal Policy Impact?
- Resource Use
If govt. decides to spend money on a particular area of the economy (transport infrastructure) or policy covers on tax and spending decisions - Income distribution
Taxation arrangements (GST-Regressive, Progressive) - Savings and the CAD
Long-Term Budget Deficit decreased national savings, causing the crowding out effect as govt. borrow from private sectors, increasing inflation, the private sector borrows from overseas
In which ways can the govt. finance their debt.
- Borrowing from the Private Sector:
Sell treasury bonds domestically under a tender system, buyers will buy at a certain rate of interest, if interest rates are too high the ‘Crowding out Effect’ leads to a reduction in private sector spending and investment. - Borrowing from Overseas
To minimise the crowding out effect, while still stimulating growth, govt. borrow from overseas, directly adding to Australia’s foreign debt. - Borrowing from the RBA (Monetary Financing)
Govt. printing more money and since 1982 (deregulation of the financial sector) it hasn’t happened - Selling Assets
Like Commonwealth land. Financing burden is simply shifted from the public sector to the private sector
In what ways can the govt. use the surplus.
- Depositing it with the RBA
- To Pay off Public Sector Debt
- Placing money in a specially established, govt. owned investment fund
What impact does the public sector have on the economy and its trends?
The impact is shown in the Public Sector Underlying Cash Outcome. A negative outcome means that there is an overall public sector deficit.
TRENDS:
1990s-2008-09: Surplus
2008-09: Deficit
Public Sector Debt consists of the accumulated debt of the govt. sector which owed both domestically and overseas.
With budget deficits since 2008-09, net public sector debt has risen sharply, although as the budget returns to surplus, net debts are expected to stabilise and then decline
When and how was the Fiscal Policy used?
Mid-1990s-Late 2000s: Long period of sustained economic growth and a boom in tax revenues from the mining boom, contributed to a sustained budget surplus and reduction in public debt. Rather than being used for the macroeconomic goals (EG, U/E, Inflation & external stability), fiscal policy had a minimal role as public borrowing was reduced and was occasionally for specific policy changes in targeted areas of the economy
2008-10 (GFC): Was used aggressively to counter the impact of a global recession. Fiscal Policy shifted towards an expansionary stance. Public debt began to rise, expansionary stance was successful in averting recession in Aus.
2010s: played a smaller role in the policy mix. stance of fiscal policy has been neutral or mildly contractionary, as govt. want to reduce the budget deficit.
What are the 2018-19 budget plans?
- Budget aimed to have a neutral effect on economic growth, underlying cash deficit almost unchanged from $18.5B to $16.3B. Goal of returning the budget to surplus of 1% of GDP, not expected to be achieved until 2026-2027.
- Placed a tax ceiling on tax revenues to not rise above 23.9% of GDP
What have been the CYCLICAL influences on the Budget?
- GFC (2008-10): Increased the budget deficit, automatic stabilisers decreased govt. revenue and increased govt. expenditure
- Labour Markets didn’t return to the strength it was before GFC, and real wage growth was MUCH slower. U/E remained above its pre-crisis levels. Meaning: Income tax receipts only recovered slowly compared to past periods
- Global economy recovery in 2010s was weaker than expected. However, TOT had a positive impact on the fiscal balance as the export prices were higher than expected
What policies are in the budget that have impacted Unemployment?
- Stimulating AD, expansionary fiscal policy can help reduce U/E or during Economic downturn reduce the rate that cyclical U/E increases
- ‘More Choices for a Longer Life’ (2018-19) Package to help oldies
- ‘Skilling Australians Fund’ (2017-18) Employers who bring overseas workers on a temporary work visa have to pay a levy that will help fund skills training and apprenticeships
- ‘Jobs for Families’ (2017-18) Budget provided $37.3B in funding for childcare
How has the recent fiscal policy impacted Resource Use?
- Direct subsidies to industries have declined to less than $4B/yr
- Other things have greater influence on resource use like: changing consumer preferences, changing business practices, new technologies and the forces globalisation
- The 2018-19 budget included a plan for $75B in transport infrastructure
How has the recent fiscal policy impactedNational Savings and the CAD?
- Fiscal Policy can influence an economy’s level of savings through surpluses (increasing) or deficits (decreasing)
- There is no obvs linkage between the CAD and budget outcome
How has the recent fiscal policy impacted Distribution of Income?
- The Budget can impact income distribution through tax and revenue
- 2018-19 Budget had changes to personal income tax, with tax reduction for lower income earners
- Because of accelerating technological change and automation resulting in structural changes, govt.s will implement taxation and spending policies to address the impacts to avoid ppl being excluded from the gains of EG.
What are the aims of the fiscal policy
Manage economic activity
Achieve greater efficiency in resource allocation
Affect income distribution
Influence on the level of national savings and reduce CAD
What are the budget outcomes
Balanced Budget: G=T
Budget Deficit: G>T
Budget Surplus: G
What are the possible fiscal stances
Neutral stance Expansionary stance (G>T) Contractionary stance (G
