Fiscal Policy Flashcards
What is Fiscal policy?
Policies of the government and spending decisions to influence economic activity.
What are the components of government revenue/expenditure?
Gov. Revenue - money the government receives - taxation (income tax, business tax, GST and excise tax).
Gov. Expenditure - planned current/capital government spending - current: spending on day to day activities.
capital: spending on infrastructure, hospitals, etc.
What is a balanced, surplus and deficit budget?
Balanced - Revenue = Expenditure
Surplus - Revenue > Expenditure (boom - tax rises - welfare payments fall).
Deficit - Revenue < Expenditure (trough - tax falls - welfare payments rise).
How do you finance a budget deficit?
1) Sell gov. bonds:
- citizens now ‘lend’ $ and in return receives interest rates on this until bought back by the government.
- crowdig out…
2) Borrow from the RBA:
- governmnet can borrow $ form the RBA - print more.
3) Borrow from overseas:
- government can borrow from overseas banks/financial institutions.
- influence ex. rates - inflow of capital will cause an appreciation.
What is a planned and actual budget outcome and how may varied results be impacted?
Planned - What the government plans when they set the budget for the financial year.
Actual - Actual financial year outcome.
FY19/20: deficit of $86bn.
Cause of Diffrence:
- Unexpected economic activities - downturn in china…
- Unexpected natural disaster - could cause additional expenditure…
What are the automatic and discretionary stabilisers?
Automatic - Occur naturally (no gov. intervention) e.g. decrease tax revenue during a trough - increase people on welfare payments. - moves to a deficit.
Discretionary - Occur by choice (gov. intervention) e.g. increase in welfare payment amounts, job keeper…
Outline the policies to persuade the AD/AS or AE model.
Expansioary Policy Stance - economy falls below full capacity, gov. spending rises - rise in AD/AE - shifts to the right. - reduce y tax to increase househod purchasing power, increase gov. spending on infrastructure, etc.
Neutral Policy Stance - economy at full capacity, no intervention required - AD/AE same. -
Contractionary Policy Stance - economy abover full capacity, fall in gov. spending and plan a budget surplus - fall in AD/AE - shifts to the left. - in a boom; increase taxation levels or cut its expenditure; reduce spending power of households/firms.
What are the strengths of the Fiscal Policy?
Direct/Targeted: Fiscal Policy can be targeted to certain sectors/ areas of the economy that need support .
Short effect lag: Once a Fiscal Policy decision is made/implemented, the flow on effects to the economy occur relatively quickly.
Complements automatic stabilisers: Fiscal Policy can be used in conjunction with automatic stabilisers to enhance its effects
What is the weakness of the Fiscal Policy?
Political: Fiscal Policy is not politically neutral and sometimes economic needs will conflict with political e.g. increasing taxes.
Inside Lags (Decision lag): Budget is set annually - so there can be a long lag before decision/implementation occurs.
Less effective during a boom: contractionary policy is less effective as governments have spending commitments they cannot cut (hard to make big changes to dedicated funds) and it’s unpopular to increase taxes
How has the actual/planned budget outcome been affected in FY19/20?
Corona Virus - business lockdown and no travel.
- budget changes; auto-stabalisers - less tax revenue (Qantas) and more people on welfare, along with the discretionary changes to jobkeeper programs.
How has the FY19/20 impated policy stance?
Expansionary Fiscal Policy - rise in gov. spending (jobkeeper); stimulate economic growth via. increasing consumer confidence - increase AD, curve shifts right - softening the downturn impact of COVID-19.
