Policy Objectives / Fiscal Policy Flashcards
Government intervenes to perform four main roles:
Allocative role: provides public goods and services
Regulatory role: regulate business enterprises
Redistributive role: provides welfare services
Demand management role: macroeconomic management
Economic policy goals for Australia
Economic Growth- increasing capacity of the economy, measured through GDP
Price Stability- very little increase in the general price level in the form of low inflation. Important because otherwise price increases causes reduced purchasing power, erodes international competitiveness etc.
Full Employment- everyone willing to work can find a job
- Frictional - always people moving to new jobs. FUE rate=1-1.5%
- Structural - miss match of available jobs through different skills
Equitable distribution of income- variation between wealthy and poor
Efficient resource allocation- use resources to the fullest
External Stability- acceptable balance of payments
RBA policy objectives
- Sustained economic growth
- Price stability
- Full employment
- External stability
- Income redistribution
- Efficient resource allocation
Compatible objectives
Economic growth and ‘full’ employment:
- Rising EG means growing demand for factors of production. More employment opportunities when production increases
Economic growth and income distribution:
- EG is necessary for incomes to rise because more people are working to earn money. Income distribution then means more people are paying taxes so the government can increase spending for growth
Price Stability and External Balance:
- Achieving price stability will also assist in achieving a more manageable trade and financial relationship with the rest of the world. Low inflation means more competitive exports which improves the trade balance (X-M).
Incompatible Objectives
Price Stability and ‘full’ employment:
- FE requires a high level of EG which in turn increases the price through demand pull inflation as more people are working with disposable income.
Price Stability and Economic Growth:
- If EG rises to rapidly then inflation increases. As AD increases, demand for inputs increases leading to cost push inflation
Economic Growth and External Balance:
- if EG is too rapid then AD is more than AS. Prices will rise making exports less competitive and imports more competitive. Increases merchandise trade deficit. Interest rates will rise with prices rising so overseas loans will rise (foreign debt).
Policy Objectives Difficulties/Time Lags
- Lack of up to date and accurate data
- External shocks
- Unpredictable responses to policy changes
- Time Lag:
Recognition lag - quick for Monetary policy, slow for Fiscal policy
Decision or implementation lag - quick for Monetary policy, slow for Fiscal policy
Impact lag - quick for Fiscal policy, slow for Monetary policy - Differences between economists
- Differences in political objectives
- Separation of powers (executive and legislative)
Definition of Fiscal Policy
The use of Government revenue and expenditure to achieve economic objectives. Through implementing taxes for revenue and reduced growth plus government spending for expenditure and increased growth. Functions of Fiscal Policy: - Stabilisation - Redistribution - Allocation
Components of Government revenue and expenditure in the budget
Budget:
- annual statement from the government of its income and expenditure plans for the next financial year.
Revenue:
1. Direct taxes (direct income redistribution) eg income tax
2. Indirect taxes (based on consumption GDP and how much someone spends) eg GST
3. Profits (corporate taxes)
4. Sale of Government Assets (Telstra)
5. Fees and Fines (Stamp duty and violation fees. Eg. Traffic fines)
Expenditure:
- Social Welfare
- Health
- Education
- Defence
- Public Administration
Budget Outcomes
Deficit - (expansionary policy) where E>R
Surplus - (contractionary policy) where R>E
Balanced - (neutral effect) G=T which rarely happens
Planned and Actual budget outcomes
- Level of economic activity may change during the course of a year (downturn meaning taxation decline and less revenue raised)
- Exogenous factors like droughts, exchange rate movements or rapid movements in trade like decrease in Chinese growth leading to less iron ore demanded and cease of the mining boom
Methods of Financing a budget
3 ways to get out or recover from a budget deficit: - selling government bonds - borrowing from the reserve bank - borrowing from overseas Surpluses can be used to payback debt
Distinction between budget outcomes
Cyclical balance:
- balance between government spending and taxation resulting from change in income or real GDP. (Good when economy is going well but bad when in recession)
Structural balance:
- balance between allocative, regulatory or redistributive government spending and taxation. (When people are working, more people are paying taxes, with more robots however there is less taxes for government revenue so it decreases)
Distinction between Automatic and Discretionary Fiscal policy stabilisers
Automatic stabilisers:
- Happens Automatically and follows the trends in the business cycle.
- when inflation is high people are paying more for the same product so people have less purchasing power so demand decreases and slow the economy.
- Revenue will increase in boom but decrease in bust
Discretionary stabilisers:
- making conscious decisions on changes in the economy.
- what is decided by the government to spend money on eg. Stadium, roads and hospitals to grow the economy
Expenditure on welfare payments:
- such as unemployment benefits or job search allowances
Fiscal Policy stances
Budget stance - refers to the intended impact of Fiscal Policy on the level of economic activity.
Expansionary: the government will then try to boost the economy by spending more and increasing budget deficit
Neutral: if there is no change in the budget from the previous time period
Contractionary: the government will then try to decrease spending and get back to surplus which will decrease the growth rate
Fiscal policy at different levels of economic activity
In a recession - cuts taxes and increases government spending to grow the economy and encourage spending to shift demand to the right. Positive multiplier effect
In a boom - increases taxes and decreases spending to shrink the economy and put a brake on spending that will then lower inflation and stabilise prices. Negative multiplier effect
