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Economics > (t4) fiscal policy > Flashcards

(t4) fiscal policy Flashcards

1
Q

What is fiscal policy (FP)?

A

FP policy is the use of government spending and revenue to manage the economy, influencing eco growth, inflation, unemployment, and external indicators

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2
Q

What role does FP play in the economy?

A

It affects the overall of economic activity and can target specific sectors like industries or social groups.

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3
Q

What is the primary tool of FP?

A

The Commonwealth Government’s Budget, which outlines planned income and spending for the financial year.

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4
Q

What types of taxes are included in the Budget?

A

Direct taxes (income and company tax), indirect taxes (GST, customs duties), and other revenues (dividends from public enterprises).

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5
Q

What are the major areas of govt expenditure in the Budget?

A

social welfare, health, education, public services, and defence.

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6
Q

When is Australian Budget typically released?

A

Annually in May, with plans for the next financial year’s spending and revenue.

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7
Q

How does FP reduce fluctuations in the business cycle?

A

By adjusting spending and taxes, it helps smooth out economic highs and lows.

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8
Q

What is a budget outcome?

A

the overall result of government revenue vs. expenditure, indicating the FP impact on the economy.

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9
Q

What are the three possible budget outcomes?

A

Budget surplus (T>G), budget deficit (G>T), and balanced budget (T=G).

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10
Q

What is the main fiscal policy aim for the budget?

A

To achieve budget surpluses on average over the economic cycle.

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11
Q

what is the underlying cash balance?

A

A measure of the budget outcome, showing short-to-medium-term fiscal impact based on cash accounting (when money is collected or spent)

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12
Q

What does the underlying cash balance ignore?

A

It does not distinguish spending type (capital or recurrent) and isn’t based on accrual accounting standards.

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13
Q

What is the headline cash balance?

A

It includes the underlying cash balance plus asset sales or purchases, impacting government borrowing needs.

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14
Q

What factors cause changes in the budget outcome each year?

A

Changes in economic conditions (cyclical changes) and changes in government policy (structural changes)

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15
Q

What are discretionary changes in FP?

A

Deliberate policy changes to influence the budget’s structural component.

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16
Q

What are non-discretionary changes in FP?

A

Budget changes from economic activity levels

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17
Q

What are automatic stabilisers?

A

Budget components that automatically adjust spending or revenue based on economic activity, without new policies.

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18
Q

What are two main examples of automatic stabilisers?

A

Unemployment benefits and the progressive tax system.

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19
Q

What is an expansionary fiscal stance?

A

A policy aimed at increasing economic activity, usually by cutting taxes or boosting spending, leading to a smaller surplus or bigger deficit.

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20
Q

What is a contractionary fiscal stance?

A

A policy aimed at reducing economic activity, usually by raising taxes or cutting spending, leading to a smaller deficit or bigger surplus.

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21
Q

What is a neutral fiscal stance?

A

When the govt keeps revenue and spending levels the same as the previous year, keeping eco activity stable.

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22
Q

How can FP influence resource use?

A

By targeting spending or taxes to encourage or discourage the use of resources in certain sectors.

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23
Q

Why might the govt directly fund public goods?

A

Public goods benefit all, and private firms may not provide them.

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24
Q

How does FP affect income distribution?

A

Through progressive income tax and spending on social services which support lower-income earners.

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25
Q

What is the crowding out effect?

A

When govt borrowing for deficits reduces its available savings, raising interest rates and making private investment costly.

26
Q

How can budget deficits affect national savings and foreign debt?

A

Deficits reduce national savings, increase foreign borrowing, and can contribute to larger CAD over time

27
Q

What does the govt do when it has a budget deficit?

A

It finances the deficit by borrowing money form the private sector, borrowing form overseas, borrowing from the RBA (printing money), or selling assets.

28
Q

What is the ‘crowding out effect’?

A

It happens when governmental borrowing raises interest rates, making it harder for the private sector to borrow and invest

29
Q

When is the ‘crowding out effect’ weaker?

A

During a recession, when private sector spending and investment are low.

30
Q

Why is the crowding out effect less significant in Australia?

A

Because global investors buy Australian bonds, helping finance deficits without heavily impacting domestic interest rates.

31
Q

What is monetary financing?

A

When the government borrows from the RBA (printing money) to finance a deficit.

32
Q

Why has Australia avoided monetary financing since 1982?

A

To prevent increasing the money supply, which would lead to higher inflation.

33
Q

How does selling govt assets help finance a deficit?

A

By raising cash, which reduces the need for borrowing, though it means losing future income from those assets.

34
Q

What are the three ways a govt can use a budget surplus?

A

Deposit with the RBA, pay off debt, or invest in funds like the Future Fund.

35
Q

What is the public sector cash outcome?

A

It reflects the borrowing needs or surplus funds across all government levels, showing the public sector’s impact on the economy.

36
Q

What happens over time if a government continues to run deficits?

A

It accumulates public sector debt, both domestically and overseas.

37
Q

How does public sector debt differ from foreign debt?

A

Public sector debt is government-specific, while foreign debt includes both public and private sector debt owed to overseas lenders.

38
Q

What role does FP usually play in Australia’s business cycle?

A

FP typically supports the economy, while MP is the primary tool. FP becomes more active during major downturns, like COVID-19 or the GFC.

39
Q

What was Australia’s fiscal goal before COVID-19?

A

To return the budget to a 1% surplus of GDP and limit tax receipts to 23.9% of GDP.

40
Q

How did COVID-19 change Australia’s FP?

A

it led to an expansionary FP, including programs like JobKeeper, which increased public debt and caused a significant budget deficit.

41
Q

What was Australia’s budget deficit during COVID-19?

A

Deficit was $134B (6.5% of GDP) in 2020-21 due to increased spending and decreased tax receipts.

42
Q

How did Australia’s FP stance change post-COVID recovery?

A

From 2021-22, the fiscal stance became mildly contractionary, focusing on sustaining growth and reducing debt.

43
Q

How have commodity prices influenced Australia’s budget?

A

High prices for iron ore and gas temporarily boosted tax revenue, contributing to a budget surplus in 2022-23

44
Q

What is the difference between net operating balance and underlying cash outcome?

A

Net Operating Balance focuses on sustainability by showing the gap between regular revenue and expenses, helping evaluate if the govt’s finances are balanced over the long term. Underlying Cash Outcome shows the govt’s actual cash movements, providing a picture of the immediate impact of FP on the economy

45
Q

What structural factor impacted the budget deficit reduction pre-COVID?

A

Increased govt spending, particularly on programs like the National Disability Insurance Scheme, limited deficit reduction.

46
Q

How did income tax cuts affect budget revenue?

A

Tax cuts introduced in the mid 200s reduced revenue growth, contributing to a slower deficit reduction.

47
Q

What long-term structural issue affects fiscal policy?

A

An ageing population increases spending pressures on health and aged care while slowing revenue growth.

48
Q

What does the Intergenerational Report (IGR) reflect?

A

the IGR projects economic and fiscal trends for the next 40yrs, highlighting slower income growth and challenges in heath and aged care spending.

49
Q

What are the ‘Three Ps’ driving Australia’s long-term growth?

A

Productivity, Participation, and Population.

50
Q

What productivity growth rate does the IGR project?

A

The IGR projects a productivity growth rate of 1.2% annually, below the 1.5% average of the last 30yrs.

51
Q

How is workforce participation expected to change by 2063?

A

Participation is projected to decline to 63.8% due to an ageing population, with some offset from higher female participation.

52
Q

What is Australia’s projected population by 2063?

A

It is expected to reach 40.5M, growing at 1.1% annually due to lower fertility and stable migration rate.

53
Q

What does the 2023 IGR say about future budget outcomes?

A

The IGR projects budget deficits will continue until 2063 due to rising spending pressures and capped tax revenue.

54
Q

What impact did COVID-19 have on Australia’s FP?

A

COVID-19 led to Australia’s largest

55
Q

What was FP’s role in economic growth before COVID-19?

A

FP had a minor role, the eco growth managed mainly by the RBA through MP.

56
Q

What were Australia’s budget goals in the late 2010s?

A

The govt focused on balancing the budget and introduced tax cuts to encourage work, investment, and eco growth.

57
Q

How did the govt encourage business during COVID-19?

A

The govt introduced ‘immediate expensing’ for business investments and ‘loss carry-back’ policies to support businesses and retain jobs.

58
Q

How did COVID-19 affect Australia’s public debt?

A

It rose sharply, with the budget shifting to a 6.5% deficit and debt reaching 28.6% of GDP by 2020-21.

59
Q

What is the role of govt in resource allocation today?

A

The govt relies on mkt-driven forces and privatization but invests in key areas like renewable energy and defence.

60
Q

What recent FP changes affected income inequality?

A

Income tax cuts introduced in stages reduced tax progressivity, benefiting high-income earners more by 2024-25, which may widen income inequality according to the Grattan Institute.

Economics (23 decks)

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