u4aos1 - budgetary policy Flashcards
define
Budgetary Policy
Budgetary Policy is the manipulation of the level and composition of Federal Government receipts and expenditure (or outlays) in order to assist in the achievement of its economic and social goals for Australia.
Expansionary budget policy
what is AD when this happens? what hapens to revenue and outlays
- ↑AD
- ↓revenue
- ↑outlays
“Increase in outlays relative to revenue which results in a net injection of funds into the eco (stimulate G sector in circular flow model)”
Contraction budgetary policy
what is AD when this happens? what hapens to revenue and outlays
- ↓AD
- ↑revenue
- ↓outlays
Automatic stabilisers
what + give examples
- the changes to the budget that occur automatically with changes in the level of economic activity
- also referred to the cyclical component of the budget
- e.g., AD low…, people unemployed = pay less tax + gov needs to pay more welfare = decrease gov revenue = increase outlays
Discretionary stabilisers
what + give examples
the discretionary stabilisers designed to change receipts or outlays in an effort to influence economic activity (AD)
e.g., tax rate reduction
$45,000 - $120,000 tax rate cut from 32.5% to 30%
⚡ stage 3 tax cuts in July 2024
⚡ Average tax rates will be lowered for all taxpayers
⚡↑disposable incomes
➢⚡lower tax burden for tax payers incentive
⚡↑C
⚡↑AD
e.g., energy bill relief
⚡ cost of living pressures
⚡ Government giving energy bill rebates of up to $300 to households
➢⚡(and eligible small businesses up to $325)
⚡ ↑discretionary incomes
⚡ ↑C
⚡↑AD
but gov claims that it can reduce inflation by 0.5% since it is going to measure energy prices less from the CPI basket
Define Direct tax + indirect tax
diff as well
Direct tax
A tax paid directly by economic agents, normally based on the income they earn, such as income taxes
Indirect tax
A tax paid by economic agents via their purchases of goods and/or services (such as the GST).
diff: direct tax are paid directly to the government from the economic agent. Indirect tax are tax collected by intermediaries (like businesses).
Define: Progressive tax, Proportional tax regressive tax
Progressive tax
Rate of tax increases as income increases
* e.g., income tax
Proportional tax
Rate of tax stays the same for all tax payers
* e.g., company tax
regressive tax
Regressive taxes are those that result in the proportion of income paid in tax rising as income falls (or the proportion
paid in tax falling as income rises)
* opposite of progressive tax
* GST
Types of government expenses
- G1 government current expenditure (component AD)
- G1: Government current on goods and services that are not capital in nature
- G2: government capital expenditure (component AD)
- G2 Government investment expenditure on goods that are of a capital nature
- Transfer payments - transfer to private sector primarily in the form of welfare payments (e.g., pensions) -> effects C
methods of financing a deficit or utilising a surplus
How does the government finance a deficit?
1/ sell bounds to Australia investors (borrow from private sector)
* most common form of financing a debt
* LEAST EXPANTIONARY METHOD
* causes IR to increase
* crowding out private sector
* ↓C+I
* ↓AD
2/ Selling bonds to overseas investors (borrow from overseas)
* borrowing overseas to finance budget deficit
* results in capital inflow
* upwards pressure on AUD
3/ Sell bonds to RBA (borrow from RBA)
* most expansionary and most inflationary
* money being released into circulation (increase MONEY SUPPLY)
* unwilling today to directly fund a budget deficit via purchase of GS
==============–
Surplus:
* repay existing debt
* spend on new project
* crowding in private sector
* invests funds such as future funds and building Australia fund
Finance the deficit = perform bond sales = Public debt is acuminated by selling bonds
Budget outcomes
Surplus: R>O
Balanced: R=O
Deficit: R<O
the relationship between the budget outcome and the level of government (public) debt
why is more debt a bad thing as well?
The relationship:
Deficit budget
= ↑ gov debt
(need to finance budget (Gov sell bonds to: o/s, aust investors, RBA))
With increase debt:
↓ Government credit rating AAA
= ↑ gov interest from debt
= ↑ gov debt
“There is a positive relationship between the size of the deficit and the level of government debt “
What is Fiscal consolidation
Long term reduce government debt
* low EG = O>R = deficit budget (expansionary stance)
* high EG = R>O = surplus budget (contractionary stance)
the underlying cash balance
def
“In relation to the government’s budget, the headline cash outcome, but excluding Future Fund earnings and “net cash flows from investments in financial assets for policy purposes”
e.g., studnet debt is not included since its going to be paied back in the futurea
Strengths and weakness of BP
StrengthsCan target specific sectors
* Cost of living pressures -> energy bill relief
* infrastructure: 120B
Quick impact lag (sometimes instant), so can impact goals achievement fastAutomatic stabilisers
* automatically helps cushion the magnitude of an economic downturn
Weaknessessubject to political bias - influence of voters
* it is a political document
* during election most likely to run expansionary BPimplementation lag - due to parliamentary process required 'bills'
* yearly application (so review + adjustments take a long time)
* once a year although ‘mini budgets’
* political hurdles (e.g., tax cuts stage 3)
effects of budget on goals + effects on outcome and government debt
If want to ↑AD
1/ Automatic stabilisers
⦿ economic impacts budget: expansionary
⦿↓revenue (↓profits = company tax, ↑UNN=↓income tax)
⦿↑outlays (↑UNN benefits - e.g., welfare)
2/ Discretionary stabilisers
⦿ Deliberate government action
⦿Stage 3 tax cuts
