Unit 4 AOS 1 - Budgetary Policy

Question 1

What is budgetary policy

Answer 1

= the manipulation of the lvl and composition of federal gov.t receipts / revenues + outlays / expenses in order 2 assist in the achievement of its economic and social goals 4 Aus

Question 2

What are progressive taxes

Answer 2

= a tax that collects proportionally more from higher income earners compared 2 lower income earners. It involves the rate of tax increasing as income increases

Question 3

What is proportional tax

Answer 3

= a tax that collects proportionally identical amounts from all income earners. It involves the rate of tax remaining the same

Question 4

What is regressive tax

Answer 4

= a tax that collects proportionally more from lower income earners compared 2 higher income earners

Question 5

What are direct taxes

Answer 5

= taxes that are paid directly 2 the gov.t and usually applied on income, whether that be personal income or business income

Question 6

What are indirect taxes

Answer 6

= usually taxes on expenditure or consumption not paid to the gov.t by the consumer but by another party, usually a supplier.

Question 7

What are the budget outcomes

Answer 7

-> balanced budget = revenues = expenditure
-> budget surplus = revenues > expenditure
-> budget deficit = revenues < expenditure

Question 8

What is headline cash balance

Answer 8

= total cash received by the federal government less the total cash paid

Question 9

What is underlying cash balance

Answer 9

= seeks 2 exclude cash flows that are included in headline cash balance, but do x have a direct / immediate impact on the economy
headline cash outcome excluding future fund earnings + net asset purchases

Question 10

What is fiscal outcome

Answer 10

= relates 2 revenue that has been earned over the relevant period compared 2 expenses that have been incurred over the period and also excludes net capital investment

Question 11

What are the budgetary stances

Answer 11

1) Contractionary
2) Expansionary
-> gov.t will use budget 2 have a counter-cyclical impact on the business cycle

Question 12

What is the impact of an expansionary budget on AD

Answer 12

= inc G1 + G2 along with upward pressure on C+I via policy or transfer payments = inc AD

Question 13

What is the impact of a contractionary budget on AD

Answer 13

= dec G1 + G2 along with downward pressure on C + I via policy or transfer payments = dec AD

Question 14

What is bracket creep

Answer 14

= this occurs when wages increase; however, the tax brackets do not change

Question 15

What are the 3 options of financing a deficit

Answer 15

1) selling bonds to the RBA
2) selling bonds to overseas investors
3) selling bonds to Aus investors

Question 16

What is a government bond

Answer 16

= bond issued by the fed government, generally with a promise to pay periodic interest payments + to repay the face value or principle on the maturity date

Question 17

What does the sale of bonds to the RBA involve

Answer 17

-> via secondary money markets, it is the most expansionary (and most inflationary) policy as the RBA uses money that isn’t in circulation in the economy.
It is a rare option as there is a desire to separate budgetary and monetary policy

Question 18

What does selling bonds to overseas lenders involve

Answer 18

-> used to finance a large expansionary budget deficits during + following the GFC
H/r
- adds to the NFD and grows the size of the CAD, as interest payments flow as debits to the net primary income subaccount
- results in capital inflows that exert upward pressure on the value of the AUD due to inc demand for AUD = -ve impact on net exports and AD -> counteracts expansionary budgetary stance

Question 19

Issues with selling bonds to Australian investors

Answer 19

• least expansionary b/c upward pressure on interest rates as demand 4 money in financial markets increases resulting in an increase in the price of money
• High interest rates do not stimulate C + I
• Will lead to crowding out of private sector

Question 20

What is crowding out

Answer 20

= gov.t becomes borrower -> dec demand pressure t/f inc price + inc pressure on interest rates which impairs bus + c’er ability 2 borrow b/c dec accessible.

Question 21

Problems with an expansionary budgetary policy

Answer 21

• cost of financing budget deficits
• crowding out effect and impact on C,I, AD
• Building up of gov.t debt that needs 2 be serviced + will attract interest that also needs 2 be paid
• impact on credit rating potentially
• can lead to higher borrowing costs + even bigger deficit
• t/f will need higher tax + lower gov.t spending

Question 22

Benefits of a surplus

Answer 22

• helps build buffer against future deficits
• generate international investor confidence (AAA)
• allows monetary policy (RBA) to better manage the economy, particularly, avoiding the chances of “crowding out” occurring

Question 23

What are discretionary stabilisers

Answer 23

= deliberate policy designed 2 change receipts or outlays in an effort 2 influence economic activity. Structural component of the budget
“deliberate” = attempt 2 use budget 2 change allocation of resources
-> actual structure of budget is deliberately altered by the gov.t

Question 24

What are automatic stabilises

Answer 24

= budget receipts + outlays will change automatically in response 2 changes in lvl of economic activity
-> automatic b/c operate in a counter cyclical way 2 boost or slow AD + eco activity without fed. treasurer changing lvl / announcing new policies

Question 25

What is the difference between automatic and discretionary stabilisers

Answer 25

= if they are reactionary or proactive in their approach

Question 26

What are examples of discretionary stabilisers

Answer 26

-> dec receipts / revenues = instant asset rite off; dec excise taxes
-> inc expenses / outlays = pension / welfare payments; G2 expenditure

Question 27

What are examples of automatic stabilisers

Answer 27

-> most types of tax receipts e.g revenues from PAYG tax, company tax, capital gains tax + excise duties
-> include expenses such as welfare benefits (especially those paid to the unemployed)

Question 28

3 types of government revenue

Answer 28

• Direct taxes
• Indirect taxes
• Non tax revenue

Question 29

3 types of government expenditure

Answer 29

• G1
  -G2
  Gov.t transfers

Question 30

What is the goal of strong and sustainable growth

Answer 30

= gov.t goal 4 SSEG is 2 achieve the higherst growth rate possible (GDP 3 - 3.5%), consistent with strong employment growth without running into unacceptable, external and or environmental pressures

Question 31

The structure of policy questions

Answer 31

N.O.L
-> nature of the policy
-> How does the policy operate to work to impact the economy
-> Link to the goal (SSEG, FE, LI, LS)

Question 32

Selected policies from 2022/23 federal budget

Answer 32

1) inc in low + middle income tax offset (LMITO) providing additional $420 4 LMI earners
2) A $250 cash payment 4 eligible pensioners + welfare recipients
3) A 50% reduction in fuel excise tax from $0.44 per L to $0.22 for 6 months

Question 33

Selected policies from 2021/22 federal budget

Answer 33

Instant asset write off = being able 2 express / write off the full amount spent on assets such as capital equipment
-> Link 2 component impacted + how = incentive 2 upgrade equipment + inc productive capacity -> inc I
-> Link b/n AD and goal = inc AD b/c suppliers inc willing 2 supply g/s b/c inc profit making opportunities -> inc eco activity b/c inc volume produced t/f inc growth 3-3.5% h/r could inc inflation

Question 34

What is the goal of full employment

Answer 34

= lvl of unemployment that exists when the gov.t’s economic growth goal is achieved + where cyclical unemployment is non-existent, generally accepted 2 be 4-4.5% (NAIRU)

Question 35

What are the types of unemployment

Answer 35

• cyclical
• frictional / intertemporal
• structural
• seasonal
• hardcore

Question 36

What are the strengths of budgetary policy

Answer 36

1) Gov.t can use discretionary stabilisers 2 target particular sectors
2) Will swing into action automatically (cyclical)
3) Impact lag = relatively short b/c direct control of taxation + gov.t spending
4) Effective in stimulating AD directly
5) Many checks and balances (poorly designed policies x passed)
6) Public scrutiny holds policy makers accountable + transparent

Question 37

What are the weaknesses of budgetary policy

Answer 37

1) Financial restrictions
2) Can undermine monetary policy via “crowing out/in”
3) Discretionary stabilisers can become procyclical b/c long lag times
4) Lack of flexibility compared 2 monetary policy b/c per annum, not monthly
5) Implementation lags b/c has 2 pass both houses of gov.t + co-op from states sometimes
6) Less effective @ restricting AD than monetary policy during boom b/c can’t immediately restrict income
7) Political hurdles
8) Political bias (pandering to voters)

Question 38

Budgetary policies 2023-24, 2024-25

Answer 38

Childcare subsidy -> inc disp income = inc AS + AD
Instant asset write off -> encourage I
Infrastructure investment pipeline for 10 yrs
Rental assistance = inc by 10% for recipients
Tax cuts = dec income tax t/f inc disp income
National house = infrastructure benefit for crisis housing
Power rebate = $300 rebate 4 power bill, $325 for some small bus ~ 17% reduction in average power bill.