Unit 4 AOS 1 - Budgetary Policy Flashcards
Budgetary policy
What is budgetary policy
= 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
What are progressive taxes
= 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
What is proportional tax
= a tax that collects proportionally identical amounts from all income earners. It involves the rate of tax remaining the same
What is regressive tax
= a tax that collects proportionally more from lower income earners compared 2 higher income earners
What are direct taxes
= taxes that are paid directly 2 the gov.t and usually applied on income, whether that be personal income or business income
What are indirect taxes
= usually taxes on expenditure or consumption not paid to the gov.t by the consumer but by another party, usually a supplier.
What are the budget outcomes
-> balanced budget = revenues = expenditure
-> budget surplus = revenues > expenditure
-> budget deficit = revenues < expenditure
What is headline cash balance
= total cash received by the federal government less the total cash paid
What is underlying cash balance
= 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
What is fiscal outcome
= 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
What are the budgetary stances
1) Contractionary
2) Expansionary
-> gov.t will use budget 2 have a counter-cyclical impact on the business cycle
What is the impact of an expansionary budget on AD
= inc G1 + G2 along with upward pressure on C+I via policy or transfer payments = inc AD
What is the impact of a contractionary budget on AD
= dec G1 + G2 along with downward pressure on C + I via policy or transfer payments = dec AD
What is bracket creep
= this occurs when wages increase; however, the tax brackets do not change
What are the 3 options of financing a deficit
1) selling bonds to the RBA
2) selling bonds to overseas investors
3) selling bonds to Aus investors
What is a government bond
= 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
What does the sale of bonds to the RBA involve
-> 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
What does selling bonds to overseas lenders involve
-> 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
Issues with selling bonds to Australian investors
- 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
What is crowding out
= 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.
Problems with an expansionary budgetary policy
- 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
Benefits of a surplus
- 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
What are discretionary stabilisers
= 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
What are automatic stabilises
= 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
What is the difference between automatic and discretionary stabilisers
= if they are reactionary or proactive in their approach
What are examples of discretionary stabilisers
-> dec receipts / revenues = instant asset rite off; dec excise taxes
-> inc expenses / outlays = pension / welfare payments; G2 expenditure
What are examples of automatic stabilisers
-> 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)
3 types of government revenue
- Direct taxes
- Indirect taxes
- Non tax revenue
3 types of government expenditure
- G1
-G2
Gov.t transfers
What is the goal of strong and sustainable growth
= 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
The structure of policy questions
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)
Selected policies from 2022/23 federal budget
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
Selected policies from 2021/22 federal budget
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
What is the goal of full employment
= 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)
What are the types of unemployment
- cyclical
- frictional / intertemporal
- structural
- seasonal
- hardcore
What are the strengths of budgetary policy
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
What are the weaknesses of budgetary policy
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)
Budgetary policies 2023-24, 2024-25
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.
