Unit 4 AOS1 - Chapter 4: Managing Aggregate Demand Using Budgetary Policy Flashcards
What is unit 4 about?
The Australian governments 2 main categories of economic policy that are used to promote the achievement of key economic goals, ultimately improving Australia’s living standards.
- Aggregate demand policies (macroeconomic policies) - budgetary (fiscal) policy
- Various aggregate supply policies (include microeconomic reforms) - (monetary policy)
Define budgetary policy.
This is an aggregate demand measure and related to changes in the anticipated levels and composition of GOVERNMENT REVENUE and EXPENSES for the year.
Budgetary policy is sometimes called ‘fiscal policy’.
What are government/budget revenues (receipts)? (Part of budgetary policy)
They are the federal government’s incoming receipts of money that pay for budget outlays. Taxation, for example, is a major source of revenue for the government.
They come from direct taxes like those on personal income and company profits, and from indirect taxes such as excise or tariffs, along with non-tax revenue.
What are government/budget expenses (outlays)? (Part of budgetary policy)
They are also known as outlays in the budget and are expenses involving, for example, the provision of goods and services for the community and welfare.
They arise from various types of government outlays (such as defence, health and education) involving both government consumption spending (G1) and government investment spending (G2), as well as transfer payments including welfare.
What is budgetary policy regarded as?
Budgetary policy is regarded primarily as a key macroeconomic or aggregate demand management policy instrument because the levels of government revenue (receipts) and expenses (outlays) can have a powerful overall effect on:
. total expenditure (especially C, I and G)
. national production
. employment
. the general level of prices and final distribution of incomes in the economy.
Who typically announces fiscal changes?
Typically, fiscal changes are announced by the Treasurer on budget night in early May, but adverse economic developments like the global financial crisis (GFC) in 2008–09 could necessitate the introduction of a special mini-budget.
Whatever is proclaimed on these occasions, some of the key elements
in the budget require debate and the passage of bills through a proper parliamentary procedure in both the Lower House and Upper House. Sometimes, too, budget night pronouncements by the Treasurer are never actually enacted.
Theoretically what is the budgetary policy?
Theoretically, budgetary policy is a very powerful instrument that can be used to manage the level of aggregate demand and pursue the government’s five economic goals including:
. low inflation (average annual inflation of 2–3%)
. strong and sustainable economic growth (growing GDP at around 3–3.5% or at levels that are economically and environmentally sustainable into the future)
. full employment (unemployment at around 4.5–5.0% of the labour force with no cyclical unemployment)
. external stability (paying our way or living within our means in external transactions without causing severe problems as a result of the CAD, NFD and changing Australian dollar)
. and equity in income distribution (everyone can access basic goods and services, enjoy reasonable living standards and avoid poverty).
Through success in these areas, the hope is that, ultimately, Australian living standards will rise faster than otherwise.
What can the changing domestic and international economic, social and political circumstances that exist at budget time do?
Changing domestic and international economic, social and political circumstances that exist at budget time partially alter how important each of the government economic goals are for budgetary policy.
What are a few examples of recent aims or budget priorities in the few years to 2013?
Know that fiscal consolidation is the main thing …..
2016 examples.
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Explain the following aim/budget priority in the few years to 2013: Promoting strong and sustainable economic growth and full employment
During and following the GFC starting in 2008–09, perhaps the main priority for the federal budget was to try to avoid recession and promote the goals of strong and sustainable economic growth and full employment.
This necessitated a more expansionary approach to budgetary policy (big budget deficits) designed to lift AD and economic activity, even though this meant increasing our overseas debt and CAD and making it harder to achieve the goal of external stability.
More recently in 2012–13–14, the need to protect jobs and promote economic growth has meant a delayed return to budget surplus.
Explain the following aim/budget priority in the few years to 2013: Promoting an equitable distribution of income
A hallmark feature of Labor government budgets between 2008–09 and 2013 was that they attempted to promote the goal of an equitable income distribution, so that more people could access basic goods and services (such as essential food, housing, health- care and education) and enjoy reasonable living standards at a level deemed generally acceptable by society.
Explain the following aim/budget priority in the few years to 2013: Promoting low inflation
Sometimes, as in the early part of 2008, Australia’s economic activity is too strong and the economy experiences near-boom conditions where there is increased inflation.
Here, widespread shortages leading to inflation required contractionary budget surpluses (where budget revenue is greater than budget expenses) to slow AD and stabilise the economy.
More recently during the economic recovery from the GFC in 2010–11–12, budgetary policy wanted to support growth and jobs without adding to inflationary pressures.
Explain the following aim/budget priority in the few years to 2013: Promoting external stability
During 2007–08, for example, an important strategy of having a large federal budget surplus (where the value of budget receipts are greater than budget outlays) was to promote the goal of external stability by lifting the level of national savings and helping to close the large national savings–investment gap (where national savings are not sufficient to finance national investment) that is filled by our reliance on overseas borrowing or foreign debt.
Because of this gap, the lack of national savings has contrib- uted to our rising foreign debt and often large CAD.
More recently, during 2011–12–13 attempts to cut the size of budget deficits or return to surplus in the medium term could be seen as a desire to help promote the government’s financial sustainability and strengthen Australia’s external stability.
What three main elements help to shape the distinctive nature of budgetary policy?
- budget revenues (both their level and composition)
- budget expenses (both their level and composition)
- the overall budget outcome (as it affects the policy’s stance or impact on AD).
Explain the following element to help shape the distinctive nature of budgetary policy: budget revenues
Budget revenues are the federal government’s incoming receipts of money that pay for budget outlays. As such, they impact greatly on disposable incomes, AD, economic activity, inflation, the allocation of resources, external transactions, income distribution and living standards. Currently, revenues consist of the following types:
. Direct taxes
. Indirect taxes
. Non-tax revenue
What are the main types of federal budget revenue?
The federal government derives revenue from a variety of sources including:
. Direct taxes
. Indirect taxes
. and Non-tax revenue
Where do budget revenues come from?
. Direct taxes
. Indirect taxes and
. Non-tax revenue
What is direct tax?
Direct tax is levied as a proportion of income received by individuals or companies.
What is indirect tax?
Indirect tax is added onto the price of a good or service at the point of sale, making the item more expensive.
What is non-tax revenue?
Non-tax revenue is revenue derived from sources other than taxation, such as from the profits made by government enterprises, interest on loans paid by other governments, or the sale of a government enterprise.
What are the types of revenue from direct taxes?
. Personal income tax (43%) . Capital gain tax . Medicare levy . Company tax (20%) . Petroleum resource rent tax
There are others, but you don’t need to know more than this.
Explain the following type of revenue from direct taxes: Personal income tax
Personal income tax is a direct tax paid by individuals who earn incomes in the form of wages, salaries, rent, interest and dividends.
For most people, income tax is deducted by firms from the pay packets of employees before they are paid (PAYG).
However, for self-employed individuals, a different system exists for estimating income and tax that must be paid.
In both cases, tax is levied (charged) at progressive rates, meaning their percentage changed with the level of income.
For instance, from 1 July 2012 the personal income tax rates range from 0 per cent on incomes below the tax-free threshold of $18 200 per year, up to the top marginal tax rate of 45 per cent on annual taxable incomes in excess of $180 000.
This source of receipts raises around 43 per cent of all federal government revenues. Since 1951, the top rate has been cut from 75 to 45 per cent (excluding the 1.5 per cent Medicare, levy that is to rise to 2 per cent from July 2014 to help cover the cost of healthcare including the disability insurance scheme).
What is PAYG?
Pay-as-you-go (PAYG) tax is a direct progressive tax levied on incomes received by individuals at marginal rates of zero per cent up to 45 per cent.
Explain the following type of revenue from direct taxes: Capital gains tax
Capital gains tax (CGT) is levied on the real profits made from the sale of capital assets such as land and shares purchased after 1985.
Currently CGT applies to only 50 per cent of the capital gain, so the actual rate is only half the normal appropriate marginal income tax rate (with the Medicare levy added), with an effective top rate of around 23.25 per cent (down from over 48.5 per cent which applied prior to 1999–2000).
Explain the following type of revenue from direct taxes: Medicare Levy
Medicare levy is a direct tax designed to provide medical insurance in order to help cover the basic costs of family healthcare and the new DisabilityCare scheme.
This is normally levied at a rate of 1.5 per cent of personal taxable incomes but will rise to a standard rate of 2 per cent from July 2014.
Explain the following type of revenue from direct taxes: Company tax
Company tax is a flat or proportional tax levied directly on business profits.
In 2012–13, the tax rate was 30 per cent of company profits (down from 49 per cent in 1986 to 39 per cent in 1988, to 36 per cent in early 2000 and 34 per cent in 2001).
Company tax raises almost 20 per cent of all budget revenue.
Explain the following type of revenue from direct taxes: Petroleum resource rent tax
Petroleum resource rent tax (PRRT) is levied at 40 per cent of the profits made from offshore petroleum operations.
What are the types of revenue from indirect taxes?
. Excise duty
. Custom duties or tariffs
. GST
. Non-tax revenue
Explain the following type of revenue from indirect taxes: Excise duty
Excise duty is an indirect tax imposed on selected, locally produced goods such as coal, petrol, LPG, beer, spirits, wine and tobacco.
It is a flat amount per physical unit (for example, kilogram, litre).
For example, the excise on unleaded petrol is about 30 per cent of the price of each litre sold, while that for brandy is over $50 per litre of alcohol.
The precise rates applicable are adjusted twice a year and, with the exception of petrol, are indexed or linked to changes in the CPI.
Overall, excise duty raises about 9 per cent of government revenue. The system of excise duty on alcohol was reviewed and there were steep rises in the excise on tobacco in early 2010 and August 2013.
Explain the following type of revenue from indirect taxes: Customs duty or tariffs
Customs duties or tariffs are an indirect tax levied on certain imported goods to raise revenue and protect local producers from foreign competition.
Since the early 1970s and especially between 1984 and 1996, the general tariff rate for manufactured goods was reduced dramatically from an average rate of nearly 40 per cent, to stabilise at a mere 5 per cent by 1996.
However, exceptions exist in 2013. Higher tariff rates apply to the textile, clothing and footwear industries (where the current rate is 10 per cent).
Explain the following type of revenue from indirect taxes: Goods and Services tax (GST)
Goods and services tax (GST) was introduced in July 2000, replacing the wholesale sales tax (WST rates 0–45 per cent).
It is a broad-based indirect tax levied at the rate of 10 per cent that is collected by the federal government on behalf of the states and territories.
Consumers pay the GST when they purchase goods and services.
The retailer adds GST to the price of items when they are sold, making the GST a regressive tax because the tax burden or rate (expressed as a percentage of their income level) is heavier for low-income earners rather than high-income earners.
Although the GST is levied on most things, for equity reasons there are some exemptions for necessities including basic unprocessed foods, residential rent, gifts to charities, secondhand goods, government charges for rates, telephone, water and car registration, export production, education and school fees, healthcare, health insurance, prescription medicines and public health goods, nursing home charges, child- care and financial services.
Explain the following type of revenue: Non-tax revenue
Non-tax revenue currently raises around 6 per cent of government revenues.
It comes from the government’s sale of goods and services, petroleum royalties, the repayment of loans by state and local governments, HECS loan repayments by students, GST administration costs, licence revenue, property rentals, and profits or dividends from the oper- ation of fully or part-owned government business enterprises such as Australia Post.
Income tax on individuals is easily the main source of receipts, followed by revenues from company tax.
What is progressive tax?
Progressive taxes are designed to redistribute income more evenly. The tax rate increases as personal income levels increase.
Eg. Personal income tax and capital gains tax
10k income = $0k tax
$180k income = $54k
What is regressive tax?
Regressive tax is a tax that tends to exaggerate income inequalities because law incomes are taxed at higher rates than high incomes.
Indirect taxes on necessities (such as excise on tobacco, alcohol and petrol or GST) are generally regarded as regressive.
$10k income = $1k tax (10%)
$100k income = $1k tax (1%)
What are the other important features of our tax system?
- Tax mix
- Tax base
- Tax burden
- Principles of taxation and tax reform
- Tax reform
Explain the following feature of our tax system: Tax mix
The tax mix refers to the balance between direct and indirect taxes as sources of revenue. Around 94 per cent of all federal revenues are derived from taxation, of which around 68 per cent is from direct taxes on incomes.
Of the remainder, just over 25 per cent comes from indirect taxes with the 6 per cent balance from non-tax revenue.
Explain the following feature of our tax system: Tax base
The tax base refers to how broadly the particular tax is applied. For example, the old wholesale sales tax (WST) taxed only goods, whereas the GST that replaces it is much wider and applies to most goods and services.
Explain the following feature of our tax system: Tax burden
Tax burden relates to the rates of direct or indirect tax applied. In the case of progressive personal income tax, the average tax burden automatically tends to increase over time, because rising levels of incomes and inflation cause people to move into higher marginal tax brackets.
This is referred to as bracket creep and can be avoided only by regular and deliberate cuts in tax rates or changes in the tax brackets.
Explain the following feature of our tax system: Principles of taxation and tax reform
Three principles of good taxation should be used to guide government tax reform.
1. Simplicity
2. Fairness
3. Efficiency
Explain the following principle of good taxation: Simplicity
For each tax we should ask the question: is it easily understood by income earners and simple to administer, with minimal compliance costs, including paper work?
Explain the following principle of good taxation: Fairness
Equity has long been an accepted principle of taxation — people should be taxed according to their capacity to pay.
For instance, should indirect taxes be levied on necessities such as food, health or education? Should the marginal rates of personal tax be made less steeply progressive so that richer households pay a smaller proportion of their income in tax than previously? Were tax loopholes closed in the 1980s; for example, with the introduction of a capital gains tax and fringe benefits tax?
Explain the following principle of good taxation: Efficiency
An efficient tax has a fairly neutral impact on the decisions of both consumers and producers. This allows the market to work more effectively to allocate resources.
PIs it efficient for the government to interfere with resource allocation by taxing luxury cars at 33 per cent while cask wine is taxed at around 11 per cent and toothpicks at 10 per cent? Is a tax on income derived from savings and investment ultimately efficient when there is a shortage of domestic savings and a rising foreign debt?
Unfortunately, not all the tax reforms introduced by treasurers between 2000 and 2013 met these three criteria.
What is bracket creep?
Bracket creep occurs when recipients of rising income gradually move into higher income tax brackets, which automatically increases their tax burden.
Explain the following feature of our tax system: Tax reform
Tax reform is an ongoing necessity so there are incentives to work hard and invest, and to ensure that Australia is internationally competitive.
. The Henry Review
. Actual tax reforms
What are the main types of federal budget expenses or outlays?
. Social security and welfare outlays (35%) . Health spending (16%) . Defence (5%) . Education spending (7%) . Transport and communications (1%) . Net payments to other governments
Explain the following type of federal budget expense/outlay: Social security and welfare outlay
These are government means and assets-tested cash transfer payments to the neediest groups. The main aim is to redistribute final incomes more equitably than market or private incomes so that even the poor can better access basic goods and services, thereby helping to reduce poverty and improving general living standards.
Federal welfare outlays claim around 35 per cent of total budget expenses. In the next few years, this expense is expected to rise with the added cost of government compensation to be paid to welfare recipients to help offset the effects on prices of the carbon tax.
These benefits include those for aged and war veterans.
Explain the following type of federal budget expense/outlay: Health spending
Health spending entails the provision of medical attention and incorporates consumption outlays on running expenses (such as drugs and staff salaries) and capital infrastructure (for example, hospital buildings) within the public health system.
In addition, health outlays cover the funding of medical subsidies paid for doctors’ services, the current maximum 30 per cent private health insurance rebate for lower income earners (with a 0 per cent rebate for higher income earners), the provision of free hospital services by state governments and some prescribed pharmaceuticals. This accounts for around 16 per cent of budget outlays.
Explain the following type of federal budget expense/outlay: Defence
Defence involves budget outlays for the payment of staff and day-to-day running expenses for the armed services. Increases in finance are provided where necessary for our defence capacity, and peacekeeping activities, border protection and surveillance, and for the war on terrorism. This takes around 5 per cent of budget outlays.
Explain the following type of federal budget expense/outlay: Education spending
Education spending represents more than 7 per cent of budget outlays and is designed largely to help provide public education through the payment of staff and the pro- vision of ordinary operating expenses.
This includes spending on universities, support of state and non-government schools, vocational education and training, and building programs.
Explain the following type of federal budget expense/outlay: Transport communications
Transport and communications cover current and capital spending on the provision of government infrastructure in areas like road, shipping, aviation and rail services.
The roads of national importance or highways programs and the recent nation building stimulus packages involving improvements to ports, railways, roads and broadband are specific examples of these outlays representing more than 1 per cent of all expenses.
Explain the following type of federal budget expense/outlay: Net payments to other governments
Net payments to other governments are federal handouts to state and local govern- ments to enable them to provide community services including public education, health, housing and transport.
Traditionally these payments were necessary because the states had few other sources of revenue from which to fund their outlays.
