Unit4 AoS1 Budgetary Policy

Question 1

Budgetary Policy

Answer 1

Refers to aggregate demand policies used by the government to affect the level and composition of government expenditure and revenue for the financial year ahead.

Question 2

Domestic Economic Stability

Answer 2

Refers to the simultaneous achievement of 3 key domestic macroeconomic goals – low inflation, full employment, and strong and sustainable economic growth.

Question 3

Budget Expenses

Answer 3

Federal government outlays contained within the budget. For example, welfare payments.

Question 4

Budget Revenues

Answer 4

Federal government incoming receipts of money contained with the budget. For example, taxation.

Question 5

Aggregate Demand Management Policy

Answer 5

Refers to budgetary and monetary policy used by the government to influence the level of spending, economic activity, and the achievement of key domestic economic goals.

Question 6

Direct Taxes

Answer 6

Refer to taxes paid directly to the government by individuals or businesses based on their income or profits. For example, personal income taxes and company taxes.

Question 7

Indirect Taxes

Answer 7

Refer to taxes added to the price of goods or services at the point of sale. For example, GST and excise tax.

Question 8

Progressive Tax

Answer 8

Refers to a tax system where the tax rate increases with higher taxable incomes. This tax system is designed to redistribute income more evenly between high- and low-income earners.

Question 9

Regressive Tax

Answer 9

Refers to a tax system where the tax rate decreases with higher taxable incomes. This tax system exaggerates income inequalities. For example, excise tax and GST are regressive taxes because the same tax rate applies to high- and low-income earners.

Question 10

Proportional Tax

Answer 10

Refers to a tax system where the proportional tax rate remains constant irrespective of taxable income level. For example, 30% tax on company profits irrespective of company size.

Question 11

Non-Tax Revenue

Answer 11

Budget receipts other than taxes. For example, profits from government businesses (Australia Post), asset sales (Medibank), interest earned from loans (HECs).

Question 12

Crowding Out

Answer 12

Suggests rising public sector spending decreases or eliminates private sector spending. For example, the government finances its budget deficit by borrowing locally, which raises the demand and price for credit relative to supply (higher interest rates), pushing out private sector borrowers and undermining monetary policy in promoting recovery.

Question 13

Tax Mix

Answer 13

Refers to the type or combination of taxes used by the federal government to raise revenue.

Question 14

Tax Base

Answer 14

The value of economic activities that are subject to tax. For example, the ‘tax base’ for Australia’s GST, is a value-added tax on the sale of all goods and services sold to consumers in a given year.

Question 15

Bracket Creep

Answer 15

Occurs when income growth pushes individuals into higher income tax brackets, increasing their tax burden.

Question 16

Budget Outcome

Answer 16

The difference between the total value of budget revenues and the total value of budget outlays. The budget outcome may be a balanced budget, deficit or surplus.

Question 17

Balanced Budget

Answer 17

The annual value of budget receipts is equal to the annual value of outlays.

Question 18

Budget Deficit

Answer 18

The annual value of budget receipts is less than the annual value of outlays.

Question 19

Budget Surplus

Answer 19

The annual value of budget receipts is greater than the annual value of outlays.

Question 20

Government Current Spending (G1)

Answer 20

Refers to government spending on goods and services for immediate use. For example, day-to-day running expenses of government departments such as, stationery and wages.

Question 21

Government Capital Spending (G2)

Answer 21

Refers to government spending on capital goods (physical assets) used to produce other goods and services. For example, spending on infrastructure such as highways, railways, and airports to help grow Australia’s productive capacity.

Question 22

Government Transfer Payments

Answer 22

A payment of money for which there are no goods or services exchanged. For example, welfare payments and interest payments on public debt.

Question 23

Operational Goal of the Budget

Answer 23

The budget is a document that sets out the level and composition of the government’s planned receipts and outlays for the next financial year, based on certain assumptions. Receipts largely come from personal income and company tax, while outlays are directed into welfare, education, defence, and health. The budget can be used as an aggregate demand policy to regulate the level of spending, and it can be used as an aggregate supply policy designed to grow a nation’s productive capacity.

Question 24

Budget Headline Balance (Budget Outcome)

Answer 24

The difference between total value of all budget revenues and outlays. Includes revenues and outlays from one-off events. For example, assets sales and debt repayments.

Question 25

Budget Underlying Balance

Answer 25

The difference between total value of all budget revenues and outlays. Excludes revenues and outlays from one-off events. For example, government assets sales and debt repayments.

Question 26

Budget Stance

Answer 26

Refers to whether the budget is neutral, expansionary or contractionary in its impact on the level of AD and economic activity. For example, budget deficits have an expansionary impact, while budget surpluses have a contractionary impact.

Question 27

Expansionary Budgetary Stance

Answer 27

Where the government increases spending/outlays relative to incoming revenue/receipts. The budget stance is considered ‘expansionary’, as this stimulates aggregate demand and economic activity. For example, a budget deficit has an expansionary budget stance.

Question 28

Contractionary Budgetary Stance

Answer 28

Where the government decreases spending/outlays relative to incoming revenue/receipts. The budget stance is considered ‘contractionary’, as this slows aggregate demand and economic activity. For example, a budget surplus has a contractionary budget stance.

Question 29

Countercyclical Budgetary Policy

Answer 29

Are aggregate demand budgetary and monetary policies designed to manipulate the strength of aggregate demand in a countercyclical way. For example, in a slowdown, a countercyclical policy action is increasing government spending or cutting taxes to help stimulate aggregate demand and economic activity. Conversely, in a boom, decreasing government spending or increasing taxes would dampen aggregate demand and economic activity.

Question 30

Automatic Stabilisers

Answer 30

Automatic stabilisers involve increases and decreases in the value of tax receipts and welfare outlays without direct intervention by the government. They are automatically activated by changes in economic activity and countercyclically alter the budget outcome and stance, to help steady aggregate demand and flatten the business cycle. For example, during a slowdown, tax revenues automatically drop because of falling sales, income and profits, while welfare payments rise due to higher unemployment. Conversely, in a boom, tax revenues automatically rise because of increasing sales, income and profits, while welfare payments drop due to lower unemployment.

Question 31

Discretionary Stabilisers

Answer 31

Discretionary stabilisers are deliberate changes by the government in tax rates, the tax mix, and the direction and composition of budget outlays to help steady aggregate demand and flatten the business cycle in response to serious economic developments.