AOS 4a Flashcards
(31 cards)
Budgetary policy:
The action by the government in collecting revenue and spending the proceeds. The treasurer delivers a budget that states how revenue will be collected and what it will
be spent on.
Aims of budgetary policy
Budgetary policy can be used to promote AD and pursue the government’s economic
goals including:
◦ Low inflation
◦ Strong and sustainable economic growth
◦ Full employment
Budget revenue: Direct taxes
Personal income tax
◦ Capital Gains Tax (CGT)
◦ Medicare levy
◦ Withholding tax
◦ Company tax
◦ Fringe Benefits Tax (FBT)
◦ Superannuation fund tax
◦ Petroleum resource rent tax
Budget revenue: indirect taxes
Excise duty
◦ Customs duty or tariffs
◦ Goods and services tax (GST)
Budget revenue: non-tax revenue
Repayments of loans by states
◦ HECS loan repayments
◦ Licence revenue
◦ Rentals, profits and dividends from GBE’s
Budget expenses
Social security or welfare outlays
Health
Defence
Education
Transport and communications
Housing
General public services
Public debt interest
Net payments to other governments
Government expenses
Government consumption spending (G1)
◦ Payments of wages and salaries for government employees
◦ Day to day operating expenses for departments such as defence, education and health
Government investment spending (G2)
◦ Spending on building, social and economic infrastructure
◦ Spending on equipment
Government transfer payments
◦ Paid to individuals – mainly welfare benefits
◦ Not considered G1 or G2 as it is the consumer (C) who spends the money
Budget outcomes: Balance budget
Revenues are the same as expenses. It is neither expansionary or contractionary.
◦ Has little effect on production, employment and inflation
Budget outcomes: Budget deficit
Revenue is less than expenditure ○ It is expansionary ○ It stimulates production, employment and inflation.
○ Financed by:
Borrow from RBA, Borrow from public or financial
sector, Overseas borrowing
Budget outcomes: Budget surplus
Revenue exceeds expenditure ○ It is contractionary ○ It slows production, employment
and inflation
○ What to do with the surplus:
Repay debt, Save with the RBA, Add to balances in special savings funds
headline balance
Represents the difference between cash outlays and cash revenues.
Underlying cash balance
Represents the difference between cash outlays and cash revenues but subtracts the value of one-off items such as asset sales that distort the true position.
Underlying balance gives a truer indication of the budget position and the effects it will have on the economy.
Fiscal balance
Fiscal balance is arrived at through an accrual approach — that is, it takes into account the impact of financial transactions even when they are deferred and there is no transfer of cash.
Over the duration of the business cycle, the government aims to have a fiscal balance by running surpluses during booms that are sufficient to pay for deficits that occurs during recessions.
Net Operating Outcome
Net operating outcome attempts to distinguish the effects of current and capital spending on the budget outcome. It is calculated by deducting net new capital investment from the underlying outcome (such as spending on infrastructure).
Helps to determine how well the government is meeting its recurrent obligation from annual revenue.
Automatic Stabilisers
Built in or cyclical stabilisers. They operate in a countercyclical way without the treasurer deliberately changing their level or introducing new policies.
Tax receipts and welfare payments to the unemployed act as automatic stabilisers.
In a downturn, the level of tax receipts will automatically fall due to higher unemployment, lower company profits and less sales of goods and services. Budget outlays will also automatically increase because of higher unemployment. This will tend to result in an expansionary budget deficit.
In an upswing, the level of tax receipts will automatically rise due to higher employment, higher company profits and more sales of goods and services. Budget outlays will also automatically decrease because of lower
unemployment. This will tend to result in an contractionary budget stance.
Discretionary stabilisers
Discretionary stabilisers in the budget are deliberate decisions by the Treasurer to alter tax rates or budget outlays. Sometimes introduced when automatic stabilisers are not enough to deal with prolonged recessions or booms.
e.g 2016 small business tax cut to 27.5%
DIFFERENCES BETWEEN ACTUAL AN
ESTIMATED BUDGETS
There are usually differences between the actual and estimated budget outcomes usually, because forecasts for economic activity are never entirely accurate. Included in each year’s budget documents are the forecasts for the performance of the economy upon which the budget outcome is based.
FINANCING A DEFICIT
When the budget runs at a deficit, the government needs to raise funds to cover the shortfall between receipts and outlays. To do this, the Treasury will issue bonds
and the purchasers of these bonds or notes essentially become lenders to the government.
They do this by:
Selling Bonds to the RBA
Selling Bonds to Australian investors
Selling Bonds to overseas investors
SELLING BONDS TO THE RBA
This is the most expansionary way of financing a budget deficit because that was not previously in circulation in the economy has now been released.
SELLING BONDS TO AUSTRALIAN
INVESTORS
Least expansionary method of financing a deficit because it results in crowding out the private sector.
An increase in bond sales puts upward pressure on on interest rates as demand for money in financial markets increases.
Consumption and Investment falls with higher interest rates, negating expansionary impact of a deficit.
SELLING BONDS TO OVERSEAS
INVESTORS
Selling bonds to overseas investors is borrowing from overseas to financial deficit.
Results in capital inflow which puts upward pressure on the value of the AUD and has a negative impact on net exports and AD, negating the expansionary impact of a deficit.
PROBLEMS WITH A DEFICIT
Budget deficits can lead to a build up of public debt over time. This can impact on Australia’s credit rating, borrowing costs and even larger deficits.
The government needs to balance running deficits to achieve it’s goals without the burden on future generations to repay what is a growing debt.
DEALING WITH A SURPLUS
A surplus can be used to:
Invest in financial markets
Repay existing debt
Develop future funds with a specific purpose (eg Education Investment Fun)
Surpluses can result in crowding in of the private sector. This is where the government becomes a net lender, creating a surplus of finds in financial markets and putting
downwards pressure on interest rates. This can increase consumption and investment and upward pressure on AD.
FISCAL CONSOLIDATION
Fiscal consolidation refers to a government reduces is expenses or raising its revenue in order to reduce a deficit or return a budget to surplus.
