Budgetary Policy (Demand Side) Flashcards
(39 cards)
Budgetary Policy
Budgetary Policy is an aggregate demand measure and relates to changes in the anticipated levels and composition of government revenues and expenses for the year
Monetary Policy
Monetary Policy is a branch of macro economic policy operated by the RBA and designed to regulate the level of AD and economic activity. It relies most heavily on changes in interest rates to alter the cost, availability and demand for credit. (borrowed money)
Underlying Budget Outcome
Underlying budget outcome represents the headline balance after subtracting the value of once off volatile items. e.g asset sales, debt repayments and loans to state governments.
Headline Budget Outcome
Headline balance refers to the difference between the total cash value of budget receipts minus the cash value of total outlays from all sources, without the removal of items that are affected by one off events. e.g asset sales, debt repayments and loans to state governments.
Bracket Creep
Bracket creep occurs when recipients of rising income gradually move into higher income tax brackets, which raises the tax burden.
Policy Mix
Policy mix is the combination of different categories of policy (for example budgetary and monetary policy) to help promote a particular economic goal, such as low inflation.
Automatic Stabilisers
Automatic stabilisers are changes in tax revenues collected and welfare outlays that are built into the budget and operate correctly in a counter cyclical way to help stabilise AD, without the treasurer deliberately changing their level or announcing new policies.
Discretionary Stabilisers
Discretionary stabilisers in the budget are deliberate changes in tax rates, the tax mix and direction and composition of budget outlays specifically announced by the treasurer to steady economic activity in response to developments. e.g Abolishing, introducing or altering tax rates or altering the level of outlays on areas such as welfare, education and health.
Budgetary Stance
Budget Stance refers to whether the budget is neutral, expansionary or contractionary in its impact on the level of AD and economic activity
Direct Tax
Direct tax is levied as a proportion of income received by individuals or companies. e.g personal income tax (PAYG), company tax.
Indirect Tax
Indirect tax is added onto the price of a good or service at the point of sale, making the item more expensive. e.g GST (goods and service tax), excise tax, non tax revenue (gov sales of g/s, petroleum royalties.)
PAYG
Pay-as-you-go (PAYG) tax is a direct progressive tax levied on incomes received by individuals at marginal rates of zero percent up to 45 percent.
Progressive Tax
Progressive taxes are designed to redistribute income more evenly. The tax rate increases as personal income levels increase.
Regressive Tax
Regressive tax is a tax that tends to exaggerate income inequalities because low incomes are taxed at higher rates than high incomes. e.g excise taxes.
Three Transition Mechanisms
- Higher interest rates slow spending ( decrease in C, I leads to a decrease in AD, decreasing demand inflation. )
- Higher interest rates push up $AUD ( due to foreign investors, decreasing both demand and cost inflation. ) -Higher interest rates depress inflationary expectations ( businesses don’t raise prices. )
Persuasion
Persuasion involves the RBA influencing AD via statements that indicate future movements in the official cash rate.
Crowding out
Occurs when the government adopts an expansionary fiscal policy ( to prevent a recession ) and gets its funding by borrowing from domestic banks. This creates a cash shortage and there is an increase in demand for cash in the private sector, pushing up interest rates. This undermines the RBA’s efforts in decreasing interest rates to promote a recovery.
Dirty Float Steps
- RBA wants to increase the exchange rate 2. In the foreign exchange market, the RBA becomes a net buyer of $AUD or reduces its net sales causing the dollar to appriciate. 3. Stronger $AUD will tend to increase CAD but will slow inflation, AD and employment.
Steps in changing the cash rate
1, RBA announces a increase in the official cash rate. 2. RBA becomes a net seller of Government bonds and securities in the overnight money market. 3. A shortage of cash in the OMM drives up i/r 4. The higher cash rate then spreads via a “ripple effect.” The higher costs are passed on. 5. Higher I/R then impacts the economy via transition mechanisms.
How can budgetary policy be used to achieve domestic economic stability?
By operating in a counter cyclical manner (due to automatic and discretionary stabilisers ) these 3 eco goals are likely to be achieved. ( business cycle smoothing. )
How can budgetary policy be used to achieve external stability?
By moderating eco growth, (smoothing business cycle) the government can decrease the likelihood of spending “spilling over” into imports.
How can budgetary policy be used to achieve equity in distribution of income?
The nature of income tax is that as your income increases you pay a higher percent in tax which is transferred to low income earners via welfare. This is known as the “robin hood principle”.
Aims of monetary policy
Stability of the currency (low inflation), Strong and sustainable economic growth and full employment. (smoothing the business cycle)
How can a budget deficit be financed?
Overseas borrowing, (appreciates $AUD and adds to NFD) borrow from the RBA, (Increases inflation, basically involves the gov printing more money) borrow from the private/public sector. (“crowding out” increases interest rates)
