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Economics U4 > Unit 4 AoS 1 > Flashcards

Unit 4 AoS 1 Flashcards

(60 cards)

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1
Q

How does Budget affect AD

A

Is an “AD management policy”
Change receipts vs outlays&raquo_space; influences leakages and injections&raquo_space; manage EA level (CFM)

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2
Q

Aim of AD Policy

A

To soften short-term cyclical fluctuations in EA by applying policies in a countercyclical way&raquo_space; increases LS through DMEG

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3
Q

Budget is not set bc…

A

Is an estimated/projected value

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4
Q

Sources of Gov Revenue

A
  1. Direct Taxes
  2. Indirect Taxes
  3. Non-tax revenue
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5
Q

Composition of Gov Revenue

A

70% Direct taxes
22% Indirect
The rest is non-tax revenue

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6
Q

Sources of Direct Taxes

A
  1. Personal income tax
  2. Medicare Levy
  3. Capital gains tax
  4. Corporate Tax
  5. Fringe Benefit Tax
  6. Petroleum Resource Tent Tax
  7. Superannuation Fund Tax
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7
Q

Sources of Indirect Taxes

A
  1. Excise Duty
  2. Customs Duties/Tariffs
  3. GST
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8
Q

Sources of Non-tax Revenue

A
  1. Profits from Gov Business Enterprises (GBEs like Aus post)
  2. Asset sales (e.g. sell parts of business)
  3. Interest (e.g. HECS loan, property revenue etc.)
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9
Q

Types of Taxes (measurement)

A
  1. Progressive Taxes
  2. Regressive Taxes
  3. Proportional Taxes
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10
Q

Examples: Taxes by Measurement

A

Progressive: personal income tax&raquo_space; diff bracket with cutoffs&raquo_space; tax added as higher

Regressive: GST - impact lower more
Proportional: Company Tax - 30% for large, 25% for SMEs

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11
Q

Impact of of Progressive Taxes

A
  1. Pruch Pow more even&raquo_space; fair
  2. Extra revenue for outlays (LS up)
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12
Q

Impact of Regressive Taxes

A

Widens Purch Pow Gap

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13
Q

Impact of Proportional Taxes

A

Fairly neutral on income distribution - constant impact regardless of income level

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14
Q

2 Ways of Classifying Gov Outlays

A
  1. Specific Function they serve
  2. General Econ Type and Nature
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15
Q

Maiin Goal of Gov Outlays

A

To correct market failure and improve resource alloc that would otherwise occur if there was total reliance on market or price system and priv sector

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16
Q

Types of Gov Outlays: Function

A
  1. Social security and welfare
  2. Health Spending
  3. Defence
  4. Education Spending
  5. Mining, Manufacturing and construction
  6. Transport and communications
  7. Housing and Comm Amenities
  8. General Public Services
  9. Public Debt Interest
  10. Net Pay to other Govs
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17
Q

Types of Gov Outlays: General Econ Type/Nature

A
  1. G1 - Gov Current/Consumption Spending (90%)
  2. G2 - Gov Capital/Investment Spending (10%)
  3. Gov Transfer Payments (35%)
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18
Q

Purpose: G2 Spending

A

To help grow PC&raquo_space; conditions more fav for businesses to operate so can improve daily lives of households

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19
Q

Purpose: Gov Transfer Payments

A

To redistribute incomes&raquo_space; more equitable&raquo_space; reduce poverty&raquo_space; LS up

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20
Q

E.g.: G1 Spending

A

Pay staff of public sector, health, defence, education
Stationery and office supplies

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21
Q

E.g.: G2 Spending

A

National social and econ infra, airports, NBN, water supply, roads etc.

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22
Q

E.g.: Gov Transfer Payments

A

Disabled, unemp, students, aged etc.

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23
Q

G1 vs G2 vs Gov Transfer Payments

A

Gov Transfer is NOT seen as G1 or G2 because the spending is done by recipients

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24
Q

Types of Budget Outcomes

A
  1. Budget Balance
  2. Budget Deficit
  3. Budget Surplus
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25
Effect of 3 Budget Outcomes
1. Balance = neutral stance >> little effect on AD/EA/DMEG 2. Deficit = expansionary on AD/EA 3. Surplus = contractionary to slow inflat booms
26
How to Finance Budget Deficit
1. Borrow from Overseas 2. Borrow within Aus
27
Pros of Borrowing O/S
1. Cheaper repay bc lower interest rates O/S 2. Avoids crowding out
28
Cons of Borrowing O/S
1. Adds to NFD (CAB weak) 2. Can erode credit rating
29
How Gov borrows within Aus
1. Source from RBA (use savings from surplus OR sell bonds to RBA [which is just the same as printing money]) 2. Borrow from Private investors (by selling bonds/treasury notes)
30
Pros of Borrow Within Aus
Money withdrawn is returned in outlays
31
Cons of Borrow Within Aus
Can cause crowding out >> less private money left to borrow >> less EA when its needed
32
Neg Effects of Budget Deficit
1. Loss of Credit rating 2. Interest paid takes money away from comm services 3. Less able to deal with econ crises 4. Increase debt is unsustainable >> burden on future generations
33
Why Deficit >> less able to deal with econ crisis
1. Lack savings >> no "fighting fund" 2. Debt >> expensive borrowing + reduced capacity
34
Purpose of a Budget Surplus
1. Reduce Debt (BUT - can cause "crowding in") 2. Build up savings with RBA as future fund (but means redirect priv sector money >> less bank credit >>> % up 3. Add to investment Balances in Special Savings Fund ("seed capital" for future early stage finance)
35
Pos Effects of Surplus
1. Offsets deficits and avoids debt 2. Create fighting fund for bad times 3. Protect Aus credit rating (+ credit cheaper in future + no interest repay) 4. Generates Confidence (confident investors >> better external situation)
36
"Operational Aim" of budget
In Med-ter = to return to surplus thru "fiscal consolidation"/"repairing the budget" >> raise receipts and lower outlays
37
How Reporting Budget Outcome
1. Headline Cash Outcome 2. Underlying Cash Outcome
38
Budget Volatile Items
e.g. Earnings from FutureFund (reinvested rather than spent) e.g. Net cash flows from investments in financial assets
39
E.g.: Gov Financial Assets Investments
- Sale of GBEs to prov sector - % from loan repayments
40
Most Common way of report budget... why?
Underlying cash outcome Headline makes estimation look better than actual Underlying less politic distortion >> better see AD impact
41
Underlying can be Expressed as...
1. Dollar amount (most common 2. % of Real GDP (better shows AD and EA impacts)
42
Events that effect Budget Outcome
1. Aus GDP growth 2. Unemp rate 3. Overseas EG 4. Commodity Prices and TOT 5. Wage and income growth 6. Unforeseen events (e.g. climate) 7. Political Obstacles + Numbers in Parl (e.g. hostile >> affects final outcome) Good umbrellas often trick whale children periodically
43
When are budget deficits used
Used in SHORT term when econ needs stimulus - BUT can become unsustainable
44
Relationship between Outcome + Stance
Budget Outcome is a guide to the type of stance adopted (better reveals stance and impact when expressed in GDP)
45
Types of Budget Stance
1. Expansionary Stance (deficit) 2. Contractionary Stance (surplus) 3. Neutral stance (balance)
46
Why deficit expands
Less is taken out than is returned Grow deficit >> more expand Smaller deficit >> less expand
47
Why surplus contracts
More is taken out than is returned Grow surplus >> more contract Smaller surplus >> less contract
48
Function of Aus Gov
To stabilise AD and EA levels >> create conditions optimal to achieve key DMEG and LS by regulating spending and reducing severity of booms and recessions
49
How Econ Stabilisers work
Works by changing receipts rel to outlays Applied countercyclically
50
Auto in a Slowdown
Auto becomes more expansionary bc... 1. Less receipts from less income spending 2. Increase welfare outlays
51
Auto leads to debt?
Auto should not lead to a rise in gov debt Can lead to CYCLICAL deficits BUT should be paid back by cyclical surplus
52
Auto in an Upswing
Auto becomes more contractionary 1. More tax receipts from more income/spending 2. Less welfare outlays
53
When are Discretionary Used
Used when auto alone is not sufficient (e.g. prolonged recession) BUT - should be removed after crisis or can lead to structural deficit
54
Discretionary in a Slowdown
1. Disc reductions in tax rates 2. Dis rises in planned outlays
55
Pros of Disc in Slowdown
Short term help + popular with voters
56
Cons of Disc in short term
Politically difficult to remove (esp if election year) Risk perm struct deficits >> debt rises
57
Disc in an Upswing
1. Discretionary rises in tax rates 2. Disc cuts in planned outlays OR slower rises in planned budget outlays
58
Strengths of Budget Policy
1. Auto and some discretionary can work quick bc little time lags (lower monetary) 2. Discretionary is precise >> targets the most needed (general monetary) 3. Budget works direction and effectively to regulate AD (monetary is less direct) 4. Some budget can also grow AS as a bonus 5. Budget bill must be approved and debated >> reject ill-design
59
Weaknesses of Budget Policy
1. Some Disc can become pro-cyclical bc time lags before impact 2. Finance constraints + create deficit >> limit budget options in future 3. Budget can undermine monetary (crowd in and out) 4. Constraints from Trade offs by other Gov Econ/Social/Environ goals 5. Adverse Political Constraints can limit Budget options/effectiveness 6. Psychological constraints reduce budget's effectiveness as stabiliser
60
2 Types of Political Constraints
1. Absence of fed gov majority in upper house 2. Adverse Voter Reaction

Economics U4 (2 decks)

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