Economics Assessment Task – The Budget Darshil Shah

Part A Glossary Budget: An outline of the Government's priorities and plans for the coming year, including an outline of the Nation’s fiscal and economic standing. Fiscal policy: Use of the federal government's powers of spending and taxation to influence the levels of growth in the economy. Fiscal Stance: The fiscal stance refers to the intended overall impact of the budget on the level of economic activity in the coming and future years. It can be neutral (G=T), expansionary (G>T) or contractionary (G<T). Budget Outcome: Budget outcome is the projection of the total outlay of the budget. It can be a surplus, deficit or a balance. Taxation: It is the compulsory levy imposed by a government. Australian Tax System – Some Concepts by MacVean Budget surplus: The amount each year by which government income exceeds government spending. Budget deficit: The amount each year by which government spending exceeds government income. Budget outlays: Economic activity of the government. Excise duty: A type of tax imposed on some goods and services due to their revenue they can generate along with their inelasticity. Excel Preliminary Economics by Jeremy Buultjens Regressive tax: a tax for which the amount of an individual’s taxes falls as a proportion of income as the person’s income increases Interest group: Organised collection of people who seek to influence political decisions. Automatic stabilisers: Devices built into the economy that triggers automatic fiscal effects such as the reduction of fluctuations by government spending. Tax scale: The levels of taxes imposed on income according to the income earned. Subsidy: Government financial assistance which is used to encourage the production, purchase and/or use of the good.
1 Rebate: A deduction from an amount charged or a return of a price paid by a business or the government to encourage positive use of a good or a service. Ecologically sustainable development: Using resources in a way that also conserves them, so that ecological processes, on which progress and life depend, are maintained. Public sector: In an economy it is the sector in which government activities occur. It is also where the Central Government resides. Funds: Providing of capital for a project, a person, a business or any other private or public institutions. Liabilities: A present obligation from past events that must be looked over. Environmentalists: People who typically favour policies that protect natural environments and partial or full restoration of altered environments to their natural state. Budget Analysis 2008/2009 – Short Response Questions 1. Fiscal Policy has the role of stabilising the level of economic activity. This further means the maintenance of a low inflation rate, reduction of the level of unemployment and achieving general policy goals. Growth rates must be stable in an economy, and the fiscal policy is the main tool that allows this to happen. It then directly and indirectly affects the unemployment level, policy goals and future stability to markets and the economy. 2. The various budget outcomes the government could choose are a balanced budget outcome (T=G), a budget surplus (T>G) or a budget deficit (T<G) 3. The different fiscal stances the government could choose are an expansionary fiscal stance (increase economic activity), a contractionary fiscal stance (decrease economic activity) or a neutral fiscal stance (no change in economic activity). 4. Cyclical components of the budget refer it the changed to government revenue and expenditure from changes in economic activity whereas the structural component refer to deliberate revenue and expenditure changes initiated by the government. This is also where the fiscal policy is revealed. 5. The projected fiscal outcome for 2008/2009 is $21.7 billion. 6. Top revenue items:1. Individual income taxation ($123700 million) 2. Company and petroleum resource rent taxation ($76410 million) 3. Sales tax ($48160 million)


4. Non-tax revenue ($20229 million) 5. Petroleum excise ($16100 million) Top expenditure items:1. Social security and welfare ($102439 million) 2. General government services ($79270 million) 3. Health ($46032 million) 4. Education ($18764 million) 5. Defence ($17896 million) 7. The budget has revealed many initiatives that will affect the nation. Some of these initiatives are a good step towards the underlying problem and provide suitable externalities whereas some come as the wrong decision. Three initiatives introduced by the government in the budget are: Tax cuts of $31 billion, Emission reductions with the use of $500 million and $1 billion to put computers on every desk of a year 9-12 student. The tax cuts will offer a decrease in taxation on specific tax brackets and hence offer relief to working families. However, this was certainly a forced effect from the pressure of the opposition Liberal government. In a path to satisfy public votes and provide appropriate basis of comparison, the budget has heavily been influenced to deliver to the public while in a way losing its main aim to lower inflation and fight other economic problems. Certainly this will put money back into the economy rather than the conventional attempt to lower spending. Nonetheless, it provides comfort to families struggling in the rising inflation/rising interest rates. This initiative uses an unorthodox approach to both keep the people happy and in the long term keep the economists happy. This is demonstrated with the deliberate introduction of ignorance towards their part in inflation hence lowering the risk of panic and events occurring therewith. Environment and the climate has become a sudden and important issue that affects the nation and the world. The federal budget has allocated $500 million to help the reduction of emissions from cars, factories and other sources. Even though this is a good start for the action of reduction of gases which sustains Earth, it is debatable as not being enough. This initiative will certainly start the renewal process of nature and encourage other businesses to adapt to the new motion of saving energy and minimising emissions. Along with this, there will be increased activity and market interest in ways to reduce this, hence increasing production for desired goods. However, as mentioned, this initiative is misjudged and misdelivered in a way that not enough will be delivered, causing havoc in ‘green’ activists. As ‘green’ as this initiative gets, there is still discomfort over the ratio in which what rate of industry is to be sacrificed over the rate of lowering carbon emissions. One of the famous promises by the Rudd government was to offer computer access to every single student in schools. That was however made unpopular by decreasing it to one in two students. Nonetheless, this initiative is better than nothing and will allow the technological leap in education that so many other


countries have taken. Positively, the budget is investing in the much needed area of education and starting general reform to the education system. It is also a good allocation of resources the government possess which will in the end encourage positive progress to education. On the other hand, this seems to be an unnecessary and overrated initiative that has grabbed the public’s attention. It will need to be more refined in order to properly affect what the government wants to achieve. 8. The budget holds an important role in the budget as it outlines where the tremendous money flows/suctions will occur and how the powerful maintenance of the economy will occur. There are many effects, both long and short, good or bad and expected or unexpected. In the short term, the budged will likely increase the spending due to tax cuts. Even though this is not the convention to lower the interest rate, it was necessary in order to satisfy the public. This tax cut will increase the inflation rate, to a degree, but will introduce the downturn of the growth rate later on. However with the increased spending on public services and reform, the budget will decrease the revenue the government receives. This is demonstrated due to the increased spending on education, health and further investment into funds that will help on periods of bad economic circumstances. In the long term, the inflationary rate will decrease along with the government’s revenue. Australia will undergo scheduled reforms, leading to certain change in Australian economy. Certainly in 2009 and onwards the trade and net income balance will decrease to a noticeable extent. However, these are all forecasts and in reality, economic activity will greatly vary to the consumers’ demands and the effectiveness of government stabilisation techniques. Fiscal policy will lower expansionary rates while the monetary policy will hopefully act on its behalf and lower its interest rates. All needs to work correspondingly in order for it to achieve the desired rate of the economy and at the same time be flexible in Australia’s trade policy. Even though everything needs to be in accordance, the economy in the long term will stabilise, while having a slight surge in the short term. It will all be worth it in the end, as the short scare will outbalance the supposed economic stabilisation. 9. Decisions are not only made by the acting government alone but are influenced by many interest groups, unions, parties and the media. The government is not only elected by the public alone, but rather political supporters who fund and further advance their party. The amount of seats are varied across each year and that further plays an important role towards what decisions are passed on the country and what influence is brought on the leading party. Political parties strategically impact the leading party’s decisions where either some functions are not performed (due to inadequate votes) or change the policy making in slow favour of the opposing party. Also, the parties that have representatives of them in parliament influence the decisions that government


makes and orders some policy to be in favour of them. The budget would have to be influenced by the conservation found in the Liberal party and some extensive measure from the Greens and other offbeat parties. Interest groups consist of people who possess knowledge on specific areas with a will to influence the political decision (including the budget). The budget essentially will outline plans to how to expense its funds and how to gather its funds. Interest group usually form in a cluster, and with this comes their power to speak for their area of concern. What allows them to reach out to governmental bodies is their formation of organisations, which allow great influence on the people’s though and hence the government reaction. Examples in which interest groups influenced the 2008/09 budget were the Australian Pensioners Agency, urging the government to provide more care to aged people. Unions can also influence the decision making as they can hold tremendous power to influence their followers and therefore the government. Nearly ¼ of workers are members of their respective unions, having power to speak on behalf of the workers. The large amount of workers can demand or change their working conditions through their unions in a wave of movement. The government must comply with many of the requests in fear of facing a strike detrimental to the Australian industry. In the 2008/09 budget, unions of all general workers showed demand in changing the WorkChoices introduced by the Howard government. This has to be done, as discontent cannot be withheld in a newly appointed government. The media might be the most important media to spark controversy and thought on governmental policies/decisions. The media has the power to present happenings of the word to the general public, whether it is biased or unbiased. The media can influence the public yet again to question current happenings and use that to indirectly affect governmental decision making process. An example includes the use of striking and sometimes over exaggerated scenes of healthcare, causing widespread panic and hence demands for more policies that deal with the specific issue. Overall, there are many bodies of influence that affect the decision making process of the government. There were current issues, ideas and discussions which to some extent influenced the government to deliver the budget to what it is now. Without these public processes the requirements of individuals and groups would not be met.


10. i) Angelo Gavrielatos, representing the Australian Education Union puts forward his opinion of an underfunded education system and the failure to deliver what is really necessary for parents/students. Angelo Gavrielatos is entirely correct in his evaluation. It seems the budget has announced the policies for education in favour of public popularity and not considering the real improvements needed that have long been neglected. Education is debatable to whether its operation is correct or malfunctioned. However, it is evident that Australia needs a clear reshape to the education system allowing greater expression from students and better funding to provide resources that will empower their future. However, it has not been addressed in the current budget. This can better be described in an analogy where shiny things are the means of people to get excited and be attracted to. This is exactly the behaviour received in the 2008/09 budget, avoiding the real issues that need to be faced. In the end however, Mr. Gavrielatos’ opinion is highly acceptable and comprehendible as the budget does need some redefinition along with a deeper look to what is required.

ii) Paul Kerin of the Melbourne Business School offers a mixed opinion of the budget, showing some good moves but no real reform. As with anything, there are negatives and positives for all. In saying that, Paul Kerin offers a fair perspective towards the budget, and outlines bad decisions such as the non-means tested first home buyers’ grant and the good decisions such as the changed perspective towards same-sex relationships. The concurrent argument throughout many economists seems the lack of great reform which was in a way needed to spark a new economic system in hope for lowering inflation. The argument presented is not the strongest due to the generalisations but offer a good overview of misjudged decisions that will be costly to the government and society.


iii) Lyne Pezzullo describes the measures of the budget in relation to Health. The budget of 2008/09 seems to have delivered the results required in the short term, but has doubts of long term sustainability. Further, Lyne shows the governments speed in the recent months and with this health is greatly focused on. The general funding will allow Health services to grow and at the same time allow some much needed reform. The opinion presented is greatly agreeable but with a sense of questioning in areas such as the immediate praising of the health system. The Medicare levy increase is in fact a good decision, and will offer benefits to people who don’t require private health insurance in that income bracket. It is likely that some policies introduced in the budget help Health, yet public dissatisfaction will continue as regular complaints in wait times and common faults will be overlooked.


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