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Unit 4 AOS 1 Outcome 1

The need for AD policies in terms of stabilizing the business cycle

Unit 4 AOS 1 Outcome 1 The need for AD policies in terms of stabilizing the

sources of government revenue including direct and indirect taxation, revenue from government businesses and the sale of government assets

types of government expenses including government current and capital expenditure and transfer payments the budget outcome: balanced, deficit or surplus Unit 4: Managing the economy VCE Economics 20172021 24

the ways government may finance a deficit or utilise a surplus the relationship between the budget outcome and the level of government (public) debt

the role of automatic stabilisers (cyclical component of the budget) in influencing aggregate demand and

stabilising the business cycle

the role of discretionary stabilisers (structural component of the budget) in influencing aggregate demand and stabilising the business cycle the effect of automatic and discretionary changes in the budget on the budget outcome and government (public) debt the stance of budgetary policy: expansionary or contractionary

the effect of budget initiatives from the past two years on the Australian Government’s domestic macroeconomic

goals of strong and sustainable growth, full employment and low inflation

the strengths and weaknesses of using budgetary policy to achieve the Australian Government’s domestic

macroeconomic goals and how these goals may affect living standards.

sources of government revenue including direct and indirect taxation,

revenue from government businesses and the sale of government assets

sources of government revenue including direct and indirect taxation, revenue from government businesses and the sale

Direct taxes Personal income tax Capital gains tax Medicare levy Withholding tax Company tax Fringe benefits tax Petroleum resource rent tax (PRRT) Superannuation fund tax

sources of government revenue including direct and indirect taxation, revenue from government businesses and the sale

Revenue from GBE's and sales of assets

Government Business Entreprises-e.g. Australian rail and track corporation

NBN co Australian Postal corporation (Australia post)

Occasionally the government may decide to privatise GBE's e.g. Telstra by selling shares in a selling shares in GBE's or selling the company

completely

Non Direct Tax Revenue

Excise duty GST Customs duties and tariffs

Non Direct Tax Revenue • Excise duty • GST • Customs duties and tariffs

Types of government expenses

Current

Government current spending

(G1)

Payment of salaries for government employees and in public sector including health, education and defense, day to day operating expenses

Capital

Government transfer spending (G2)

Welfare payments and grants and industry assistance. Social security payments are means and assets tested transfer payments people in need. Redistributing final incomes and equitably.

Infrastructure and public goods to improve productivity

Budget Outcomes Balanced, deficit, surplus

Budget Outcomes

Balanced, deficit, surplus

Budget Outcomes Balanced, deficit, surplus
Budget Outcomes Balanced, deficit, surplus

Budget Outcomes

Balanced

Deficit

Surplus

Outlays=revenue

Outlays>Revenue

Revenue>outlays

Neither expansionary/contractionary (neutral stance-does not affect the level of consumption and production)

total spending exceeds total outlays

total receipts exceeds total outlays

Budget Outcomes Balanced Deficit Surplus Outlays=revenue Outlays>Revenue Revenue>outlays Neither expansionary/contractionary (neutral stance-does not affect the level

Ways which government may finance deficit

or use Surplus

 

Surplus

 

Deficit

Surpluses allow the government to invest more

Borrow from overseas

into public goods which have positive externalities and improve productivity e.g.

Selling government bonds (expansionary budgets 2008-2009 and 2016-2017)

health, education, roads and public transport

Borrow from RBA (print more money)

Special funds e.g. future fund or medical research future fund

Selling of IOU's

Debt reduction

 

Save with RBA-’fighting fund’ for natural disasters

Borrow from Australian public sector

 

Selling of government bonds and treasury notes

Relationship between the budget outcome

and the level of government (public) debt

  • 1. The maintenance of fiscal balance is advantageous to the

government in the long term

  • 2. The operational role of the Budget is to achieve budget surplus in

the medium to long term, requiring budget receipts to be greater

than outlays

  • 3. The maintenance of budget surplus over the long term helps

reduce public debt and reduces reliance on foreign debt (NFD).

Business cycle

Business cycle

Role of automatic stabilisers (cyclical component of the budget) in influencing aggregate demand and stabilising the business cycle

Automatic stabilisers act automatically counter-cyclically over the coarse of a business cycle to reduce the fluctuations in GDP growth

Built into tax receipts and government expenses e.g. PAYG tax, GST and excise tax

Scenario 1-Cyclical Slowdown

  • 1. Cyclical downturn in level of GDP growth and unemployment

  • 2. Budget receipts from GST, PAYG (personal income tax falls)

  • 3. Increases level of disposable income and encourages C and I (AD)

  • 4. Budget outcome moves towards cyclical deficit

Scenario 2-Cyclical Upswing

1.Cyclical upturn in level of economic activity and GDP growth

2.Budget receipts from personal income and company tax increases

3.Discourages C and I and hence slows AD

4.Budget outcome moves towards cyclical surplus

Effect of automatic and discretionary changes in the budget on the budget outcome and government

(public) debt

 

Advantages

Disadvantages

Precisely targets areas of economy which need correction

Political barriers can create delays in implementation and passing

 

Permanent structural deficit may occur if stabilizers are nor removed after periouds of stimulus

Stance of budgetary policy: expansionary or contractionary

An expansionary budgetary policy-stimulate AD and economic activity Increase deficit Cut surplus

Contractionary budgetary or fiscal policy stance-seek to slow AD and economic activity

Reduction in size of deficit Rise in in budget surplus

Effect of budget initiatives from the past two years on the Australian Government’s domestic macroeconomic goals of strong and sustainable growth, full employment and low inflation

• Initiatives $840 million Youth Employment package with aim to get 120,000 vulnerable young people into

Initiatives

$840 million Youth Employment package with aim to get 120,000 vulnerable young people into jobs

Macro goals affected: Full employment, low inflation, strong and sustainable economic growth

$50 billion investment in infrastructure between 2013-2014 and 2019-2020

Macro goals affected: full employment, strong and sustainable economic growth

Introduction of Ten year enterprise tax plan-from first of July businesses with an annual turn over of less than $10m will have a tax rate of 27.5%

Macro goals affected: strong and sustainable economic growth, full employment

Tax discount of 8% for small businesses with annual turnover of less than $5m

Macro goals affected: strong and sustainable economic growth, low inflation

Sustainable path back to balance

Increasing the 32.5 per cent tax threshold from $80,000 to $87,000. This will stop around 500,000 taxpayers facing the 37 per cent marginal tax rate Macro Goals affected: Strong and sustainable economic growth (negative effect on goal of inflation)

2017-2018 Budget Initiatives

Strong and sustainable economic growth

Company Tax-Ten year enterprise tax plan to reduce company tax from 28% to 27.5%

Regional growth fund-$472m into regional infrastructure projects

Melbourne to Brisbane inland rail- $8.4b to Australian rail track corporation

Small business-$10m increase in small business tax threshold

2017-2018 Budget Initiatives Strong and sustainable economic growth Company Tax- Ten year enterprise tax plan to

Deregulation-$300m-national partnerships on regulatory reform-reduces costs of production

Welfare-introduction of cashless debit card

Full employment Skilling Australia fund- $1.5b towards apprenticeships and traineeships

Immigration reform-abolition of 457 visa and higher requirements for English language, work experience and visa renewals, and criminal history checks

Low inflation

Capital gains tax-CGT exemption for temporary residents removed Cracking down on multinational tax avoidance

Low inflation

Encouraging higher labour force participation

Affordable child care (Child care subsidy)-$37.3b to ease cost of living for 1million Australian families for before/afterschool childcare

Relationship to macro-goal of low inflation

This initiative will encourage parents/ single parents of young children to return to work, increasing labour force participation and AS (shift to right), placing downwards pressure on wage growth, by reducing the effects of demand pull inflation on the labour force while increasing Australia’s productive capacity.

Low inflation Encouraging higher labour force participation Affordable child care (Child care subsidy)-$37.3b to ease cost

Strengths and weaknesses of using budgetary policy to achieve the Australian Government’s domestic macroeconomic goals and how these goals may affect living standards.

 

Strengths

Weaknesses

 

Discretionary stabilizers

 

Short time lags

May become pro cyclical due to long tome lags

Do not create permeant deficit

Lack of flexibility to alter/remove

Precisely targets areas of weakness

Financial constraints and the creation of structural deficit

Also affects AS polices

Constraints may occur due to conflicts between government

 

economic goals political constraints can limit government budget options

Lack of majority

Adverse voter reaction

Limited powers of federal government

e.g. lacks power to raise/lower GST since would require approval

from states. Psychological constraints-prevailing business and consumer confidence

 

Automatic stabilisers

 
 

Function automatically without government intervention No political distortion Acts quickly to correct fluctuations in AD counter-cyclially

 

Imprecise-not targeted at specific areas of the economy