VCE Economics 3 + 4: Budgetary Policy

Budgetary Policy

An aggregate demand measure and relates to changes in the anticipated levels and composition of government revenues and expenses for the year

Budget revenues

The federal government's incoming receipts of money that pay for budget outlays. Taxation, for example is a major source of revenue for the government.

Budget expenses

They are outlays in the budget involving, for example, the provision of goods and services for the community and welfare

Direct tax

Is levied at a a proportion of income received by individuals or companies

Indirect tax

Is added on the price of a good or service at the point of sale, making the item more expensive

Non-tax revenue

Revenue derived from sources other than taxation, such as from the profits made by government enterprises, interest on loans paid by other governments, or the sale of a GBE

Pay-as-you-go (PAYG)

Is a direct progressive tax levied on incomes received by individuals at marginal rates of 0% up to 45%.

What are the main types of direct taxes?

- personal income tax

- capital gains tax

- medicare levy

- withholding tax

- company tax

- mineral resource rent tax (MRRT)

- petroleum resources rent tax (PRRT)

- fringe benefits tax (FBT)

- superannuation fund tax

What are the main types of indirect taxes?

- excise duty

- customs duties or tariffs

- carbon tax

- goods and services tax

What are the main types of budget outlays?

- social security and welfare outlays

- health spending

- defence

- education spending

- transport and communications

- housing and community amenities

- general public services

- public debt interest

- net payments to other governments

- mining, manufacturing and construction

Transfer payments

Government cash benefits paid to the neediest individuals. They are usually provided on the basis of means (income) and assets (wealth) tests designed to exclude people who are relatively well off. They are not included in either G1 or G2 as it is the recipient who spends the money.

Budget outomce

Represents the difference between the value of budget revenues and the value of budget outlays. The budget may be balance, deficit or surplus.

Balanced budget

Occur when the value of revenue equals the value of expenses

Budget stance

Refers to whether the budget is neutral, expansionary or contractionary in its impact on the level of AD and economic activity

How can the government finance a budget deficit?

- overseas borrowing

- borrow from the RBA

- borrow from the Australian public or the financial sector

Crowding out

Occurs when a government runs a deficit budget to stimulate the economy. If it is financed by local credit, it pushes up domestic interest rates. This undermines the efforts of monetary policy in stimulating a recovery.

Budget surplus

Occurs when the value of government revenues exceeds the value of government expenses, leading to a contractionary impact on aggregate demand.

Fiscal balance

Refers to a strong and sustainable financial position for the government's budget where, over the medium term, the budget surpluses generated in booms are more than sufficient to pay for or cover the budget deficits in recessions without the need to borrow or commit future generations to heavy debt repayments.

Automatic stabilisers

Changes in tax revenues collected and welfare outlays that are built into the budget and operate correctly in a countercyclical way to help stabilise AD, without the treasurer deliberately changing their level or announcing new policies

Discretionary stabilisers

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

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 such as asset sales and debt repayments

Underlying budget outcome

Represents the headline balance after subtracting the value of once-off volatile items, such as asset sales, special loans to state governments or debt repayments by other governments.

Fiscal outcome

refers to the overall financial result of a government's revenue and expenditure activities within a specific period, often a financial year

Countercylical budgetary policy

Adopting an expansionary stance to increase AD in a slowdown and a contractionary stance to slow AD during an inflationary upturn, thereby helping to stabilise the level of economic activity

What have recent budgets proposed to promote sustainable economic growth?

- rebates for rainwater tanks and solar panels

- the carbon tax

What are some weaknesses of budgetary policy in pursuing domestic economic stability?

- long time lags are a constraint for some discretionary stabilisers

- lack of ability to alter some budge outlays

- financial constraints limit budget options

- constraints due to conflicts between domestic stability and other government goals

- political constraints can limit budget options

- psychological constraints can affect the budget

What are some measures to promote savings and hence external stability?

- low tax rate (15%) applied to superannuation contributions

- no tax on contribution for low income households

- higher taxes on excessive drawings

(>100k p/a) of superannuation

- compulsory superannuation contributions of 9% increasing to 12% by 2019/20

- superannuation co-contributions of up to $1000 p/a for people with incomes less than $37000 p/a

What are some aspects of the budget that may affect the CAD and external stability?

- increasing the tax free threshold, could be used for more savings but could also be used on imports

- some spending involves imports e.g. defence spending and capital equipment for infrastructure

- changes in foreign aid affect net secondary incomes and hence the CAD

Fixed incomes

Are incomes that remain relatively fixed or unchanged over time. Retired persons, for example, are usually on fixed incomes as they may receive a pension that will only change if the government decides to increase the pension.

Progressive tax

A tax where the percentage of income paid in tax rises as taxable income rises

What are some recent changes to direct taxation to help promote equity in income distribution?

- increased tax-free threshold

- lower tax rates on savings interest

- exemption from medicare levy for lower income earners

- tax rebates for education costs

Asset test

A test which assesses wealth and is used to help decide who is eligible for an age pension or other government welfare

Means test

A cut-off level of income used to decide whether an individual is sufficiently needy to be entitled to government income support or welfare

Ageing population

This occurs when the median age of the population rises; results in more aged pension pressure on the budget outcome.