economics SAC term 3 no.1

AD policies

are applied counter cyclically to manipulate AD and economic activity, and improve living standards - budgetary & monetary policies.

budgetary policy (fiscal policy)

it is the way in which the government decides to spend its revenue and obtain its revenue to achieve its economic and social objectives for Australia

the overarching goal

is that there is ongoing economic prosperity and improved wellbeing for all Australians

budgetary policys economic & social objectives

internal & external stability, greater equity in the distribution of income and to achieve the most efficient allocation of resources

internal stability

economic growth, low inflation & full employment

external stability

current account deficit & net foreign debt

budget outcomes

is the relationship between the government's total revenue (income) and total expenses (spending) over a financial year

the 3 budget outcomes

budget surplus, budget deficit & balanced budget

budget surplus

occurs when the total government revenue is greater than total government expenses

budget surplus - budget stance

is contractionary because a surplus causes leakages to rise relative to injections in the economy

why the government uses a budget surplus

the government uses it to slow the economy in a boom by slowing spending and economic activity that is causing inflation

budget deficit

occurs when the total government expenses is greater than the total government revenue.

value of revenue less than value of gov expenses/outlays

budget deficit - budget stance

tends to be expansionary because it encourages AD & economic activity. stimulates production, employment & possibly inflation. Sometimes can be less expansionary because of fiscal consolidation

budget deficit is usually financed by government borrowing

1. overseas spending

2. borrow from the RBA

3. borrow from the australian public/financial sector

balanced budget

occurs when total government revenue equals total government expenses

revenue = outlays

balanced budget - budget stance

budget stance is neutral as neither expansionary or contractionary in its impact on AD and economic activity

budget stance definition

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

fiscal consolidation

describes a government reducing its expenditure/raising revenue with the aim of reducing the deficit or return the budget to surplus

fiscal strategy

is a government's long term plan for managing its revenue and expenditure to achieve specific economic and social objectives, setting out the overall approach to budget

fiscal strategy aims for goals like

low inflation, full employment & sustainable economic growth

government outlays

relates to how the government uses the revenue it collects to directly or indirectly provide household and businesses with G&S and incomes

government outlays impacts

impacts AD and economic activity by changing the levels of C, I & G

government outlays expenses/payments are classified in 2 ways

1. the specific functions they serve

2. their general economic nature or type

why are government outlays used

the government uses the budget to correct market failure and improve the allocation of resources

government debt

is the gov owing more (to owners of bonds) that it is owed at any given point in time

government deficit

is the gov spending more than they receive in revenue over a period of time (year)

budget outlays

also known as government spending, budget outlays are divided into 3 categories

the 3 types of budget outlays

current government expenditure (G1), capital expenditure (G2) & transfer payments

current government expenditure (G1)

includes spending on consumer goods, as well as wages and salaries of public servants and the running costs of schools, hospitals & defence

capital expenditure (G2) - gov capital spending/gov investment spending

spending on assets that will continue to provide benefits in the future such as infrastructure, including the building of new hospitals, roads & energy generation

transfer payments

involves spending on social security benefits and subsidies to industries. not included as G1 or G2 spending because it is the recipient of the transfer payment who spends the money

automatic (cyclical) stabilisers 

are changes to the budget that occur without deliberate government intervention and result from changes in the level of economic activity

discretionary stabilisers (structural component of the budget)

are deliberate policy decisions to change receipts or outlays in an effort to influence economic activity

counter cyclical definition

a policy or indicator moving opposite to the economic cycle, stabilising fluctuations

strengths of budgetary policy

1. can be used to increase national savings to improve external stability

2. can be implemented immediately once the budget has been passed

weaknesses of budgetary policy

1. the budget is based on treasury forecasts which aren’t always accurate and aren’t consistent (overseas conditions)

2. only implemented once a year - government have to wait to adjust spending or taxes