Economics: Fiscal Policy, Taxation, and Stabilisers for Students

Purpose of this unit

To understand how fiscal policy, monetary policy, and microeconomic reform are used to keep the economy stable, growing, and fair.

Fiscal policy

It's how the government uses spending and taxation to influence the economy and achieve goals like low unemployment, stable prices, and growth.

The budget

A plan the government makes each year, showing expected revenue (taxes) and spending.

How can fiscal policy reduce unemployment?

Government can spend on construction, hospitals, and roads to create jobs.

How can fiscal policy reduce inflation?

Government can spend less or raise taxes to slow down spending.

Tax revenue

The money the government expects to collect from taxes.

Non-tax revenue

Money earned from government businesses (e.g., Australia Post) or selling assets.

Customs duty

Tax on imported goods (e.g., cars, clothes). Protects local businesses.

Excise duty

Tax on inelastic goods like fuel, alcohol, and cigarettes.

Income tax

Tax taken from wages.

Company tax

Tax on business profits.

Fringe benefits tax

Tax on work perks like company cars or gym memberships.

Superannuation fund tax

Tax on money put aside for retirement.

GST

10% tax on most goods and services, except basics like food, health, and education.

Direct tax

Paid straight to the government (e.g., income tax, company tax).

Indirect tax

Hidden in prices of goods/services (e.g., GST, excise tax on fuel).

Proportional tax

Everyone pays the same percentage of income.

Progressive tax

Higher earners pay a higher percentage of their income.

Regressive tax

Lower earners pay a bigger share of their income (e.g., GST).

Bracket creep

When rising wages push people into higher tax brackets, even if real spending power doesn't increase.

Adam Smith's 4 principles of taxation

Equity - Rich should pay more than poor. Collection - Taxes should be cheap/easy to collect. Certainty - People know what, when, and how much to pay. Convenience - Easy to pay (e.g., taken from wages).

How do higher taxes affect GDP?

Reduce consumption (C) and investment (I), increase government revenue (G).

How do lower taxes affect GDP?

Increase consumption (C) and investment (I), reduce government revenue (G).

Current expenditure

Spending on present services (e.g., teachers, hospitals).

Capital expenditure

Spending to create future benefits (e.g., new hospitals, roads).

Transfer payments

Money given without goods/services in return (e.g., pensions, unemployment benefits).

Discretionary fiscal policy

Deliberate government decisions to change spending or taxes.

3 budget outcomes

Deficit (GE > T), Surplus (GE < T), Balanced (GE = T).

3 stances

Expansionary (stimulate), Contractionary (slow down), Neutral (same as last year).

Effect of a surplus

Slows economy, reduces inflation (used in a boom).

Effect of a deficit

Boosts economy, increases jobs and growth (used in downturns).

Automatic stabilisers

Built-in systems that adjust automatically with the economy (e.g., taxes, welfare).

How do automatic stabilisers work in a boom?

More tax collected, less welfare spent → slows the economy.

How do automatic stabilisers work in a downturn?

Less tax collected, more welfare spent → stimulates the economy.

Why are they called "shock absorbers"?

They automatically smooth out economic ups and downs without new government decisions.