Unit 4 AOS1 Economics - Budgetary Policy

Budgetary policy (fiscal policy)

Is an AD strategy that is directed by the treasurer that involves changes in the level of composition of budget receipts and budget outlays

G1

Government consumption spending

G2

Government investment spending

Budget receipts

Comes from direct taxes such as those on personal income and company profits and from indirect taxes such as excise or tarrifs

Budget outlays or expenses

Arise from various types of government expenditure on public goods such as defence heath and education involving both G1 and G2

Direct taxes

Levied on those receiving incomes, make up for almost 70% of all budget receipts

Examples of direct tax

• Personal income tax

• PAYG (Pay as you go)

• Capital gains tax

Capital gains tax (CGT)

Is levied on the real profits made from the sale of capital assets such as land and shares purchased after 1985

Indirect taxes

Are added on to the price of some goods at the point of sale, and making up nearly 24% of all budget receipts

Example of indirect taxes

• Excise duty

• Tarrifs

• GST

Excise duty

Tax on imposed on locally produced goods like petrol, alcohol and tobacco

Tarrifs

Tax on imports

GST

10% tax when purchasing a Good or service

Non-tax receipts

Raise around 7% of all federal governments recovery

Examples of non-tax receipts

• Interest

• GBE’s

Progressive taxes

Raises with the level of income someone earns

Regressive taxes

Increases income inequality (Gst)

Proportional taxes

Fairly neutral impact on the distribution of income

Surplus (contractionary)

Receipts>outlays = slow AD

Deficit (expansionary)

Outlays>receipts = stimulate AD

Types of budget expenses

• Education

• Mining, manufacturing and construction

• Defence

Government consumption spending (G1)

Includes the payment of wages and salaries for federal government

Government capital spending (G2)

• Involves budget outlays on national social and economic infrastructure

• Includes roads, hospitals and schools

Goal for the budget

To run a surplus over the median term

How to overcome a budget deficit (who does AUS borrow from)

• Borrow from overseas

• Borrow from RBA

• Borrow from private investors

Crowding out

A situation where by financing a budget deficit through the borrowing of money from domestic banks in the hope to stimulate AD, actually prevents borrowing by consumers and businesses due to reduced supply of money to loan out by banks, this slows AD by reducing C and I

Issues with a budget deficit

• Loss of credit rating

• Interest payments take money from providing community services

• Less able to deal with an economic crisis

• Can cause a burden on future generations

How to overcome a budget surplus

• Reduce debt

• Build savings balances with the RBA

• Invest more into savings for future generations

Advantages of a budget surplus

• Avoid debt

• Protects credit rating

• Generates confidence

Headline cash outcome

Represents the annual difference between receipts minus outlays

Underlying cash outcome

Uses the figure from headline balance then subtracts the value of volatile one-off items