Economics 2.2.3

fiscal policy and budget outcomes yr 10 2026

fiscal policy

refers to the use of government spending and taxation to affect the level of economic activity, resource allocation, and income distribution

discretionary fiscal policy

deliberate use of taxes or government spending to influence economy, used when non-discretionary fiscal policy is inefficient

discretionary fiscal policy examples

direct taxes

direct taxes

levied upon institutions or person's wealth, income and assets

non-discretionary fiscal policy

automatic or built in stabilisers, used to smoothen fluctuations of the economic cycle without the need for government intervention

non-discretionary fiscal policy examples

present tax structure, unemployment benefits

federal budget

statement of expected revenue and expected expenditure for the coming fiscal year

purpose of budget

decides how revenue should be raised and funds allocated to areas of need, redistributes income from wealthy to less wealthy, influences influence of macroeconomic activity

neutral budget outcome

balanced budget, where government expenditure is equal to government revenue

neutral impact

aggregate demand and economic acitivity is neutral

neutral effect

have little effect on production, employment and inflation

deficit budget outcome

expansionary budget, government expenditure is more than government revenue

G>T

this causes less money to be taken out of the economy through revenue than it is poured back into the economy through spending

deficit impact

expansionary impact on aggregate demand and economic activity

deficit effect

stimulates production, employment and inflation

becomes a contractionary stance

if the size of deficit is cut from one year to another as it is less expansionary

becomes an even more expansionary stance

if there is a rise in the size of the deficit relative to the size in previous years

surplus budget outcome

contractionary budget, government expenditure is less than government revenue

G

causes more money to be withdrawn from the economy through spending that it is returned in revenue

surplus impact

contractionary impact on aggregate demand and economic activity

surplus effect

limits growth in production, employment and inflation

becomes an expansionary stance

when comparing successive years, size of surplus is reduced due to less of rapid rise in revenue

becomes even more contractionary stance

if size of budget surplus increases from previous years

government revenue

total income a government receives to fund public services, infrastructure and operations

government revenue example

taxes, fees

government expenditure

total money government spends during a specific period

government expenditure example

infrastructure projects, welfare

expansionary fiscal policy

used to stimulate economy and has expansionary effect on aggregate demand and economic activity

expansionary fiscal policy involves

increasing government spending, reducing taxes which all inject money into the economy

expansionary fiscal policy examples

tax cuts, increased transfer payments

contractionary fiscal policy

used to slow down economy, has a contractionary effect on aggregate demand and economic activity

contractionary fiscal policy involves

reducing government expenditure, increasing taxes which all withdraw money from economy

contractionary fiscal policy examples

increasing tax, slashing government projects