eco essay - fiscal policy

discuss how fp has been used to influence resource allocation, redistribute income + stabilise business cycle

fiscal policy

involves the use of taxation and government spending to achieve the government’s economic objectives

automatic stabilisers

policies that operate automatically to counterbalance the trend in the level of economic

growth and to stabilise the economy (includes progressive taxation + unemployment benefits)

discretionary fiscal policy

deliberate revenue and expenditure changes initiated by the government

influence resource allocation: taxes on demerit goods

• e.g excise duty on tobacco and alcohol

  • diverts resources away from certain types of economic activity

influence resource allocation: government provision of public goods

• using government revenue to provide critical infrastructure that private firms fail to supply

  • e.g roads, railways, electricity

• e.g NSW hydroelectric scheme - Snowy Hydro 2.0 - $12 billion program

  • built by government-owned Snowy Hydro Ltd.

influence income distribution: progressive income tax

higher-income earners are taxed at a higher marginal tax rate + pay proportionally more than low-income earners

influence income distribution: tax free threshold - how does it reduce income inequality?

• $18 200

• helps low income earners retain more of their income

• provides tax relief

influence income distribution: tax cut change from 2020-23 to 2026-27 for 2nd lowest income tax bracket - how does this reduce income inequality?

• 19% to 15%

• provides tax relief for low income earners

  • reduces inequality in income distribution

influence income distribution: welfare payments

• designed to reduce inequalities

• directly redistributes income to those who are more disadvantaged

welfare spending % of government expenditure

37.1% (2026-27)

how much is current standard jobseeker payments?

$808.71 per fortnight

business cycle

fluctuations in the level of economic growth due to domestic and international factors

unemployment in July 2020

7.5%

GDP growth in June 2020

-7%

what was the budget stance during COVID and what was the budget deficit?

• expansionary stance

• 2020-21 - $134.2 bil. deficit

how did the budget deficit stimulate economy?

• government spending helped provide injections to the economy when consumers were less inclined to spend due to lockdown restrictions

examples of measures from the strong fiscal response in 2020

• stimulus packages - e.g JobKeeper ($89 bil, $1500 per fortnight)

• instant asset write-offs up to $150k (raised from $30k) for small businesses

after COVID, there was —- economic ——

strong, recovery

what did inflation peak at in Dec 2022?

7.8%

what caused the rise in inflation?

due to demand-pull inflation as lockdown restrictions were lifted + consumers could spend more, increasing AD

what was the budget stance and outcome in 2022-23?

contractionary stance, surplus of $22.1 bil

how did the government achieve a surplus budget?

• increase in export prices in 2022 - due to supply chain disruptions due to russia-ukraine conflict

  • iron ore, coal, gas

what did inflation fall to as a result of contractionary FP?

4.1%, Dec 2023