Eco U4 AoS1 - Budgetary Policy

Budgetary Policy

• The estimates and projections of the level and composition of the Federal Government’s receipts and outlays in order to assisst in the achievement of economic (Full Employment, Low Inflation, SSEG) and social goals in Australia.

• It is a government intervention

The Goal Of Budgetary Policy

• The overriding goal of budgetary policy is to improve the living standards (material and non - material) of all Australians, achieve the most efficient allocation of resources and acheive the macroeconomic goals of Strong and Sustainable Economic Growth, Low Inflation and Full Employment

Direct Taxes

Levied on the incomes received by individuals and companies. (Mention how its progressive).

Eg. Superannuation Tax, Fringe Benefits Tax (FBT), Personal income tax, Company and Resources rent taxes

Indirect Taxes

Levied on the production or sale of goods and services. (TB)

Placed on the sale of goods and services and added onto the price of items at the point of sale. (Cohen)

Eg. Goods and Services Tax (GST)→ levied on consumption, Excise→ levied on production, Customs Duty

Progressive Tax

A progressive tax is one where higher income earners pay a higher percentage rate of tax compared to lower income earners.

It is designed to tax higher income earners more heavily than low income earners, so that the overwhelming tax burden falls upon those with a greater capacity to pay.

eg. Australian progressive income tax system

Proportional Tax

Proportional taxes on income are those where the ‘rate of tax’ stays the same regardless of how much income is earned. This means that income earners will pay exactly the same proportion of their income in tax.

Eg. Company Tax - The best example of a proportional income tax in Australia is the company tax in so far as it relates to large companies (those with turnover more than $50m per year), where the rate is currently set at 30% of the income (profit) made by large companies. For those companies earning less than $50 million per annum, a lower rate of 25% applies.

Regressive Tax

Regressive taxes are those that result in the proportion of income paid in tax rising as income falls (or the proportion paid in tax falling as income rises). Most indirect taxes are regressive in nature, with the most common example being the GST.

The regressive effects of the GST are a result of it being imposed on the consumption of products purchased by households, rather than on the incomes of those purchasing the products. The exemption of basic goods from GST helps to reduce the overall tax burden for lower income earners compared to higher income earners.

Non - Tax Revenue

from sources other than taxation such as profits gained from the operation of GBE’s (eg Australia Post), also asset sales from privatisation (receipts from assets sales will only be included in the headline outcome, not the underlying budget outcome). Interest earned, petroleum royalties and repayment of loans by state and local businesses, property rentals as well. 

Breakdown of 25-26 Budgetary Policy

Composition of Expenses

The Federal Government’s expenditure is broken up into 3 groups:

Consumption or current expenditure (G1): represents payments for goods and services that will not result in ongoing benefits in the future

(e.g. payment of wages and salaries for federal government employees in the public sector including health, education, defence, housing, transport and welfare, along with the day-to-day operating expenses of departments. Purchase of goods and services from the private sector like prescription drugs and medications used in hospitals, educa­tional materials for schools, food and munitions for the defence department and the cleaning and repair of public assets are also included.)

Capital investment (G2): purchases of capital assets that will have ongoing benefits (e.g. infrastructure, schools, roads, railways, pipelines). G2 helps grow productive capacity.

Transfers: payments to the private sector (e.g. welfare payments, grants and industry assistance) This is where final incomes are re-distributed more equitably to increase access to goods and services for low income earners

Budget Outcomes

1. Balanced Budget

2. Budget Deficit

3. Budget Surplus

Balanced Budget

A Balanced Budget: the total value of government receipts or revenues extracted exactly equals the total value of expenses or outlays pumped back into the economy. (revenue = expenditure)

Budget Outcomes = 0

Budget Surplus

A Budget surplus would result if the total value of government revenues exceeds the total value of its expenses (revenues > expenditure)

Budget Outcome = positive

More leakages compared to injenctions, which leads to an decrease in the pace of economic activity, decreased rate of economic growth, leads to a contractionary effect on the level of economic activity.

Budget Deficit

A Budget deficit would result if  the total value of government revenue is less than the total value of government expenses.  (revenues < expenditure)

Budget Outcome = negative

More injenctions compared to leakages, which leads to an increase in the pace of economic activity, increase rate of economic growth, leads to an expansionary effect on the level of economic activity.

Headline Cash Outcome (not necessary but good to understand)

• The headline cash outcome: (whether it is positive or negative overall) represents the difference between cash outlays and cash revenues from all sources.

Underlying Cash Outcome

The underlying cash outcome: uses the figures for the headline balance (cash revenues - cash outlays) but then subtracts the value of volatile, once-off items such as those from asset sales, special loans to state governments or debt repayments by other governments. The underlying cash outcome excludes the following:

• Future fund earnings (an independently owned sovereign wealth fund into which the Government deposits funds to meet its future liabilities)

• Net cash flows from investments in financial assets for policy purposes (sale of GBEs, purchases of shares by the Government or granting/repaying state Government debt)

Current and Future Budget Predictions

Capital Expenditure

• G2

• Results in ongoing benefits

• eg. highways, bridges, railways, infrastructure, hospital buildings, school buildings

ReCurrent Expenditure

• G1

• Any expenditure that is for goods and services that will be consumed for that financial year

• Results in no ongoing benefits