Government in the Macroeconomy

Government Revenue, highest to lowest

  1. Personal income tax (47.2%)

  2. Company Tax → for being a business + profits (18.1%)

  3. GST → paid on expenditure (13.4%)

  4. excise and customs → trying to limit consumption (8.8%)

  5. superannuation fund taxes

  6. other taxation

  7. non-taxation → donations (8%)

Indirect taxes

  • applied to goods + services

    • not income/profits

  • burden of tax falls on consumers not producers

    • producers must pay, but increase the price to make consumers pay it

  • largest indirect tax → GST, excise + customs equivalent excise duties

    • fuel, alcohol (not wine), tobacco products, import tariffs

  • smaller taxes on → luxury car tax + wine equalisation tax

Government expenditure

  1. social security + welfare

  2. health

  3. general revenue assistance

  4. education

  5. defense

  6. response to COVID 19

  7. Public Debt Interest

  8. Transport and Communication

  9. Other

Social Security + Welfare

  • largest functional expenditure

    • above a third

  • age pension, family tax benefits, child care subsidies, Jobseeker, NDIS

  • seen in social security + welfare expenditure budget

Health Expenditure

  • 15% gov. expenditure

  • medicare, hospitals + aged care

  • COVID 19 = increase in spending

General Revenue Assistance

  • money paid (Aus gov → state gov + local gov.)

  • also called untied funding

  • able to be spent on anything

    • distinct from funds provided for specific purposes

  • mostly consists of GST

    • collected by Commonwealth, transferred to local gov., spent by local gov.

  • About 11.1% of gov. expenditure

Education

  • funding for primary, secondary + tertiary education

  • accounts for 6.9% gov. expenditure

COVID-19 Response

  • Jobkeeper program + Jobmaker Kiring credit

  • 9.5% gov. expenditure 2019-2020

  • 12.3% gov. expenditure 2020-2021

Taxation

  • purpose

    • redistribution of income

    • influences how resources are allocated

    • regulates economic fluctuations (business cycle)

  • classified w/ impact vs burden

    • impact → from whom the tax is collected/levied

    • incidence → where the tax burden falls/who pays the tax

Tax Classification

  • Direct Taxation → collected from income, impact + incidence falls on the same person/individual

  • Indirect Taxation → (GST, excise) collected from consumer spending, impact + incidence fall on different people

    • gov levies tax on producers

    • producers increases price

    • consumers pay more

    • producers gain typical profit + pays tax

  • producers give money for the tax, consumers pay

Types of tax

  • Progressive

    • increases rate of tax as income increases

    • burden falls mostly on upper income earners

    • as you move to upper tax brackets, you are taxed more

Taxable income

Tax

0-$18,200

Nil

$18,201 - $45,000

16c per $1 over $18,200

$45,001 - $135,000

$4,288 + 30c per $1 over $45,000

$135,001 - $190,000

$31,288 +37c per $1 over $135,000

$190,001 and over

$51,638 +45c per $1 over $190,000

  • Regressive Taxes

    • greater burden on lower income earners

    • decreasing proportion of income as income increases

    • GST + excise tax

      • flat rates on expenditure

      • same dollar value for high/low income earners

  • Proportional Tax

    • constant proportion of income regardless of income

    • company tax → 30% of profits

      • different from business tax

  • specific tax → charged on volume of sales (price irrelevant)

  • ad valorem → percentage of price (GST)

Macroeconomic Objectives of the Australian Government

  1. Sustainable Economic Growth (3-4%)

    “The capacity of the economy to satisfy material wants of its members”

    • measured by GDP rate of change

    • Potential Growth → determined by labour force growth, productivity growth

      Labour growth = 1.75%, Productivity 1.5%

    • Potential GDP Growth 3.25%

    • Actual rate of growth → depends on aggregate demand growth

    • higher real income + satisfies more wants

    • more demand for productive resources + labour

    • higher employment w/ higher growth

    • high growth puts pressure on factor markets (unsustainable)

  2. Price Stability (2-3%)

    • low rates of inflation

    • supply side pressures

      • cost of production (including transport) increases

    • demand pressures

      • disequilibrium w/ demand + supply

  3. Full Employment (under 5%)

    “Occurs when everyone who is willing and able to work can find a job”

    • impossible to achieve absolutely zero (frictional + structural)

    • frictional → 1.5 - 2.5% of all unemployment

    • Structural → mismatch of available skillsets + location (2-3% total unemployment)

    • Frictional + Structural = natural rate of unemployment + NAIRU

      • lowest rate of unemployment w/o inflationary pressure (4%)

    • cyclical/demand deficient unemployment comes last

Other objectives

  • equitable distribution of income + welfare

    • achieved as a byproduct

  • most have inequality

  • efficient resource allocation

    • involves changes @ microeconomic level

  • increase in productivity + increase in efficiency = increase in prosperity