Fiscal Policy

Fiscal Policy
Fiscal Policy is a macroeconomic (influencing the whole economy) policy that can influence resource allocation, redistribute income and reduce the fluctuations of the business cycle. Government’s policy
What is the expected outcome for the 2012-13 Budget? Give a brief explanation.
1.5 billion dollar surplus; from deficit to surplus. They are using contraction Fiscal policy.
What is the expected outcome for the 2012-13 Budget? Give a brief explanation.
1.5 billion dollar surplus; from deficit to surplus. They are using contraction Fiscal policy.
Its instruments include government spending and taxation and the budget outcome.
In order to exercise Fiscal policy, the government uses the Budget where it shows planned expenditure and revenue for the next financial year.
Budget Outcomes There are three possible budget outcomes: 1. Fiscal Surplus (budget Surplus): total government revenue will exceed total expenditure 2. Fiscal Deficit (budget Deficit): total government expenditure will exceed total revenue 3. Fiscal Balance (Balanced budget): total government revenue will equal total government expenditure
The government’s main aim is to achieve fiscal balance, on average, over the course of the economic cycle.
Changes in Budget Outcomes 1. Cyclical (non-discretionary) impacts on the budge caused by changing economic (They don’t make the choice. It happens automatically)
Tax: Progressive tax
Examples are: * A boom period when taxation revenue is high and economic growth is strong, will cause a surplus or reduced deficit * A recession or slowdown when taxation revenue is low and economic growth falls will cause a deficit or reduced surplus.
Automatic Stabilisers
Automatic Stabilisers is the instrument inherent in the government’s budgets that counterbalance economic activity.
Boom/Upswing: Automatic stabilisers decrease economic activity as less welfare is paid and more taxation is collection.
Aim: reduced inflation
Explain the role of automatic stabilisers (cyclical component of the budget) from the period 2008-2012.
The role of automatic stabilisers from 2008-2012 were people started to lose their job due to GFC which causes Government to give money to the unemployed people and causes the increase of welfare payments and causes the taxation decreases and decreases the taxation receipt.
Explain the role of automatic stabilisers (cyclical component of the budget) from the period 2008-2012.
The role of automatic stabilisers from 2008-2012 were people started to lose their job due to GFC which causes Government to give money to the unemployed people and causes the increase of welfare payments and causes the taxation decreases and decreases the taxation receipt.
Recession/downswing: automatic stabilisers increase economic activity as more welfare is paid and less taxation is collected.
Aim: reduce unemployment or limit its increase
Net public sector debt: will peak in 2012 at $143 billion which will be 9.6% of GDP. This will decline slowly to $132 billion by 2016 (7% of GDP) as a result of small surplus budgets after 2012. This is viewed as the major economic negative of the period 2008-12 * How does this public sector debt relate to the goal of a surplus over the economic cycle? * To get Australia out of debt. * Explain the concept of fiscal sustainability. Which economic issue does this relate to? * Relate the concept of not running a long string of budget deficit over time. If we run a long string of budget deficit it will increase the public debt. * How did the budget position change from 1996-2014? (2012: 1.5billion budget outcome) ($43billion fiscal stimulus: building education revolution; high marginal propensity to consumer. $900 per semester. * Period 1997-2008 (string of budget surplus) * Period 2008-2012 (string of budget deficit) * Period 2012 onwards (string of budget surplus) 2. Structural (discretionary) impacts on the budget caused by deliberate changes to the budget by the government.
Examples are:
Increased spending or taxation with the aim of stimulating the economy
Contraction budget stands * How might this change the budget outcome?
Counter-cyclical policies: Governments will have policies to alter economic conditions
Automatic stabilisers play a counter-cyclical role but are not enough on their own to solve economic problem as they will only reduce the extremes.
Fiscal policy will have impacts on the following: * Economic activity * Resource use * Income distribution * Saving and the current account deficit (CAD)
The government sell more securities if they need more money. They increase the interest in order for people to buy the securities.
Describe the role of discretionary (counter-cyclical) policies from 2008-2011? The government uses discretionary policy to stimulate the economy. * List examples * Why were they used? * Were the counter-cyclical policies successful? E.g. recession or not, unemployment rate, net public sector debt, mismanagement. * Give examples from 2012 onwards. * Australia is now Mildly Contractionary fiscal stand. Tax revenue is increasing; new taxes e.g. carbon tax; mineral resources rent tax; reducing spending except for priority areas.
Impact on Economic Growth
The most important effect of the budget is how it influences the economy in the short term.
Expansionary: the government aims through the budget to increase the level of economic activity. This can occur through a reduction in taxation or increase expenditure. It will create a smaller surplus or a deficit.
GFC – this was used in order to counterbalance the negative effects of the GFC in 2008-2009.
Contractionary: the government aims to decrease the level of economic activity. This can occur through an increase in taxation or a reduction in spending. This will create a smaller deficit or a larger surplus.
Neutral: the government aims to have no impact on economic activity through the budget. There will be no change to the gap between expenditure and revenue.
Crowding out effect: Budget deficits decrease the size of national savings (public and private sector savings) as when the government borrows the private and public sectors are competing for this limited supply (total of $143bn from 2008-2012)
This competition for funds may put upward pressure on interest rates.
How may this impact on economic growth? * Decrease economic growth because Australia got limited amount of money to fund.
Regressive tax – low income wages get the same tax as the people who are high income wages.

Impact on Resource Use
Direct measures: government allocated money directly (discretionary spending) to an area of the economy where the market, will not provide the required good or service. These are called ‘public goods’ Fiscal policy can influence resource use directly by allocating spending to an area of the economy.
Indirect measures: tax and spending decisions that make it more or less likely for resources to be used in a particular way (Carbon Tax and Green energy/products)
List an example of direct (discretionary) spending on infrastructure over the next decade. Why is it being provided? * National Broadband network. Increase the productive capacity, as we live in a globalise country particularly in those rural areas. Improving roads, motorways, railways in rural area to increase the Australia productive capacity. Upgraded highways. Port being built in Sydney, to allows the increase productive capacity.
How do governments react to economic slowdowns/natural disasters with discretionary spending? * Increase welfare payments and other forms of disastrous relief. Glenn Stevens, governor of rural; decrease the cash rate.
Impact on Income distribution
The most important way to redistribute income is through fiscal policy. Progressive tax (automatic stabilisers) means people on higher incomes are taxed to provide services and income for people on lower incomes.
Unemployment and Workforce Participation: Fiscal policy can reduce unemployment levels by stimulating economic growth.
The stimulus packages of 2009 supported an estimated 20,000 jobs as unemployment rose by 1.8% where as other economies averaged a 3%-6% rise.
Since 2008 Australia has created 350,000 jobs compared to 17m lost in other OECD nations. This reduced income inequality as less people rely on welfare.
Organisation for economic co-operation and development (OECD)