Economic management: Fiscal policy

Economic management: Fiscal policy

Learning goal 1

• determine a rationale for the government to develop and implement macroeconomic policies, including the stabilisation of the economic cycle and the attainment of the range of economic objectives

Multiple Choice

A peak or boom is characterised by:

• Full employment and inflationary pressures due to the level of demand (expenditure) being in excess of supply.

• Lowest levels of income and output.

  Unemployment at its highest level.

  Consumer demand and sales at lowest levels.

  Few incentives to invest and expand.

• Rising unemployment, declining inflationary pressure and low business and consumer confidence.

• Rising economic activity including income, output and employment.

  
  

  Consumer demand rises

  
  

  Inflationary pressure

  
  

  Tightening labour market leads to rises in wages and salaries.

  
  

  Shortages begin to appear as economy

Multiple Choice

A contraction (downswing) is characterised by:

• Full employment and inflationary pressures due to the level of demand (expenditure) being in excess of supply.

• Lowest levels of income and output.

  Unemployment at its highest level.

  Consumer demand and sales at lowest levels.

  Few incentives to invest and expand.

• Rising unemployment, declining inflationary pressure and low business and consumer confidence.

• Rising economic activity including income, output and employment.

  
  

  Consumer demand rises

  
  

  Inflationary pressure

  
  

  Tightening labour market leads to rises in wages and salaries.

  
  

  Shortages begin to appear as economy

Multiple Choice

A recession (trough) is characterised by:

• Full employment and inflationary pressures due to the level of demand (expenditure) being in excess of supply.

• Lowest levels of income and output.

  Unemployment at its highest level.

  Consumer demand and sales at lowest levels.

  Few incentives to invest and expand.

• Rising unemployment, declining inflationary pressure and low business and consumer confidence.

• Rising economic activity including income, output and employment.

  
  

  Consumer demand rises

  
  

  Inflationary pressure

  
  

  Tightening labour market leads to rises in wages and salaries.

  
  

  Shortages begin to appear as economy

Multiple Choice

A recovery (upswing) is characterised by:

• Full employment and inflationary pressures due to the level of demand (expenditure) being in excess of supply.

• Lowest levels of income and output.

  Unemployment at its highest level.

  Consumer demand and sales at lowest levels.

  Few incentives to invest and expand.

• Rising unemployment, declining inflationary pressure and low business and consumer confidence.

• Rising economic activity including income, output and employment.

  
  

  Consumer demand rises

  
  

  Inflationary pressure

  
  

  Tightening labour market leads to rises in wages and salaries.

  
  

  Shortages begin to appear as economy

Demand management policies

• Fiscal and monetary

• The Australian Government implements fiscal and monetary policy to stabilise the level of demand (to stabilise the economic cycle) in the economy and help promote its economic objectives.

• What are the 6 economic objectives?

The six main macroeconomic objectives

• 1.  Price Stability inflation around 2-3%  

• 2. Full employment – the Natural Rate of Unemployment between   5% to 6%.          

• 3.  External stability – Acceptable Balance of Payments (CAD at 4% to 5% of GDP) and a stable currency            

•  4. Sustainable economic growth              

• 5. Equitable distribution of income            

• 6.      An efficient resource allocation:

  (i) Technical efficiency

  (ii) Allocative efficiency

  (iii) Dynamic efficiency

Multiple Choice

The desired rate of inflation is what percent?

• 1

• 2-3

• 4-5

• 5-6

Multiple Choice

The desired rate for unemployment is what percent?

• 1

• 2-3

• 4-5

• 5-6

Leaning Goal 3

• summarise the sources of government income (direct and indirect taxation, revenue from government enterprises and sale of government assets)

• ...and the components of government expenditure (current, capital and transfer payments) in the federal budget

Why is this important?

• Government income and revenue relate to budgets

• A budget is a statement of the government's estimated revenue and expenditure for the coming financial year

• Budgets have an effect of the overall level of aggregate demand in the economy of the short to medium term

• They also have an effect on resource allocation, distribution of income and individual household budget

Open Ended

Define a budget

Government income

• direct taxes on individuals (income, the Medicare levy) and businesses (company profits). It cannot be passed onto someone else.

  
  

• indirect taxes (the goods and services tax, customs and excise duties). These can be passed onto others by the firm.

  
  

• other revenues (dividends from government business enterprises and sale of government assets).

Multiple Choice

The three largest sources of Government revenue come from:

• Income tax, Superannuation taxes, Non-tax revenue

• Income tax, Company taxes, Sales taxes

• Income tax, Sales tax, Fuel excise taxes

Types of Government expenditure

• Current Transfers – Day to day financial transactions. transactions in which a resident entity in one nation provides a nonresident entity with an economic value, without receiving something of economic value in exchange.

• Capital Transfers – Transactions where one party has transferred ownership of something to another party without receiving anything specific in return.

• Transfer Payments – Payments from government to individuals and households in the form of cash social welfare payments, such as pensions, unemployment benefits, childcare subsidies and family allowances

Taxes

• Taxes can be used as a form of fiscal policy to stimulate economic activity or to reduce it.

• You need to read about:

• principles of taxation (there is 4)

• types of taxes (including proportional, progressive and regressive)

• effects of taxation (including raise revenue, redistribution of wealth, incentive to work and bracket creep- see handout)

Learning Goal 4

• analyse the role of automatic stabilisers and the role of discretionary spending in influencing aggregate demand and stabilising the economic cycle, and apply using diagrams

• 
  

  KEY IDEA

  Well-targeted discretionary use of fiscal policy, complemented by automatic stabilisers, can influence the level of demand in the Australian economy, although the levels of consumption expenditure and private sector investment remain the key determinants of the level of aggregate demand

Types of fiscal policy

• Discretionary fiscal policy: deliberate changes to fiscal policy instruments (government spending and/or taxes) to influence the level of aggregate demand; also referred to as ‘structural components of the budget’

  
  

• Cyclical components of fiscal policy or Automatic stabilisers: those elements of non-discretionary Fiscal policy that operate without the need for government action; that is, they automatically counterbalance changes in the level of economic activity

• They swing into action as real GDP changes, causing changes to AD to offset the employment and price effects of the gaps. Eg. Taxes and Welfare benfits.

Open Ended

Explain how automatic stabilisers and/or discretionary spending can influence aggregate demand and stabilise the economic cycle making reference to the diagram included.

Expansionary and Contractionary Fiscal Stances

• Expansionary fiscal policy is where government expenditure is increased or taxes are lowered to boost aggregate demand

• Contractionary fiscal policy is where spending is curbed or taxes raised to reduce aggregate demand

Paying for expansionary fiscal policy

• borrow from central bank (RBA)- ie. print money/increase the money supply (inflation pressures)

• borrow from domestic private sector (households and firms) -->competition between public and private sector in the financial sector --> higher interest rates and lower investment-->less impact on AD - G up I down) This is called the 'crowding out effect'

• borrow from overseas (=potentially access to cheaper funds and injection into circular flow--> increase in AD. BUT puts economy at risk of currency fluctuations and high levels of debt)

Learning goal 5

• investigate recent Australian federal budget outcomes to analyse the causes and effects of expansionary and contractionary fiscal policy stances

• •To identify the government’s fiscal stance the effect on the budget balance of the cyclical phase of the economy needs to be removed. This can be done by deriving the budget balance that would exist at a set level of economic activity: the full employment level of GDP: If a change in full-employment budget balance were observed, it must be a result of deliberate changes to government expenditures and/or taxes

  •The full-employment budget balance is also known as the cyclically adjusted budget balance, in summary:

  –An expansionary fiscal policy stance is indicated by an increase in the cyclically adjusted budget deficit or a decrease in the cyclically adjusted budget surplus

  –A contractionary fiscal policy stance is indicated by a decrease in the cyclically adjusted budget deficit or an increase in the cyclically adjusted budget surplus

• 
  

Activity

• Examine the sources provid

• Identify periods where the government may have needed to make counter-cyclical changes to the economy (expansionary or contractionary fiscal policy)

• Suggest whether this would have been an expansionary or contractionary stance

• Read through the handout notes and identify whether your predictions were accurate

• Download and look at the most recent budget (2020-2021)

• Read the fiscal strategy and outlook section and discuss what approach the Federal Government has taken towards cyclical changes caused by covid-19. Do you believe these will be successful?