Government in the Macroeconomy

• Australia has over two million public sector employees – 80% employed by state government, 12% by Commonwealth government and 8% by local government.
• Economic roles of government are:

  •Provision of public goods and services

  •Regulation of business enterprises

  •Redistribution of income

  •Macroeconomic management
• Each year, the Commonwealth Government delivers its budget – a plan for how it will collect and spend money in the coming year
• •In 2023-24, government planned to collect $680bn in revenue

  •92% of this revenue is from taxes

  •Income tax is the main method of raising government revenue

  
• Direct tax– imposed on income; burden of paying tax falls directly on the taxpayer; taxpayer pays tax directly to government
• Indirect tax – imposed on expenditure; burden of paying tax not directly felt at time of payment; tax is collected by a third party (retailer) and then passed along to the government
• Progressive tax - tax rate increases as the taxpayer's income increases. This means that individuals with higher incomes pay a larger percentage of their income in tax compared to those with lower incomes

  
• Proportional tax - the tax rate remains the same regardless of the taxpayer's income level. This means everyone pays the same percentage of their income in tax, leading to a consistent tax burden across different income levels.

  
• Regressive tax - the tax rate decreases as the taxpayer's income increases. This means that lower-income individuals pay a higher percentage of their income in tax compared to higher-income individuals –lower income earner are disadvatanged

  
• Income tax

  •Largest component of revenue – accounts for 48% of all revenue

  •Pay tax on paid employment, income received from trusts or businesses, investment income (rent, interest, dividends), capital gains, welfare payments

  •Direct tax – deducted from salary each week/month and sent directly to tax office

  •Progressive – rate of tax paid increases as your income increases 
• •Income tax

  •Australia has income brackets – relationship between income and tax paid

  •In each bracket, the marginal rate of tax (MRT) is higher

  •Average rate of tax is tax payable divided by income

  •Both MRT and ART increase as we move into higher tax brackets – as income rises

  •No tax is paid until you reach $18,200 – tax free threshold
• Company tax

  •Companies pay tax on their profits

  •Subject to a flat rate of 30% on taxable income

  •Small or medium businesses (turnover of less than $50m) subject to reduced tax rate of 25%

  •Direct as it is levied on company as taxpayer

  •Proportional as all companies pay same percentage of profit in taxes
• Goods and services tax (GST)

  •10% on G+S sold domestically for consumption

  •Tax included in final price of the good, paid by consumers at point of sale and passed to the government via the seller

  •Basic foods, some education courses and some medical, health and care products are exempt from GST

  •Distributed to the states via Commonwealth government, who determine spending needs and revenue raising ability of each state
• Goods and services tax (GST)

  •Indirect tax – burden is shifted from business to consumer

  •Regressive – larger percentage of income from low income earners than from high income earners

  •GST on a car worth $30,000 would be $3,000

  •Someone earning $60,000, the tax is 5% of their income; someone earning $120,000, the tax is 2.5% of their income
• Excise duty

  •Excise duty is a tax on alcohol, fuel and tobacco

  •Wholesaler of the product pays the tax on basis of total sales – BP would pay 46c in tax on each litre of petrol sold in it’s retail network

  •Indirect – passed onto consumer and is a tax on expenditure

  •Regressive – rate of tax is constant and greater burden on lower income earners

  •Placed on goods to create a disincentive to consume. Increased tax rates over time. Inelastic goods meaning it is quite effective in raising revenue.

  
• Customs duty – tariff

  •Tax levied on imports

  •Used to be quite high in the 80s, but Australia has adopted a trade liberalisation approach which is against protection

  •Custom duty is now responsible for just 2.5% of government revenue
• Taxes on superannuation

  •Most Australians pay 15% tax on their super contributions – generally less than MTR on income tax

  •Known as concessional contribution rate – encourages people to contribute to superannuation (capped at $25,000)

  •Direct

  Proportional – can be debatable
• Fringe Benefits Tax (FBT)

  •Levied (at the highest MTR) on the value of non-cash benefits given to employees are part of their salary package (such as company cars, school fees for children and low interest loans)

  •Introduced in 1980s in the interest of vertical equity (principle that people should pay tax according to their ability to pay) and horizontal equity (principle that those on the same income level should pay similar amounts of tax)

  •Proportional tax

  •Direct tax
• Resource rental tax

  •RRT are imposed over and above company tax in resource industries – oil, gas etc on the basis that these resources belong to the citizens, not just the company that has exploration and extraction rights

  •Australia has a Petroleum Resource Rent Tax (PRRT) at rate of 40% of taxable profits on oil and gas production. Only collects a small amount of overall tax revenue

  •Direct and proportional
• Other revenue

  •Collects revenue from sales of goods and services it provides to public or businesses, interest on funds in holds, dividends, fines and penalties levied on illegal behaviour by businesses
• taxes

  
• Macroeconomic objectives:

  Sustainable economic growth

  Price stability

  Full employment
• Sustainable economic growth

  •Increase in real output of goods and services produced in a country – measured by changes in real GDP

  •Aim for around 3% annually

  •Currently 1.0% - weakest rate of annual growth Australia has recorded in years
• Price stability

  •Refers to low inflation – important as inflation adversely affects spending power of households and firms, international competitiveness and distorts distribution of income

  •Has been the government’s goal post COVID recovery and Russia/Ukraine war, which lead to high levels of demand pull and cost push inflation

  •Target is between 2-3%

  •Currently 2.7%

  
• •Not all objectives can be achieved at once – trade off to be made.

  •These objectives are not all compatible

  •In an attempt to recover from COVID-19, government’s focus was on full employment – lead to increased government spending and falling interest rates – this encourages spending and lead to both economic growth and full employment goals being achieved

  •This was at the expense of inflation. Resulted in a cost of living crisis with inflation reaching a peak of 7.8%
• •COVID-19 2020 saw first recession in 28 years – March 2020 economic growth was -0.3 and June 2020 was -7.0. Unemployment rose from 5.2 to 7.4% in six months
• •Recovery period in second half of 2020 saw economic growth increase by 3.8% in September and 2.4% in December, but recovery slowed due to emergent of new COVID strains and lockdowns
• •2022 saw unemployment fall below 4% which inflation rose to a peak of 7.8% in Dec 2022 due to demand pull and cost push inflation
• •Currently experiencing periods of slow economic growth with just 0.2% in the June 2024 quarter. Inflation has slowed to 2.7% while unemployment is increasing at 4.2%

  •Predicting an increase in unemployment as consumer demand levels off due to increase interest rates
• macroeconomic objectives