fiscal policy

• Fiscal Policy


  The use of changes in the level and direction of government spending (G) and revenue (T) to achieve: Reallocation of resources, Redistribution of income, Stabilisation of economic activity
• Commonwealth Government Budget


  The main instrument of Fiscal Policy, an announcement of the planned levels of government expenditure (G) and government receipts (T) for the financial year
• Budget Papers


  Set out the government expenditure as Expenses and government receipts as Revenue
• Mid Year Economic and Fiscal Outlook (MYEFO)


  A statement released by the Federal government in December or January with updated forecasts
• Budget outcomes


  The summary of government expenditure and revenue for the next financial year, expressed as a budget deficit (G > T), budget surplus (T > G), or balanced budget (G = T)
• Fiscal Stances

  Neutral stance: A balanced budget is achieved where G = T, with a neutral effect on economic activity

  
  

  Expansionary stance: Involves a net increase in government spending through a rise in G or a fall in T, creating a larger budget deficit or smaller budget surplus

  
  

  Contractionary stance: Involves a fall in G and an increase in T, creating a smaller budget deficit or larger surplus
• In response to COVID-19 the government adopted an expansionary stance, with budget deficits increasing in 2020-2021 due to increased spending
• Since COVID-19, the stance has been contractionary, as the budget deficits are getting smaller and even posted a budget surplus
• Stabilisation of economic activity


  One of the market economy's major problems is that the rate of economic growth changes from year to year, often following an economic cycle of boom and bust. Fiscal policy can be used to reduce or smooth out these fluctuations in the business cycle.
• Expansion / Expanding / Expansionary

  Used to describe the economy when it's growing, or when government expenditure is increasing
• Contraction / Contracting / Contractionary


  Used to describe the economy when it's declining, or when government expenditure is decreasing
• Cyclical component (non-discretionary changes)


  The part of the budget that changes with the level of economic activity in the economy. Automatic stabilisers are in-built as part of the cyclical component which acts to dampen the extremes of a business cycle.
• Structural Component (discretionary changes)


  The main part of the budget where the government can directly alter economic growth through deliberate (discretionary) decisions on expenditure and revenue
• Automatic stabilisers


  Changes in the level of government revenue and expenditure that occur as a result of changes in the level of economic activity, without a deliberate change in government policy. Examples include unemployment benefits and progressive income tax system.
• With the onset of COVID-19 and government shutdowns, firms laid off workers leading to a sharp rise in unemployment, increasing from 5.2% in February 2020 to 7.5% in July 2020. This automatically increased government expenditure on unemployment benefits, providing people income they could spend on goods and services.
• Post COVID-19 economic growth has been strong, resulting in record low unemployment which reached 3.5% in 2022 (it's still low at 3.9% in 2024). This has automatically reduced government expenditure since the gov't is spending less on unemployment benefits. Furthermore, government taxation revenue has increased as more people are working and also getting wage increases that has pushed them into higher taxation brackets.
• How automatic stabilisers counterbalance the trend in level of economic growth and work to stabilise economic activity

  1 paragraph on how automatic stabilisers help to stabilise economic activity during a downturn

  1 paragraph on how automatic stabilisers help to stabilise economic activity during an upturn
• Expenditure (structural component)


  Increasing (or decreasing) funding in programs such as health, education, infrastructure, defence, and social welfare
• Revenue (structural component)


  Government can choose to increase or decrease its revenues by adding/removing/adjusting taxes – main taxes are income tax (PAYG), company tax and GST
• Transfer payments (social welfare)

  Increasing transfer payments would lead to higher disposable income and therefore greater levels of consumption
• Infrastructure spending


  The government engages firms (contractors) to build infrastructure on their behalf, creating demand for goods and services and jobs. Individuals employed then use their income for consumption, further increasing economic activity.
• The Australian Government has committed $120 billion over 10 years in infrastructure across Australia
• The government decreases taxes


  This will have an expansionary effect on economic activity
• Expansionary fiscal stance


  The government increases spending to stimulate the economy and/or decreases taxation
• Since the unemployment rate rose from 5.2% to 7.4% in 2020 in response COVID-19 shutdowns, the budget's automatic stabilisers (cyclical component) kicked in. Government expenditure rose due to increased unemployment benefit claims, increasing injections into the economy. Furthermore, the government collected less in income taxation as unemployment increased and wage rises slowed, decreasing leakages from the economy.
• In order to combat the economic effects of COVID-19, the government choose (deliberate/discretionary change) to increase government expenditure and reduce taxation to stimulate the economy and reduce the severity of the recession.
• In response to COVID-19 the government's fiscal stance was highly expansionary due to both the automatic stabilisers (cyclical component) responding to the drop in economic activity and the discretionary stimulus measures (structural component).
• Consumption


  Consumption of goods and services in the economy and therefore the amount of money in the circular flow of income
• Government (G)


  The government steps in to make up for a fall in demand by increasing spending or reducing taxation
• Expansionary stance


  The government's response to make up for the fall in demand
• Since the unemployment rate rose from 5.2% to 7.4% in 2020 in response to COVID-19 shutdowns, the budget's automatic stabilisers (cyclical component) kicked in
• Government expenditure rose due to increased unemployment benefit claims


  This increased injections into the economy
• The government collected less in income taxation as unemployment increased and wage rises slowed


  This decreased leakages from the economy
• Cyclical component


  Automatic stabilisers responding to the drop in economic activity
• Structural component


  The government's discretionary stimulus package
• Government stimulus package 2020


  In order to combat the economic effects of COVID-19, the government chose to increase government expenditure and reduce taxation to stimulate the economy and reduce the severity of the recession
• Government expenditure (G) acts as an injection to the economy
• In response to COVID-19

  The government's fiscal stance was highly expansionary due to both the automatic stabilisers (cyclical component) and the government's stimulus package (discretionary changes, structural component)
• Expansionary stance


  The government's response to COVID-19, as seen in increasing budget deficits since 2020 due to increased spending
• The government provided an unprecedented $291b of stimulus measures, involving both increases in government expenditure and reductions in taxation