U4AOS1BUDGET

• Aggregate demand policies


  Policies aimed at influencing the total demand for goods and services in an economy
• Budgetary (fiscal policy)


  Estimated changes in the level of composition of government revenues and expenses for the year ahead
• Purpose of budgetary policy

  • Cyclical instability can be reduced by the government applying AD policies in a counter-cyclical way
• Sources of government revenue

  • Direct tax
  • Indirect tax
  • Non-tax revenue
• Direct tax


  Levied on those receiving income
• Personal income tax


  A direct tax paid by individuals who earn incomes in the form of wages, salaries, rent, interest, and dividends
• Medicare levy


  Designed to provide medical insurance
• Capital gains tax


  Levied on real profits made from the sale of capital assets
• Corporate gains tax (CGT)

  Large companies: 30% of each dollar of profit; Small and medium sized: 25%
• Fringe benefits tax (FBT)


  Tax paid by firms on the value of perks provided by businesses to their employees
• Petroleum resource rent tax (PRRT)

  Levied at 40% of the profits made from offshore petroleum operations
• Superannuation fund tax


  Levied at 15% of most premiums
• Indirect tax


  Added onto the price of some goods at the point of sale
• Excise duty


  Imposed on selected, locally produced goods; a flat amount of tax per physical unit
• Customs duties or tariffs

  Levied on certain imported goods to raise revenue and protect local producers from foreign competition
• Goods and services tax (GST)

  Broad-based indirect tax levied at the rate of 10%
• Types of tax


  • Progressive tax
  • Regressive tax
  • Proportional tax
• Progressive tax


  Narrow income inequality (e.g., PAYG tax)
• Regressive tax


  Widen income inequality (e.g., GST, excise duties, carbon tax)
• Proportional tax


  Neutral impact on income distribution, with a constant tax rate regardless of income (e.g., general company tax rate 30%)
• Main sources of non-tax revenue

  • Profits from government business enterprises
  • Receipts from asset sales
  • Interest
  • Petroleum royalties
  • Repayment of loans
  • GST administration costs
  • Property rentals
• Types of government expenses

  • How the government uses the revenues it collects to provide households and businesses with goods, services, and incomes
• Classifying budget expenses by function

  • Social security or welfare
  • Health
  • Defence
  • Education
  • Mining, manufacturing, and construction
  • Transport and communications
  • Housing and community amenities
  • General public services
  • Net payments to other governments
• Government current spending (G1)

  Wages, salaries for public sector employees, day-to-day operating expenses, purchases from the private sector
• Government capital spending (G2)

  Investments in infrastructure to grow the economy's productive capacity
• Government transfer payments


  Welfare benefits and industry assistance to redistribute income more equitably
• Budget outcome


  Reflects the total value of receipts minus the total value of outlays for the year
• Balanced budget


  Total annual value of receipts is equal to the total annual value of outlays
• Budget deficit


  Total annual value of receipts is less than the total annual value of outlays
• Ways to finance a budget deficit

  • Borrow from overseas
  • Borrow within Australia
• Budget surplus


  Total annual value of receipts is greater than the total annual value of outlays
• What the government can do with a budget surplus

  • Reduce debt
  • Build up savings balances with the RBA
  • Add to investment balances in special savings fund
• Advantages of running budget surpluses


  • Offset deficits and avoid debt
  • Create a fighting fund for bad times
  • Protect Australia's credit rating
  • Generates confidence
• Headline cash outcome


  Represents the annual difference between total cash receipts and total cash outlays from all sources
• Underlying cash outcome


  Derived from the headline balance but excludes volatile one-off items
• Factors affecting the budget outcome

  • Rate of GDP growth
  • Unemployment rate
  • Overseas growth rates
  • Commodity prices and terms of trade
  • Wages and income growth
  • Unforeseen events
  • Political obstacles
• Budget stance


  Relates to whether the change in the budget outcome is intended to have an expansionary, neutral, or contractionary impact on the level of AD + EA
• Budget outcome stance


  • Deficit
  • Surplus
• Evaluating expansionary budget


  • Budget deficits are typically expansionary because government spending exceeds tax revenue, boosting AD and EA
  • The change in the size of the deficit over time determines the stance
• Evaluating contractionary budget


  • Budget surpluses are typically contractionary because tax revenue exceeds government spending, slowing AD + EA
  • The change in the size of the surplus over time determines the stance