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1、UNIT 7 FISCAL POLICY7.1 The Operation of Fiscal PolicyA. The Nature of Fiscal PolicyB. Budget ObjectivesC. Government RevenueD. Government ExpenditureE. Budget Outcomes: Balance, surplus, deficitF. The Budget StanceG. Discretionary and Non-discretionary Fiscal PolicyH. Supply-side Fiscal Policy7.2 R
2、ecent Fiscal PolicyFiscal Policy over the previous yeara) Major budget itemsb) Compared to previous years - evaluate changes in policy emphasis7.3 The Effectiveness of Fiscal PolicyStrengths and Weakness: includinga) Times lagsb) Crowding out effects c) Taxation and Savings issues7.1 The Operation o
3、f Fiscal PolicyA. THE NATURE OF FISCAL POLICYBudget - definitionThe Commonwealth Governments estimates of its expected revenues and expected expenses usually for the next financial year period.The Federal Budget is announced in a policy speech delivered in May each year by the Treasurer (Currently M
4、r Wayne Swan) and is then published (www.budget.gov.au)Fiscal Policy - definitiono The use by the Government of its finances (spending, taxing and borrowings) to achieve the governments objectives for the level and type of economy activity.o The changes the Government makes to the size and compositi
5、on of government revenues and expenses to achieve its economic objectives o The use of Government spending and taxes to influence the nations output, employment and price level.B. BUDGET OBJECTIVESSee Study Guide Units 4 and 5a) Economic Growth= The increase in the real value of national production
6、over a period of time, usually a year.= An expansion in national output measured by the annual percentage increase in a nations real GDP.b) Full Employment c) Price Stabilityd) External Stabilitye) Efficiency in Resource AllocationThe basic economic problem is that there are limited resources availa
7、ble to satisfy our unlimited needs and want. Efficiency in resource allocation means using the least costly combination of resources to maximise the satisfaction of societys needs and wants, both now and in the future through promoting allocative, productive, dynamic and inter-temporal efficiency. f
8、) Equity in the Distribution of IncomeAs an objective, the government does not aim for an equal distribution of income because this would reduce the incentive to work and earn income. However, it does aim for a more equitable distribution of income. This means that the government wants to provide a
9、minimum living standard for low-income earners and their family and to reduce some of the income inequalities suffered by other members of the economy.C. GOVERNMENT REVENUEGovernment Revenue comes from 2 broad sources:a) Tax revenue, and b) Non-Tax revenuea) Tax revenue (see SG p58-60)i) The differe
10、nt types of tax include: Personal Income Tax Company Tax Excises eg Petrol, alcohol and tobacco excises Customs Duty Sales Taxes eg GST Superannuation Taxii) Direct and Indirect TaxesDirect taxesAre Taxes that are paid directly to the government by the person or institution that owes the tax. Person
11、al Income Tax on PAYG (approx 41% of Revenue) Company Tax set at 30% of profits (approx 25% of revenue) Capital gains tax Tax on profit on sale of assets Fringe Benefits Tax tax on gifts to workers by employers Indirect TaxesAre collected by a third party on behalf of the government. Indirect taxes
12、are regressive in nature. As income increases, the proportion of your total income that is spent on the tax decreases. (generally regressive) Excise duties on alcohol, cigarettes and petrol Custom duties (tariffs) GST replaced sales tax in year 2000(Goods and Services Tax = VAT (value added tax) in
13、other countriesiii) Progressive, Proportional and regressive taxesProgressive TaxesWhere the proportion of Income that is paid in tax increases as Income increases.Eg Personal Income Tax.Proportional TaxesWhere everyone pays the same percentage of Tax.Eg Company Tax Currently 30%. All companies pay
14、a Tax rate of 30% on profits irrespective of their level of Profit.Regressive TaxesWhere low income earners pay a higher percentage of their income in tax than higher income earners.Eg GST (Goods and Services Tax). Although the GST of 10% is a proportional tax it is regressive in effect. Low income
15、earners usually spend all of their income and save either little or nothing. Therefore they pay close to 10% of their income in GST. High income earners usually save a significant amount of their income and therefore pay GST on a lower percentage of their income than low income earners.b) Non-Tax re
16、venue (see SG p58-60)Non Tax revenue comprises approximately 6% of Total Government revenue. It includes:o Interest, rent and dividendso Profit from Government Business Enterprises (G.B.E) e.g. Australia posto Sale of Government assets e.g. selling Telstra (Australias Telecommunications Co.)D. GOVER
17、NMENT EXPENDITUREThe main types of expenditurea) Current Expenditure (G1)Community services, health and aged care, wages to government workers and education.e.g. costs of operating hospitals, schools, defence forces etcb) Capital Expenditure (G2)This is spending on fixed costs either replacement or
18、upgrading (spending on long lasting things) e.g. buildings and capital equipment for hospitals, schools and army barracks etcNote:Both a + b need resource contribution and are therefore counted in calculation of GDPc) Cash transfer paymentsWelfare payments to people with little or no other income. N
19、othing is expected in return for this payment. Its not counted in GDP e.g. unemployment benefits, pensionsE. BUDGET OUTCOMESa) The Budget OutcomeThe Budget Outcome is the difference between estimated government revenue (receipts) and estimated government spending (outlays). Therefore there are 3 pos
20、sible types of budget:i. Balanced Budget - this occurs when revenues equals to expenditure (G=T)ii. Budget Surplus - this occurs when revenues are greater than expenditure (TG)iii. Budget Deficit - this occurs when revenues are less than expenditure (GT) b) Headline and Underlying Budget Outcomesi.
21、Headline Outcome: this includes all revenues including asset salesii. Underlying Outcome: this excludes assets sales (eg the sale of Telstra) from the outcome and is now the most commonly used outcomec) Fiscal BalanceAn accrual accounting method means that the budget includes expenses incurred but n
22、ot yet paid (such as funding for accrued superannuation liabilities). The estimated budget surplus or deficit under the accrual method is called the fiscal balance. d) What does the government do with a Surplus?The Government can:i. Repay government foreign debt (NFD)ii. Repay debts to Australians f
23、rom previous deficit budgetsiii. Deposit the cash with the RBA iv. Accumulate funds in the Future Fund and the 3 Nation Building Fundse) Financing the Budget DeficitThe Government must borrow from:i. The RBA (Central Bank)ii. Overseas nations increase NFD (Net Foreign Debt)iii. The Australian Public
24、 using government bonds, securities F. THE BUDGET STANCEThe Budget stance signals the Governments intention in relation to the level of economic activity. It explains whether the budget is being used by the Government to expand or contract the economy.a) An Expansionary stanceAn expansionary is used
25、 by the federal government to expand Aggregate Demand (AD) when it is concerned about a downturn in economic activity falling economic growth and rising unemployment.In a period of slow economic growth, policy makers could either: do nothing and wait for the trade cycle to expand, increase governmen
26、t spending, or reduce taxesThis expansionary policy would: shift the AD curve outwards increase real GDP raise the price level.Expansionary fiscal policyThe amount of spending required Initial spending by the government is amplified, as a spending multiplier occurs. Those receiving the money spend s
27、ome of it on goods and services, which creates a ripple effect. The proportion spent depends on the marginal propensity to consume (MPC). We use this to calculate the spending multiplier.b) A Contractionary stanceA contractionary stance is used by the government to slow Aggregate Demand (AD) when it
28、 is concerned about rising demand inflationary pressures.Contractionary fiscal policy can also be effective against demand-pull inflation. Cutting spending reduces aggregate demand (a negative spending multiplier applies in this case). The rate of growth of CPI will be reduced. The government could
29、also raise taxes.Contractionary Fiscal PolicyA ComparisonHow to determine the Governments stance?Step 1 - Compare the Fiscal balance with the previous years balance. An increase in a surplus or a decrease in a deficit reflects a contractionary stance A decrease in a surplus or an increase in a defic
30、it reflects an expansionary stanceStep 2 Determine the effect of the structural component of the budget We must distinguish between the effects on the budget of the Automatic stabilisers and the Discretionary stabilisers. In order to determine the Governments stance we must ignore the effects of the
31、 Automatic stabilisers on the budget (the cyclical component) and examine only the structural component of the budget. The Governments stance maybe considered expansionary even when the surplus increases. This may occur where the automatic stabilisers result in an increase in large surplus for examp
32、le as a result of increased revenue from the resources boom; however the government creates a budget with a structural deficit by increasing government spending and decreasing taxes. Similarly the Governments stance maybe considered contractionary even when the budget deficit decreases if the struct
33、ural component of the budget is in surplus.c) Fiscal Consolidation Means maintaining an average of balanced budgets over the medium term (5-7years) It means maintaining a budget surplus while there is sound economic growth in order to contribute to public saving and therefore national saving. It als
34、o means running budget deficits during downturns in economic activity in order to stimulate the economy. This suggests a method to improve external stability because the government believes that higher national savings will help ease the CAD and improve NFD (Surplus Budget Crowding in)G. DISCRETIONA
35、RY AND NON-DISCRETIONARY FISCAL POLICYFiscal Policy is largely about adjusting Government Spending and Taxation in order to either increase or slowdown the level of Aggregate Demand (AD). Therefore it can be used to achieve the objectives of Economic Growth, Full Employment and Price Stability.In a
36、period of slow economic growth and high levels of unemployment, Fiscal Policy is used to boost demand by increasing Government Expenditure and/or reducing Taxation. In a period of rapid economic growth that is resulting in high inflation, the Government would reduce spending and/or increase taxation
37、 in order to slow economic growth and reduce inflationary pressures. There are 2 components (operational features) of the Budget that enable the Government to use Fiscal Policy to achieve its objectives:a) The Cyclical component (Automatic Stabilisers)b) The Structural component (Discretionary Stabi
38、lisers)a) Automatic stabilisers Automatic Stabilisers are the cyclical component of the budgetAutomatic Stabilisers = the effect of the economy on the budgeto Automatic stabilisers are the changes in the levels of budget revenues and expenses caused by changes in economic activity.o They are called
39、stabilisers because they tend to smooth out the fluctuations in the business cycle. (they are counter cyclical) o Automatic stabilisers help manage economic fluctuations without any deliberate policy changes by government.Eg:During periods of strong economic growth (eg booms)o Tax revenue will incre
40、ase due to increased incomes and company profitso Outlays will decrease due to less welfare payments because of lower unemploymento This leads to surplus budgets, which are (in general) contractionary. o This will slow down AD and reduce inflationary pressuresDuring periods of weak economic growth (
41、eg recessions)o Tax revenue will fall due to decreased incomes and company profitso Outlays will increase due to increased welfare payments because of higher unemployment.o This leads to deficit budgets, which (in general) are expansionary.o This will increase AD and stimulate economic activityb) Di
42、scretionary Stabilisers Discretionary Stabilisers are the structural component of the budgetDiscretionary Stabilisers = the effect of the budget on the economyo These are the deliberate changes to government outlays and revenues made in response to the state of the economy ie designed to have an eff
43、ect on the economy.o For example when the Government announces there will be a change in tax rates or when they announce new spending initiatives (projects) such as a new building for all schools. H. SUPPLY-SIDE FISCAL POLICYThis reflects government policies that increase aggregate supply to achieve
44、 long-run growth in real output, full employment and a lower inflation level.Examples: Microeconomic reform in Australia Increased spending on Infrastructure7.2 Recent Fiscal PolicySee: Study Smartwww.budget.gov.au- “2009/2010 Budget at a glance”- 2010/2011 Budget due May 11 2011Plain English Econom
45、ics - 2009/2010 Budget IssueWhere revenue comes from 2009/2010Where taxpayers money is spent 2009/20102009/2010 Budget: ObjectiveStrategy (in 2009-10 Budget) to achieve the objective1. Economic Growtho Stop the impact of the GFC on the Australian economy. eg:o Supply side policies: Increased spendin
46、g on infrastructureo Demand side policies: Stimulus payments to individuals2. Price Stabilityo Expand the productive capacity to increase Economic Growth back to 3-4%. Increase Aggregate Supply eg:o Education revolutiono Increased spending on Infrastructure3. Full employmento Due to the GFC, the une
47、mployment rate rose. o Spend more on jobs training and creating new jobs (eg jobs involved in building the new school buildings)4. External Stability5. Efficiency in Resource Allocationo Increased spending on infrastructure. This improves Aggregate Supply and the productive capacity of Australia, enabling Australia to grow at a faster rate in the future.6. Equity in the Distribution of Incomeo Low income tax rebateso Welfare to work policies design