Please enable JavaScript.
Coggle requires JavaScript to display documents.
Unit 4 AOS 1 (The budget (Types of receipts (Direct taxes - taxes paid on…
Unit 4 AOS 1
The budget
A document that sets out the government's planned receipts and outlays for the upcoming financial year
Long term goal is to improve the living standards of Australians and to achieve the most efficiency allocation of resources
Based on estimates of GDP growth, unemployment, wage growth, terms of trade etc.
-
-
Budget outcomes
Surplus, deficit or balanced
Measuring the outcome
-
Underlying cash outcome - the headline cash outcome adjusted to exclude earning from the future fund and net proceeds from the sale and purchase of assets as these are one off transactions that do not reflect the underlying cash position
Budget outcomes
-
Deficit budget - stimulates AD, expansionary budget
Surplus budget - restrains AD, contractionary budget
Financing a deficit
Selling bonds to the RBA - the RBA can create money to buy these bonds so therefore this is inflationary as it increases the money supply
Selling bonds to Australian investors - means that businesses are competing against the government to borrow money and thus can be 'crowded out' of the market, reducing business investment and increasing interest rates (as there is more demand for loans) lessening the impact of the expansionary budget
Selling bonds to overseas investors - avoids overcrowding of the domestic lending market however it will cause an increase in demand for AUD by overseas investors causing the AUD to appreciate which lessens the impact of the expansionary budget
-
-
-
Open market operations
The RBA influences interest rates through changing the cash rate, the RBA does not control the interest rates of the economy (it is up to borrowers and lenders in the competitive market) but the RBA has a strong influence
Cash rate is the interest rate charged by banks to other banks in the overnight money market on overnight loans
-
If the RBA buys Commonwealth government securities from banks with cash = increases money supply in the overnight money market = decreases the cash rate
If the RBA sells Commonwealth government securities to banks for cash = decrease the money supply in the overnight money market = increases the cash rate
Transmission mechanisms
Cost of credit channel - a higher cost of borrowing = reduction in borrowing for consumption and investment and increases savings as higher interest rates give a greater incentive to save = reduces AD and inflationary pressures
Cash flow channel - households with existing loans will be spending more each month on interest payments = reduces discretionary income and thus consumption, similar occurs with businesses as it reduces funds available for investment = reduces AD and inflationary pressures
Asset prices and wealth channel - higher interest rates tend to decrease the value of assets such as housing and shares due to decreased demand for them as the cost of borrowing increases = reduces confidence = people spend less and save more = reduce AD and inflationary pressures
Exchange rate channel - an increase in interest rates causes an appreciation of the AUD due to relative interest rates increasing and thus more investors wish to invest in Australia = reduces net exports and lowers AD and inflationary pressures
Availability of credit channel - higher interest rates means higher risk of default on loans as more interest must be repaid = lenders tighten their lending criteria and thus there are fewer loan approvals = reduced borrowing for consumption and investing = reduces AD and inflationary pressures
RBA
-
Objectives
Maintain price stability (2-3% per annum as measured by the CPI over the course of the business cycle), this goal is flexible
-
-
-
Looks at the underlying inflation rate when deciding whether to change the cash rate but its goal is based on CPI
Monetary policy stance
-
-
Neutral
-
-
Neutral stance can be changed over time due to factors such as the relationship between the cash rate and interest rates, competition in the lending market and relative interest rates
-
Stabilisers
Discretionary
A policy decision by the government to change receipts or payments in the budget in order to influence economic activity
-
E.g. if growth is declining the government might aim to boost aggregate demand through increased infrastructure spending or tax cuts
Automatic
A change to the budget that occurs within any policy decision by the government but rather automatically in reposes to changes in the level of economic activity
-
They operate counter-cyclically, assisting the lessen the impact of low/high growth even when the government is making no deliberate policy decisions
E.g. if unemployment increases then Newstart allowance payments will increase or if wages growth is stagnant then so will income tax receipts
-
-