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Unit 4 AOS1 Economics (Government Policy) - Coggle Diagram
Unit 4 AOS1 Economics (Government Policy)
The underlying cash balance
headline: all revenues and expenses on a cash accounting basis
underlying: removes 'net cash flows from investments in financial assets for policy purposes. removes both receipts and payments relating to investments in financial assets eg. investment in the NBN, repayment of a loan
underlying cash balance / GDP; measures the size of the deficit a proportion of GDP (size of economy)
if deficit grows in line with GDP = neutral
if the deficit grows a slower pace than GDP = good
if the deficit grows faster than GDP = bad
3 Main elements to the budget
budget revenue (mainly from taxation)
direct taxes: collection of tax directly from individual or businesses on income or profits paid straight to govt eg. income tax, corporate tax.
indirect tax: levied on the buyers/sellers of goods and services. Tax collected by producer/seller then passed to govt eg. GST, excise tax, tariffs
the sale of a govt asset or revenue from govt business enterprises
progressive tax: the more a persons earns, the higher the percentage of tax that is levied on their income. eg. income tax
regressive tax: the % of tax paid is higher for lower income earners, than income earners eg. GST
proportional tax: percentage/proportion of tax paid out of total income is constant amoungst tax payers eg. company tax
budget outlays (spending)
current spending (G1): day to day operational spending by govt that have current benefit eg. maintenance, cleaning, repairs, staff
capital spending (G2): investment spending by the govt into physical assets that have future benefit eg. infrastructure, schools, roads
transfer payments: one way payment (not in exchange) eg. aged pension, youth allowance, jobseeker
the overall budget outcome (surplus/deficit)
flow measurement (difference b/w revenues and expenses over a period of time
Financing a deficit & utilising surplus
financing deficit (borrowing) by selling bonds: the investor who buys the bond from the govt receives interest and their money back at a certain time
selling bonds
selling bonds to local investors
selling bonds to overseas investors
selling bonds to the RBA (rare)
if govt runs a surplus eg. they have excess $ they have 3 choices.
pay off debt (pay back bondholders)
invest (future fund)
save
Relationship b/w debt & deficit
debt is stock measurement at a point in time, measures total stock of govt debt (bonds) outstanding
if the govt runs a deficit, this means their expenses are greater than their revenues over a financial year. They need to finance this by selling bonds. This increases the total stock of govt debt
if the govt sells bonds to finance a deficit. This increases the total stock of govt debt. An increase in govt debt leads to an increase in interest repayemments which is an expense for the govt. Thus increases the size of their future deficit (all other things being equal)
if the govt runs a surplus, this means their revenue is greater than expenses over a financial year. They may choose to use this surplus to pay down their debt (by paying back maturing bonds) This decreases the total stock of govt debt
any time the govt runs a deficit debt increases
Automatic (cyclical) stabilisers
In an expansion:
tax revenue collected will increase (due to the progressive nature of our income tax system)
this increases leakages out of the circular flow model slowing down AD
welfare outplays will decrease as lower unemployment rate means less people qualify for welfare payments
this decreases injections into the circular flow model and slows AD growth
stabilisers speed up the economy when economic growth is too slow and slow down economic growth when the economy is growing too fast. Working without govt intervention
In a contraction:
tax revenue collected will decrease, decreasing leakages out of the circular flow model and slows drop in AD.
welfare outlays will increase, increasing injections into the circular flow model and slows drop in AD
automatic stabilisers smooth out the business cycle without govt intervention to cool a hot booming economy or stimulate a slowing (contracting) economy 'offsetting' a drop in AD
Discretionary stabilisers
during an expansion the govt will use discretionary stabilisers by decreasing the level of (G1+G2) spending in the economy and increase the income tax rate, increasing revenue. This will either decrease the deficit increasing govt debt or increase the surplus, decreasing govt debt
deliberate govt policies to manage the economy
eg. increase welfare payments (job seeker) by $40 each week
Evaluate
Strengths
Can target areas of weakness: by changing composition of expenses/revenues to target specific households or industries
Short impact lag: as it impacts the level of AD relatively quickly. eg. tax or spending changes, once implemented quickly impact level of AD
Have AD and AS impacts: eg. can increase both AD (short term) and AS (long term) through education, infrastructure, research & development etc.
Weaknesses
Subject to political bias/constraints: highly politicised and often used for political purposes rather than economic, therefore make politically popular but economically unsound decisions
Subject to financial constraints: due to govt need/want to bring budget back to surplus and reduce govt debt. Trade off b/w spending and stimulating growth and budget surpluses and reducing debt. Limitation in contractions
Long implementation lag: only meet once a year, BP initiatives much be voted on by both houses of parliament (time consuming)
Budgetary Policy stance
'stance' signals the govt intention in relation the level of economic activity. Uses BP as a tool to impact level of AD and activity in Australia and is only reflected in the structural component of the budget NOT any cyclical changes
using it to expand AD and activity = expansionary stance
using it to contract AD and activity = contractionary stance
focus on the relative change in stance over time (financial year) to understand intentions
if the budget is contracting (decreasing) the level of AD and the level of activity, the budget outcome must be in surplus or moving from deficit to surplus eg. revenues are growing faster than expenses or expenses are decreasing faster than revenues
surplus = contractionary
if the budget is expanding (increasing) AD and the level of economic activity the budget outcome is in a deficit or moving from surplus to deficit eg. expenses are growing faster than revenues or vice versa
deficit = expansionary
RULE:
surplus = contractionary
deficit = expansionary - if moving towards balanced (eg. from surplus or deficit) = 'less'
if moving away from balanced (eg. increase in surplus or deficit) = 'more'