Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 22-1 Chapter 22 Fiscal policy Budget Revenue Budget Expenditure

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 22-2 Lecture Plan Defining fiscal policy Revenue and expenditure Budget outcomes and stances Impact of budget imbalances Non-discretionary fiscal policy Discretionary fiscal policy Financing a budget deficit Strengths and weaknesses of fiscal policy

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 22-3 Fiscal Policy Definition The budgetary stance of the central government of a country Changes in government spending and tax collections for the purpose of achieving full employment and non-inflationary economic growth Therefore the aim of fiscal policy is to control the level of demand in the economy

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 22-4 Budget Revenue and Spending Revenue sources Direct taxation e.g. – Personal income tax – Company tax Indirect taxation e.g. – Sales tax – Excise duties – Gains tax Non-tax revenue e.g. – Asset sales, interest and rent Areas of spending Social security and welfare Payments to state governments Defence and public order Education General public services Economic affairs Public debt interest

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 22-5 Australian Budget Aggregates, A$ Billion, 2003–04 and 2004– – –05 * Expenditures Receipts Deficit (–)/Surplus (+) * projection Source: Australian Federal Government Budget papers, May 2004.

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 22-6 Australia’s Federal Budget Receipts by Main Sources 2001–02 Source: Federal Government Budget Papers, May 2002.

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 22-7 Budget Revenue and Expenditure

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 22-8 Budget Outcomes and Budget Stances

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 22-9 Budget Impacts Budget surplus impact – Under a budget surplus, aggregate demand falls – Because of the Multiplier the fall in economic activity is greater than the change(s) in revenue and/or expenditure – See text Figure 22.2, p. 396 Budget deficit impact – Under a budget deficit, aggregate demand rises – Because of the Multiplier the rise in economic activity is greater than the change(s) in revenue and/or expenditure – See text Figure 22.3, p. 397

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser Summary of Fiscal Policy Expansionary fiscal policy Problem: unemployment and deflation Remedy: induce an expansion in aggregate demand (AD) by pursuing a budget deficit Government action - Increase G - Decrease T, or - A combination of both Contractionary fiscal policy Problem: demand-pull inflation Remedy: induce a contraction in the AD by pursuing a budget surplus Government action - Increase T - Decrease G, or - A combination of both

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser Non-discretionary Fiscal Policy (Automatic Stabilisers) Those aspects of budget which come into play to offset changes in income and expenditure associated with the business cycle – Automatic changes in tax receipts – Unemployment benefits and social welfare The overseas component of the budget deficit results from federal government spending overseas less federal government revenues overseas; neutral impact

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser Discretionary Fiscal Policy Those aspects of the Budget over which the government exercises control Automatic stabilisers cannot eliminate 100% of the impact of changes in the business cycle Consequently, the government deliberately changes taxation levels (revenue) or its expenditure to achieve the goals of macroeconomic management (e.g. economic growth)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser Financing a Deficit The government can borrow from – Private sector (e.g. sale of bonds): expansionary – Reserve Bank (‘printing money’): money supply up – Public (sale of securities to the public): neutral – Overseas (adds to Australia’s foreign debt) Public sector borrowing requirement (PSBR) increases in a budget deficit situation ‘Crowding-out’ (drain in the pool of funds available for private borrowers)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser Strengths – Transparency – More effective in a recession in stimulating AD than monetary policy – Can target specific groups in the community with assistance – Its effect can be immediate Weaknesses – Uncertainty of its outcomes – Timing/implementation lags – Political sensitivity – ‘Crowding-out’ effect of budget deficit Fiscal Policy Strengths and Weaknesses