Budgetary Policy Stabilisers Budget Deficit/ Surplus

Automatic Stabilisers These are features that are “built in” to the budget. When economic conditions change, the value of the automatic stabilisers will also change, without any need to make further alterations to the budget. These stabilisers are referred to as the cyclical component of the budget, because their value will change based on the stage of the business cycle.

Example Automatic Stabilisers There are two obvious examples of automatic stabilisers; income tax and welfare payments. During strong economic phases, more people will be employed and profits will be high. This means that the government will be able to collect more in income tax and company tax, but will not have to pay as much in welfare payments.

Example Automatic Stabilisers On the other hand, when the economy is in a weaker stage unemployment is higher and profits lower. As a result welfare payments increase, while the total amount collected in income tax and company tax will fall. These changes happen automatically – hence the name “automatic stabiliser".

Discretionary stabilisers The federal government is also able to make changes to the federal budget at their own discretion. These are revenues and expenses that the government chooses to implement in a particular year to try and solve a particular economic problem. Discretionary stabilisers are referred to as the structural component of the budget.

Example Discretionary Stabilisers Debt Recovery Tax was introduced in 2014 budget as a 2% increase on income tax on people earning $180,000 per annum. This will increase receipts by $600 million in This amount reduces household expenditure for those people earning $180,000 reducing Aggregate demand in that segment of the economy. This was a discretionary change. $100 million in spending that has been implemented as part of the Western Sydney infrastructure plan in the budget This will increase aggregate demand in this area of Australia

Counter-cyclical Budgetary Policy Historically, governments have used budgets to stabilise the level of economic activity. During a trough in the business cycle, growth is low and unemployment is relatively high. In these circumstances the government would use budgetary policy in a counter-cyclical way. It could seek to reduce the surplus or increase the deficit by: ▫Allowing automatic stabilisers to play their part, and/or ▫Implementing a more expansionary policy stance, by increasing spending and/or decreasing the tax burden, thereby reducing the surplus or increasing the deficit.

Financing a budget deficit The government can finance a budget deficit in 3 ways: 1.Overseas borrowing: the government can borrow funds from overseas in order to finance excess spending. This will add to net foreign debt and worsen the CAD 2.Borrow from the RBA: the government can use up savings with the RBA or sell bonds to the RBA which would effectively involve the RBA printing more money.

Financing a budget deficit 3.Borrow from the public or financial sector: the government can borrow from the public/financial sector by selling bonds to them. This can cause upward pressure on interest rates and ‘crowd out’ private investment

1.Repay debt – local or overseas 2.Deposit the money into the reserve bank of Australia, using it to buy gold, other investments or used in the event of a downturn. 3.Added to government fund for future development and Infrastructure. e.g the Future fund Using a budget surplus The government can use a budget surplus in 3 ways

Fiscal Balance over time Over the duration of the business cycle the government aims to have a fiscal balance by running surpluses during booms that are sufficient to pay for deficits that occur in recessions As a result there will be a zero impact on the level of private sector savings and government debt over the business cycle.