Federal Budget Significance of a Government Budget p. 455 Statement of Revenue and Expenditure for current financial year. , Statement about future anticipated expenditure and revenue ,surplus and deficits and projected wages growth, inflation, employment, GDP Statement expressing stated government philosophy and implied philosophy and vision for the future, (i) taxation-level, type-Income Tax, Company tax, Capital gain, goods and service, excise, custom duties (ii) redistribution- transfer payments, who , how much (iii) economic direction and pathways- environment, energy, industry, infrastructure, immigration and population.

Fiscal Stance The extent to which authorities are actively trying to expand or contract/retard economic activity through revenue raising and expenditure policies. P. 456 Government attitude to the role of governments often reflected in the % of GDP expended by governments. (also reflected in privatisation philosophy. Private Enterprise is much more efficient???) Australian Federal govt expenditure as % of GDP 25% up to 2018

Countercyclical Fiscal Policy Anti Inflation Measures- Decrease Government Spending - Decrease Aggregate Demand- decrease excess supply -firms decrease or not increase prices - less Demand Inflation Increase Taxes -will have the same consequences as above Anti Recession Measures- Increase Government Expenditure-will have the opposite consequences to the above. Decrease taxes Increase depreciation allowances Increase welfare payments

Other Roles of Fiscal Policy These invariably are reflections of Government Philosophy p.459 Shifting the taxation base from progressive ( direct Tax) to regressive- (indirect taxes) . Reduce or increase tax scales Abolish or introduce redistributive taxes, wealth tax, capital gains tax, death duties. Create incentives to seek employment.( no unemployment benefits for first 6 mths.) Remove disincentives in seeking employment. Fiscal Policy can target particular sections of the community. Raise the retirement age

Fiscal measures and macroeconomic Outcomes The outcomes of expansionary or contractionary measures can be targeted by the measures taken. P 459 ,460 When reducing taxes ,which tax ? Personal Income tax can be targeted towards the lower income earners who have a higher propensity to consume. It can target small businesses by increasing depreciation allowances which would stimulate direct investment.( e.g.the PM announcement of increased depreciation for small businesses to $ 25 ,000)

Govt can stimulate infrastructure. P 460 Can increase welfare payments stimulating consumption Although the budget may be be in deficit, it may not be a domestic deficit ,due to o/s expenditure,thus it may not have an expansionary effect. Cyclically adjusted budget deficits and surpluses and automatic stabilisers.

Budget Deficit Government Expenditure exceeds Government Revenue Government finances its deficit by selling Government Treasury notes and Bonds. National Debt is the total face value of outstanding Commonwealth Government Securities on issue. P462 Read “Assets and Surpluses to aid debt pledge” Some Securities are purchased by the Central Bank with newly created money MONETISED DEBT. This money becomes immediately part of the Money Supply , known as money financing. The remainder of the deficit is financed by borrowing from the public through the sale of Govt Securities “DEBT FINANCING” NB Since 1980 the deficits have been entirely financed through debt financing. P 463

Crowding out Effect by Government Expenditure. How can this occur? Read P464, 465 Government borrowing to finance expansionary fiscal policy can cause interest rate to rise thereby lowering consumption and business investment. If the expenditure by governments is spent on capital goods and infrastructure , it may offset fall in private capital expenditure and could be beneficial in the future.

The Burden of Tax Internal Debt- is no burden since it does not involve international payments for interest or principal repayments. It does not affect our Balance of Payments. If internal debt is used to finance capital expenditure it will increase the nations capacity to produce goods and services. If internal debt is used for consumption expenditure ,it may have adverse consequences for future generations.

The Burden of Tax External Debt-in 2016 this proportion of National Debt was 68% of CGS on issue, rising from 35% in 2003. The interest payable and repayments have to be met out of foreign reserves (that is payable o/s). It is critical that this debt is incurred to finance public capital investment to increase output thus facilitating interest and principal repayments. External debt to finance current consumption expenditure would increase burden without prospect of increased future national income. Read The European Sovereign Debt- and Banking –crisis. P466,467

Readings Government Spending A/n Govt Spending to GDP General Govt Spending Public Spending Ratio in the member states of the EU Exceptions become the new rule for budgets

Readings Tax Reform Obsession Here is my big dangerous tax idea Taxation Tax Reform Obsession Here is my big dangerous tax idea Real victims of dividend policy are not average tax payers Don’t worry too much about Tax How rich and poor share the income .Getting Down to Brass tax

READINGS Class Notes Topic : Federal Budget Readings Debt A/n Govt Debt ratio to GDP A/n Private Debt ratio to GDP A/s Foreign Debt-a quick guide Assets and Surpluses to aid Debt Pledge