The Government in the Economy

 Fiscal Policy is…..  How the Government of the day spends its revenue?  What the Government of the day does with our taxes?  How much money the government earns in relation to how much it spends……  How Government Revenue and Expenditure is manipulated to achieve an aim – growth, low inflation etc

 Identify the sources of revenue for the Government. Text pp Taxation Direct : E.g. PAYE, RWT, Company, Gift &Estate Indirect: E.g. GST, Excise, Tariffs, Duties Fees/Fines: Court Fines, Motor Vehicle Registration, etc Investment: Cullen Fund , Dividends from S.O.Es, etc

 Identify the areas for Government Expenditure. Text pp Current: Education, Health, Other Departments, Salaries etc Capital: New Hospitals, Roads, Schools, Defence Equipment, Supreme Court…National Library Transfers: Welfare Payments, DBP, Sickness, UE

 How many government departments can you name? Agriculture, Forestry, Fisheries, Health, Education, Defence, Judiciary, Police, Local Government, Conservation, Internal Affairs, Foreign Affairs, Social Development, Labour, Transport, Housing, Cultural Affairs (?), Trade, Enterprise, Maori/Pacific Affairs, IRD, …..and on and on and on…….

 So how much compared to other countries does the NZ Government spend?

Check out pp and your own prior Knowledge. Make notes which describe 1)what Fiscal Policy is 2) Define: The Government Budget, Surplus, Deficit, Balanced, Operating Balance 3) Outline and describe the details of the Public Finance Act 2004

 Is the government’s policy on its income and spending to influence economic activity.  It does this by issuing a plan of expenditure and revenue raising for 12 months. The Budget!  Economic Activity…?  Economic Growth, Employment, Inflation, Exchange Rate, BOP – Favourable Trade position, Social Equity/Concerns

 Deficit…Government spending exceeds government revenue…  Balanced…Spend what they earn…  Surplus…..Spend less than they earn…  What is the effect of a deficit, surplus etc on..  Circular Flow  Aggregate Demand  The Economy  Your Tax bill or student loan/allowance/education  What is happening tomorrow afternoon that might impact on the gov’t fiscal policy?

 Replaces the FRA 1994  Increased transparency with Fiscal Policy  Plan for the long term  Forecast what effects of intended policy are  Independent assessment and reporting of Fiscal Policy  Public, Parliamentary Scrutiny of Fiscal and other Economic Policy  Reduce Public Debt to prudent levels to guard against future adverse events, surplus until this is achieved

 Tell us  what your doing exactly  How it will effect us  Give us a chance to evaluate it for ourselves ▪ (by using our reps)  Get the debt down! ▪ We used to have quite a lot!

 Taxation Accounts for 90% Govt revenue  Fines/Fees accounts for 1%

GO TO PP LINK THESE WORDS IN A MINDMAP /FLOWCHART. Budget Deficit Surplus Balanced Revenue Expenditure Contractionary Expansionary Aggregate Demand***

The Budget Surplus Spends less than earns. G ↓, possibly C & I as well. AD ↓ Contraction ary Fiscal Policy Deficit Spends more than earns G ↑, maybe C or I as well AD ↑ Expansiona ry Fiscal Policy Balanced Spend = earn Has T (Taxes) ↓ or ↑ Has G ↑ or ↓

 Increases spending of Infrastructure?  gives Tax cuts?  Introduces a Capital Gains Tax?  Increases GST to 15%?  Decreases the unemployment benefit?  Raises the Retirement Age to 68?  Builds a new prison?  Gives the PPTA a 4% pay rise for 3 years?

 Government Spending is a ?  Taxation is a ?  Deficit….increase or decrease the flows?  Surplus increase or decrease the flows?  Why would an increase in in Social Welfare spending not impact on GDP?

 Workbook  Pp. 203 Q4, 5  Pp. 204 Q11  Pp. 205 Q12 – 17  Pp. 206 Q18, 20-22

 So the gov’t spends too much and then needs to pay for it. It can do this by running either a:  Monetised Deficit  Non Monetised Deficit

Borrow from RBNZ Borrow from Overseas on fixed exchange rate Monetised. Both increase the money supply which increases Inflation

↑ G ↑ in bank deposits ↑ in Settlement Cash Deposits At RBNZ Secondary Expansion of Money Supply Gov’t deposits at RBNZ ↓ /Go into Overdraft/ ↑ if borrow from O/S Money Supply ↑ ↑ D for Money meet by ↑ in S of Money So interest rates stay same Inflationary!

Borrow from Public (Selling Gov’t Bonds and Securities) Borrowing from Overseas under floating exchange rate Non Monetised (Both ↑ the D for $ which will ↑ r )

↑ G ↑ in bank deposits ↑ in Settlement Cash Deposits At RBNZ Secondary Expansion of Money Supply But Public buys Gov’t bonds which ↓ Bank Deposits ↑ D for Money Not meet by ↑ in S of Money So interest rates ↑ Not as Inflationary! B/C ↑ in AD not as large