Fiscal Policy  The use of changes in government spending and taxation revenue (budget) to 1. Reallocate resources 2. Redistribute income 3. Regulate the.

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Presentation transcript:

Fiscal Policy  The use of changes in government spending and taxation revenue (budget) to 1. Reallocate resources 2. Redistribute income 3. Regulate the economy (stabilisation of business cycle

 Why is Fiscal Policy important? Y = C + I + G + (X-M) Therefore, Fiscal Policy has the power to regulate demand Keynesian Diagram to illustrate

Budget Outcome  The budget is a plan of G and T  Possible Outcomes 1. Balanced G = T 2. Surplus T > G 3. Deficit G > T Aim: to achieve fiscal balance, on average, over the course of the economic cycle

 However the budget outcome is complicated by the accounting method used 1. Fiscal outcome - accrual accounting = long term indicator 2. Underlying cash outcome- cash accounting = current impact on economic activity 3. Headline cash outcome – cash outcome = includes one-off transactions

Recent Budget Outcomes  Use the statistics from figure 14.1 to graph the fiscal balance.  Describe the trend  Account for the trend  Plain English – Budget report - main features as 1 paragraph summary

Fiscal Stance – Discretionary 1. Expansionary – when deficit increases or surplus decreases - loose Fiscal Policy 2. Contractionary – when deficit decreases or surplus increases - tight Fiscal Policy 3. Neutral – outcome remains unchanged

The Keynesian View  Discretionary Fiscal Policy occurs when the government deliberately alters G and/or T to expand or contract the economy eg. Decreases income tax rates in order to stimulate consumption This decision will increase the deficit or decrease the surplus because it changes structure of the budget

Non-Discretionary eg. When a recession occurs G increases and T decreases due to higher unemployment. Non-discretionary changes occurs when cyclical factors affect the budget outcome Explain how unemployment benefits counter the business cycle- automatic stabilizer

Impact of the budget  Economic growth  Unemployment  Resource Use

 National Savings and current account  Distribution of income

Financing a Budget Deficit  Borrowing form the private sector- crowding out  Borrowing from overseas  Borrowing from the RBA = printing money  Selling assets

Retiring a budget surplus  Repay government debt – reversing crowding out and increasing national savings  Save for the future- invest funds in financial assets for future needs- future fund to pay for superannuation – also increases national savings  Current PSD page 290