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 trendAccount 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 overseasBorrowing from the RBA = printing

moneySelling 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