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Fiscal PolicyThe Government in the Economy
What is Fiscal Policy?
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
Step 1: Revenue
Identify the sources of revenue for the
Government. Text pp. 312-315TaxationDirect : E.g. PAYE, RWT, Company, Gift
&EstateIndirect: E.g. GST, Excise, Tariffs,
DutiesFees/Fines:Court Fines, Motor Vehicle
Registration, etcInvestment:Cullen Fund , Dividends from S.O.Es,
etc
Step 2: Expenditure
Identify the areas for GovernmentExpenditure. Text pp. 315-319Current:Education, Health, Other Departments, SalariesetcCapital:New Hospitals, Roads, Schools, DefenceEquipment, Supreme Court…National Library Transfers: Welfare Payments, DBP, Sickness,
UE
Beau0cracy!
How many government departments can you name?
Agriculture, Forestry, Fisheries, Health,Education, Defence, Judiciary, Police,
LocalGovernment, Conservation, Internal
Affairs,Foreign Affairs, Social Development,
Labour,Transport, Housing, Cultural Affairs (?),
Trade,Enterprise, Maori/Pacific Affairs, IRD,
…..and on and on and on…….
NZ Fiscal Policy
So how much compared to other countries does the NZ Government spend?
Fiscal Policy is….
Check out pp. 320-321 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
Fiscal policy defined
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
The Budget can be in …..
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?
Public Finance Act 2004
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
In other words…
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!
FYI…
Taxation Accounts for 90% Govt revenue
Fines/Fees accounts for 1%Core Crown Revenue 2007/08
Corporate Tax PAYEOther Income Tax
GST
Other Indirect Tax
Fees, Fines etc
Sales of G & S Other Income Investment
The Nuts and Bolts of Fiscal Policy…
GO TO PP. 320-321LINK THESE WORDS IN A MINDMAP /FLOWCHART.
BudgetDeficitSurplusBalancedRevenueExpenditure ContractionaryExpansionaryAggregate Demand***
Fiscal Policy in action…
The Budge
t
SurplusSpends less than earns.
G ↓, possibly C & I as well.
AD ↓
Contractionary Fiscal Policy
DeficitSpends more than earns
G ↑, maybe C or I as well
AD ↑
Expansionary Fiscal Policy
BalancedSpend =
earn
Has T (Taxes) ↓ or
↑
Has G ↑ or ↓
What happens to AD if the Government:
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?
Circular Flow…
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?
DO…..
Workbook Pp. 203 Q4, 5 Pp. 204 Q11 Pp. 205 Q12 – 17 Pp. 206 Q18, 20-22
Financing the deficit..
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
Monetised
Borrow from RBNZ
Borrow from
Overseas on fixed
exchange rate
Monetised. Both increase the
money supply which increases
Inflation
Monetised Deficit
↑ 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!
Non Monetised
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 )
Non Monetised Deficit
↑ 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 Inflationar
y!
B/C ↑ in AD not as large