Budgets and outcomes

• The Budget is :: a tool which plans government expenditure and revenue for the next financial year, in an economy.

• The budget includes all forms of government revenue, including:

  • direct tax (personal income & company tax)
  • indirect tax (Customs, GST)
  • other revenues (dividends from public trading enterprises)

Budget outcomes

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• gives an indication of the overall impact of fiscal policy on an economy

  • (different to the budget stance)

• The three budget outcomes include:

  • Deficit: expenditure greater than revenue
  • Surplus: revenue greater than expenditure
  • Balanced: revenue equal to expenditure

• Australia aims for ‘balanced budgets’

  • where surpluses outweigh deficits, ensures debt is sustainable.

• The budget includes four main measures of the budget outcome (different accounting methods):
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• The ==underlying cash balance== (revenue - expenses)

  • preferred measure
  • reflects short- to medium-term fiscal impact
  • based on cash accounting (recorded at the time collected)

• The headline cash balance

  • Includes asset sales/purchases (cash flows from investments for policies)
  • can differ from underlying due to one-off transactions

• based on accrual accounting:

  • The fiscal balance (revenue - expenses & net capital investment)
    • considered more accurate.
  • The net operating balance
    • best for budget sustainability
    • separates capital and recurrent spending

Changes in budget outcomes

• Two key factors impact the budget outcome each year:
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• Discretionary changes in fiscal policy

  • deliberate modification of spending and/or taxation rates
  • influences the structural component of the budget outcome

• Non-discretionary changes in fiscal policy

  • changes in economic activity
    • e.g. recession → less revenue to be taxed → deficit
  • influence the cyclical component of the budget outcome.

• Automatic stabilisers are :
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• instruments inherent in the government budget that counterbalance economic activity. (a counter-cyclical role)

• Two main automatic stabilisers:

  • Unemployment benefits
  • The progressive income tax system (tax brackets)

Counter-cyclical policies are :: economic policies designed to smooth fluctuations in the business cycle.

Effects of budgeting changes

Impact on economic activity (Budget stance):

• Budget stances refer to :: the impact of fiscal policy on economic growth (Expansionary, Contractionary, or Neutral stance)
  • Expansionary stance:
    • a net increase in government spending (or reduced taxation)
    • increases AD,
      • → supports economic growth
  • Contractionary stance:
    • a net decrease in gov spending (or increased taxation)
    • contains AD,
      • → promotes sustainable eco growth & price stability
  • Neutral stance

Impact on resource use

Fiscal policy affects resource allocation through direct government spending and tax/spending decisions.

• Direct influence (would be underproduced without gov intervention):

  • Government projects like infrastructure and disaster relief

• Indirect influence: Tax policies can incentivise or discourage resource use (e.g., GST on tobacco and other demerit goods).

• A public good is :: an item that private firms are unwilling to provide (as they cannot restrict usage to people paying). Because of this, governments generally provide these goods. (e.g. parks, roads)

Impact on income distribution:

• not in trials

• Progressive taxing increases equality

• spending on community services increases equality

  • as the low-income earners often utilise these services the most.

Impact on savings and external balance

• a budget deficit decreases national savings (in the long-term)
  • as governments finance budget deficits by borrowing from private sector savings.
  • → leads to increased foreign debt
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