Economics Assignment- Government in Action by Amin Lalani
Commonwealth Government Budget
The Commonwealth Budget is an official document presented in May each year, that sets out the government's revenue and expenditure plans for the coming financial year. By varying its intended expenditure (G) and revenue (T), the government can influence the overall level of economic activity, and have a significant influence on the level of inflation and unemployment.
Fiscal policy is a macroeconomic policy that can influence resource allocation, redistribute income and reduce the fluctuations of the business cycle. Its instruments include government spending and taxation and the ...view middle of the document...
This included spending of $19 billion on the Medicare Benefits Schedule (MBS), the National Health Reform Payment to the States for public hospitals ($13 billion), and the Pharmaceutical Benefits Scheme($9 billion).
Impact of budget outcomes
Besides the individual instruments of spending and revenue collection, the overall outcome of the budget- known as the budget outcome or fiscal outcome- is an important feature of fiscal policy. The budget outcome gives an indication of the overall impact of fiscal policy on the state of the economy. This leads to three possible budget outcomes:
* Balanced Budget- this occurs when the planned government revenue equalises with planned government expenditure.
* Budget surplus- Arises when the planned government revenue is greater than planned government expenditure.
* Budget deficit- Happens due to excess government expenditure compared to revenue.
The change in the budget outcome from one year to the next can signify a change in government fiscal policy stance. Three possible stances are:
* Expansionary fiscal policy stance- the government either reduces taxation revenue or increase government expenditure or use a combination of both, generating either a smaller surplus or bigger deficit than previous year. This policy is intended to increase the level of economic activity by stimulating aggregate demand.
* Contractionary fiscal policy stance- government would be planning to increase taxation revenue or decrease government expenditure (or a combination of both), creating either a smaller deficit or bigger surplus.
* Neutral fiscal policy stance- Arises when the government does not change the budget outcomes from the previous year's level.
The impact of these stance are:
* Expansionary : leading to a reduction in unemployment since, in order to increase production, firms must employ extra resources. However, inflation may rise if the economy grows rapidly.
* Contractionary: this should decrease the level of economic activity by dampening aggregate demand. This would also tend to reduce inflation but it risks increasing unemployment if demand is reduced too much.
* Neutral: Have no overall effect on the level of aggregate demand and economic activity.
Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle. The most common examples are transfer payment and progressive tax system.
* High Growth – In a period of high economic growth, automatic stabilisers will help to reduce the growth rate. With higher growth, the government will receive more tax revenues – people earn more and so pay more income tax (note the tax rate doesn’t change, the...