“c04AggregateDemandPoliciesAndDomesticEconomicStability_PrintPDF” — 2022/6/7 — 8:31 — page 291 — #5
PART A Aggregate demand budgetary policies and the pursuit of domestic economic stability 4.2 Definition and aims of budgetary policy KEY CONCEPT
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• the federal government’s budgetary strategies or policy is designed to help promote the Australian government’s domestic macroeconomic goals and improve living standards.
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4.2.1 Definition of budgetary policy
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Budgetary or fiscal policy is an aggregate demand strategy that is directed by the Treasurer and involves estimates of changes in the level and composition of budget receipts (revenues) and budget outlays (expenses) for the year ahead: • Budget receipts or revenues come from direct taxes such as those on personal income and company profits, and from indirect taxes such as excise or tariffs, along with non-tax revenue. • Budget outlays or expenses arise from various types of government expenditure on public goods such as defence, health and education, involving both government consumption spending (G1 ) and government investment spending (G2 ), as well as transfer payments including welfare and subsidies.
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The difference in value between the government’s expected receipts and outlays is called the overall budget outcome which, as we shall soon see, might be a deficit (when the annual value of receipts is less than outlays), surplus (when receipts are greater than outlays) or balance (when receipts are equal to outlays).
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As mentioned, budgetary policy is regarded as a key macroeconomic or aggregate demand management policy instrument, simply because changes in the levels of government receipts and outlays can have powerful effects on total expenditure (components of AD, especially the levels of C, I and G), national production, employment and the general level of prices or inflation. For example, changes in personal income tax rates and/or welfare benefits can affect C, changes in company tax rates can affect I, changes in spending on infrastructure can affect G2 and export development grants can affect X. In these ways, budgetary policy can be used to influence leakages, injections and AD in the economy, as a way of managing the level of economic activity.
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However, because budget receipts and outlays are only estimated or projected values based on certain assumptions and forecasts, what is announced on Budget night might not actually happen. As we have seen in recent years, the actual or closing budget numbers might be quite different to those initially forecast, reflecting unexpected developments that unfold during the year. These can alter the value of receipts and outlays. For instance, actual budget deficits have sometimes been much bigger than anticipated in the original forecast, due to weaker economic growth, higher unemployment, slower wage growth, depressed TOT, a global slowdown, a pandemic, severe climatic events, and greater household and business pessimism. On other occasions, the actual budget outcome has been stronger than forecast because of better than expected developments that have increased the value of budget receipts relative to outlays. Because conditions can change so much during the year, it is now common for the treasurer to update budget forecast during the Mid-Year Economic and Fiscal Outlook (MYEFO), delivered in December each year. Sometimes too, crises like the COVID-19 pandemic of 2020 can suddenly appear, requiring prompt emergency measures that can’t wait till the next budget, typically in May.
TOPIC 4 Aggregate demand policies and domestic economic stability
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