4.6 The stance of budgetary policy — is it expansionary or contractionary?

PART A Aggregate demand budgetary policies and the pursuit of domestic economic stability

4.2 Definition and aims of budgetary policy

KEY CONCEPT

• the federal government’s budgetary strategies or policy is designed to help promote the Australian government’s domestic macroeconomic goals and improve living standards. 4.2.1 Definition of budgetary policy 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. 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). 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. 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 UNCORRECTED PAGE PROOFS measures that can’t wait till the next budget, typically in May.

The ultimate aim of all government economic policies (including fiscal policy), is to increase the wellbeing of Australians. So, depending on the changing conditions of the time, different budgets can target particular problems like unemployment, weak economic growth or the rising cost of living — with the hope better achieving our key domestic macroeconomic goals and living standards.

Recently, for instance, the economy was weak so ‘jobs and growth’ and mapping a recovery path out of COVID19 were among the key aims of budgetary policy decisions. In addition, the Treasurer needed to ensure that the government was living within its means with a plan to return the budget to surplus over time at a prudent rate, as conditions improve. Failure to do this would lead to unsustainable rises in government debt.

The following quotes from the Treasurer help to illustrate some of these key aims of recent budgetary policy:

Budget Some objectives of recent budgets (with quotes from the treasurer’s speeches)

Aims of the 2019–20 budget measures

Referring to the budget, ‘… The plan I outline tonight does this in three ways. First, it restores our nation’s finances … Second, it strengthens our economy and creates more jobs…. And third, it guarantees essential services … while tackling the cost of living.’ (Treasurer, Josh Frydenberg, Budget speech, 2 April, 2019). But then came COVID-19 and the recession starting in the March quarter of 2020. The treasurer announced a wide range of temporary stimulus measures to support individuals, businesses, and specific industries, aimed to help offset falling production and rising unemployment.

Aims of the 2020–21 budget measures

This budget was a record deficit that sought to map a path out of recession, by trying to stimulate AD. ‘… Tonight, we embark as a nation on the next phase of our journey. A journey to rebuild our economy and secure Australia’s future. Our plan will grow the economy. Our plan will create jobs. Our plan will continue to guarantee the essential services Australians rely on.’ (Treasurer, Josh Frydenberg, Budget speech, 6 October, 2020)

Aims of the 2021–22 budget measures

This budget planned to slowly reduce the budget deficit, while still providing significant stimulus to spending. ‘… this Budget will ensure we come back even stronger, securing Australia’s recovery … A plan that continues to protect Australians from COVID … a plan that creates more jobs… a plan that guarantees essential services … and a plan that builds a more resilient and secure Australia.’ (Treasurer, Josh Frydenberg, Budget speech, 11 May, 2021) 4.2 Activities

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Track your results and progress Find all this and MORE in jacPLUS 4.2 Quick quiz 4.2 Exercise 4.2 Exercise 1. Define budgetary policy. 2 marksUNCORRECTED PAGE PROOFS 2. Outline the main aims of budgetary policy.

2 marks

3. Outline the ways budgetary policy be regarded as an aggregate demand policy. 2 marks 4. Outline why it is important for the budget to eventually return to surplus over the medium to longer term.

2 marks