Budgetary Policy Stance - PowerPoint Presentation

Slide1

Budgetary Policy Stance

Expansionary budgetary policy is designed to stimulate or expand economic activity during a downturn or recession and is usually associated with a deficit or bigger deficit.

Contractionary

budgetary policy is designed to constrain or restrict economic activity during boom periods and is usually associated with a surplus or bigger surplusSlide2

Using Budgetary Policy to Achieve Economic Goals

Between the mid 1990s and 2007-08, budgetary policy was not specifically used to manage or manipulate the business cycle.

Whilst automatic stabilisers did work in a counter-cyclical fashion, the budget was rarely used to

contract

the economy when growth and inflation were too high.

This counter-cyclical arm of policy making was left primarily to the RBA and monetary policy.Slide3

The GFC and a shift in Budgetary Policy

When the global financial crisis occurred and the global economy went into a recession the government recognised the need for budgetary policy intervention.Slide4

‘In normal times, monetary policy is the main tool for stabilising the economy. But these are not normal times. Extraordinary times call for extraordinary macroeconomic policy measures. In the current circumstances monetary policy action alone will not be sufficient to restore growth within a reasonable time period....... The extraordinary speed and scope of the deterioration in the global economy means there is a much greater macroeconomic stabilisation role for discretionary fiscal policy than would normally be the case.’

(Updated Economic and Fiscal Outlook, February 2009 www.budget.gov.au)Slide5

Budgetary Policy during a downturn

Budgetary policy used to stimulate the economy should be:

Timely

Temporary

TargetedSlide6

Budgetary Policy and Low Inflation

The problem of high inflation is primarily tackled by the RBA using monetary policy

However, budgetary policy will generally be framed with some consideration given to inflationary impact

Budgetary policy can support the RBA by:

Increasing the size of the structural surplus relative to the previous year in order to have a

contractionary

impact on AD and therefore decrease demand inflation pressures.Slide7

Budgetary Policy and Eco Growth

The delivery of a budget deficit or an expansionary budget, is expected to assist in the achieving economic growth because the government is injecting funds into the economy

Additional budget expenditure in the form of increased G1, G2 or transfer payments will stimulate AD, increase economic growth.

The budget has become more active in demand management since the GFCSlide8

Budgetary Policy and Full Employment

Budgetary policy is the primary policy weapon used to tackle the burden of full employment.

The budget can be used to stimulate AD and create jobs at a macroeconomic level (

ie

decrease cyclical

unemployment)

It can also focus on particular industries to assist in training, re-training and education to reduce structural unemployment.Slide9

Budgetary Policy and Equity in Income Distribution

Budgetary policy plays a primary role in achieving a more equitable distribution of income by:

Ensuring all Australians have sufficient income to purchase goods and services

Ensuring no persons or household experience absolute poverty

Ensuring that large income inequalities are avoided

It can achieve this through both the budget outcome and specific policiesSlide10

Budgetary Policy and Equity in Income Distribution

An expansionary budget will boost AD, increase production and create more employment.

More people employed will lead to higher incomes as people move off transfer income to factor income

Governments can also control incomes via the manipulation of taxes, transfer payments and benefits.Slide11

Budgetary Policy and External Stability

Better external stability can be achieved by either:

Increasing national savings and/or,

Increasing Australia’s share of world income

Past of the Government’s medium term fiscal strategy is designed to improve the government’s net financial position.

This is centred on a need to keep public sector debt low and ensure the CAD reflects

private

saving and investment position.

This is why the government has aimed for ‘fiscal consolidation’ by returning the budget to surplus in 2012-13 Slide12

Budgetary Policy and Living Standards

Using budgetary policy to achieve the five economic goals is ultimately aimed at trying to improve the living standards of all Australians.

Some policy measures are not targeted at the economic goals but rather aimed at improving the allocation of resources

These are also designed to improve

living standards.