Fiscal Policy Essay + Role of Government (1 Viewer)

[ssoans]

Hi,
Could someone please help me understand how to study and plan for a Fiscal Policy + Role of Government essay, please?
I'm not hundred percent sure how to get ready for this.

Thank you!

 

[laterz laterz]

This question is really vague and doesn't really ask you to do anything. So if you wanna go the way on how to achieve economic objectives, I would do this:

Introduction:
Over the last 2 decades, Australia has experienced a great amount of fluctuation in the economy which makes it necessary for the government to implement fiscal policy. Fiscal policy is the government’s use of spending and taxation in the budget to achieve economic objectives namely full employment, low inflation (2-3%), economic growth, external stability and environmental sustainability. These FP measures have been relatively effective over the years.

Body paras:

→ economic growth/activity
Budget (fiscal) stance refers to the overall effect of the budget outcome on economic activity
(1) expansionary stance - Govt is planning to ↑EA through ↑deficit or ↓surplus

• COVID-19 pandemic (2020) has accelerated the decline in Australia’s EG causing the economy to experience its first quarter of negative growth in 28 years
• Policies: expansionary FP w/ welfare spending to stimulate the consumption - JobKeeper wage subsidy ($70bn) → help contribute to multiplied ↑consumption and investment → ↑AD & ↓UE → minimise contraction in EA

Cons: large scale expansionary fiscal can worsen budget balances → COVID fiscal stimulus had resulted in the budget's underlying cash balance to be in $22.4b deficit by the end of March + estimated debt-to-GDP ratio surge to 50%. → hinders fiscal consolidation + ↓funds to be spent on productive assets e.g. infrastructure as govt must finance deficit → can slow EG

• Effectiveness: Yet, the inherent effectiveness of this stimulus outweighs the negatives, seen in how compared to global GDP contraction of 3%, Australia’s contraction was of 1.32%, with the RBA forecasting a v-shaped economic recovery near the end of 2020

→ income distribution
Income distribution refers to the way in which an economy’s income is spread among members of different social & socioeconomic groups

• Taxation - aus’s income inequality has continued to be above in avg in OECD, thus in order to tackle in which relative poverty has ↑12.6% to 13.6% (2009-20) → aus govt makes changes to progressive personal income taxation system as the main tool improve Y inequality
  • PROS: It is progressive as higher income earners are taxed proportionately more than lower income earners → raises revenue for govt → redistribute Y → social welfare payments → decreases income gap
    • Seen in how 50% of tax is paid by the top 10% of income earners
  • CONS: govt is currently aiming remove the 37% MRT from 2024 → makes taxation system less progressive & benefits higher income earners more proportionally as they receive higher savings → ↑income inequality in LT
• Spending - e.g. social welfare - ↑disposable Y of low income earners & ensures consumption does not reach 0 e.g. UE benefits → ↓Y inequality
  • Aus has spent ~ 36% of GDP on welfare in 2018-19

CONS: in recent yrs govt has been tightening Social Security and Welfare Payments as a part of fiscal consolidation w/ expenditure was $6.3b less than estimated 2017-18 budget



→ UE & LFPR
(1) cyclical UE - welfare spending: COVID-19 pandemic (2020) has accelerated the decline in Australia’s EG causing the economy to experience its first quarter of negative growth in 28 years w/ overall UE is predicted to rise to between 10% and 15%

• Policies: welfare spending to stimulate the consumption - JobKeeper wage subsidy ($70bn) involves workers receiving a fortnightly payment of $1,500 through their employer → keep workers attached to firms ↑disposable Y & prevent wide-scale business failures
  • estimated that JobKeeper will save, at most, 1 million jobs with the UE rate being 5% points higher without the scheme
• Cons: scheme doesn’t shield all types of workers e.g casual workers who have been with their employer for less than a year amounting to ~ 950,000 workers → can dampen impact of Jobkeeper
• Effectiveness: Yet, the inherent effectiveness of this stimulus outweighs the negatives, seen in how compared to global GDP contraction of 3%, Australia’s contraction was of 1.32%, with the RBA forecasting a v-shaped economic recovery near the end of 2020

.
(2) structural UE - UE has remained steady at ~5% in the last decade accompanied by steady employment growth (~1.6% in last decade). Yet, the long period of below-average wages growth (2.1% 2020) suggests there is still spare labour capacity largely due to persistent levels of structural UE

• Policies: extension of the $525m skills package (2019-20) from previous years - consists largely of education & training programs to ↓skills shortages which make it easier for ppl to enter the workforce or find alternative jobs
  • So far, 85% of all jobs experiencing shortages in 2007-08 has fallen to 38 jobs (2019). If these policies continue to ↓structural UE → ↑productivity of labour → stimulate wage growth + ↓inflationary pressures
• Cons: issue of underemployment has not been targeted enough as it has has to risen to 8.5% (2018), particularly due to growth in casualisation & part-time jobs
  • can offset reductive impacts of these structural UE policies as ↑rising underemployment in LT can cause ↑structural UE as workers lose the ability to update their skills with on-the-job training

→ NS & CAD (aka external stability)

• Over long term, budget deficits in which aus has had continuous deficits since GFC (19.2% 2019)→ ↓NS (private savings + public savings) as govt finances deficits by borrowing from private sector savings
  • w/ depleted NS pool → crowding out effect - ↑competition for limited amount of savings to finance domestic consumption & investment → ↑IRs → crowds out priv sector investors who cannot borrow at higher IRs
  • As aus is open economy & crowding out effect is not major as private sector borrowers may borrow from overseas funds - Reflected by ↑KFA credits but a ↑foreign debt → ↑debt servicing costs → ↑NPY debits in LT → ↑CAD
    • Little correlation between budget deficits and CAD
• Policies:
  • while engaging in fiscal consolidation, govt planning to ↑NS through 7yr personal income tax plan to help generate more Y to finance deficit
    • high income earners who already have high MPS will gain more savings due to the removal of the 37% marginal tax bracket → significantly contribute to NS
  • Greater superannuation flexibility - makes a major contribution to the relatively high saving rate - Ppl 66 and under will now be able to make 3 yrs’ worth of non concessional contributions to their super in a single year → ↑Y during retirement → ↑savings

Cons: income tax is the government’s greatest source of revenue making up 46% of it and so the government will then have less revenue to save & this may offset savings impacts as NS = public + private savings



--> inflation (i dont have a lot on this so u might wanna search it up)
FP:
Inflation
Minor impact on inflation, to maintain stable AD and price stability

7-year Income Tax Plan
Govt aims to recover our low inflation in the past 5 years which has only entered the 2-3% target band twice- by reducing marginal rates of tax (MRTs) to increase net G and AD
The proposed tax changes are quite drastic by eliminating the 32.5% and the 37% MRT brackets
The changes are estimated to reduce our taxation revenue by $158b until 2029-30
Thus significantly increasing our net G and shifting our AD upwards on the AD/AS graph
Projected to increase our inflation by 0.5ppt by 2029-30
Is unlikely to pass through parliament as it is regressive
Unforeseen impacts are not known yet

 

[ssoans]

wow thank you so much, we actually didn't study much on fiscal policy until last week but this really helps thank you!

Im not really sure on some of the abbreviations, coud you please tell me what they mean?

 

[laterz laterz]

wow thank you so much, we actually didn't study much on fiscal policy until last week but this really helps thank you!

Im not really sure on some of the abbreviations, coud you please tell me what they mean?

yeah ofc nws

can u write all the abbreviations u dont get and ill write what they are alongside

 

[ExtremelyBoredUser]

This is extremely helpful to me as well, thank you a lot for making it very detailed. I have a question, do you know which sources you used for the statistics you cited, for e.g 950,000 workers?

 

[laterz laterz]

This is extremely helpful to me as well, thank you a lot for making it very detailed. I have a question, do you know which sources you used for the statistics you cited, for e.g 950,000 workers?

nws man

oh sorry, i'm not sure as I made these notes a while ago

 

[ExtremelyBoredUser]

nws man

oh sorry, i'm not sure as I made these notes a while ago

Yeah all goods, thanks a lot once again, really appreciate it.

 

[ExtremelyBoredUser]

To clarify; what is NS?

 

[jimmysmith560]

To clarify; what is NS?

NS stands for national savings and is equal to private savings + public savings (as mentioned above).

Public savings come from the government sector. It is positive when tax revenue exceeds government spending. Or, when the government runs a fiscal surplus.

Private savings constitute the sum of saving by the private (financial and non-financial) corporation and household sectors.

 

[laterz laterz]

To clarify; what is NS?

what jimmy said

thanks jimmy

 

[ssoans]

yeah ofc nws

can u write all the abbreviations u dont get and ill write what they are alongside

UE
LFPR
NS CAD

 

[ExtremelyBoredUser]

UE
LFPR
NS CAD

UE: Unemployment
LFPR: Labour Force Participation Rate
NS: National Savings
CAD: Current Account Deficit

We learn CAD and NS next year so thats why we wouldn't know it now.

 

[ExtremelyBoredUser]

NS stands for national savings and is equal to private savings + public savings (as mentioned above).

Public savings come from the government sector. It is positive when tax revenue exceeds government spending. Or, when the government runs a fiscal surplus.

Private savings constitute the sum of saving by the private (financial and non-financial) corporation and household sectors.

Thx!!