Assignment 1

Changes in the budget outcome

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One important observation from Table 1 is that, the amount of revenues, expenditures as well as budget outcomes change each year. There are two main reasons for these variations:

Discretionary changes in fiscal policy

Discretionary changes are deliberate changes inrevenue and expenditure levels by the government. For example, in the 2009??“10 Budget, the government anounced a $22billion infrastructure investment. Such deliberate changes in fiscal stance alter the structural component of the budget, and are used to stabilise the economy in the medium-term.
Cyclical or non-discretionary changes in fiscal policy

Adjustments in levels of revenue and expenditure can result from changes in the level of economic activity (booms and recessions). These adjustments are beyond the control of the government and are known as automatic stabilisers. There are two main automatic stabilizers:

Unemployment benefits

In a recession, the level of economic activity falls and the unemployment rate increases. As a result, government expenditures on unemployment benefits and Job Search allowances automatically increase. This increase in government expenditure reduces the budget surplus or increases the deficit. As unemployment increases in the recession then spending on unemployment will rise, increasing the spending of unemployed people. This acts to offset the recession and increase spending in the community.

The opposite occurs during an upturn in economic activity. In this situation, jobs are created and the government spends less on unemployment benefits, which increases the budget surplus or reduces the deficit.

The PAYG income tax system

During times of economic growth, employment levels and incomes rise. Workers move into higher income brackets automatically increasing government taxation revenue. This process is known as fiscal drag or bracket creep. During a downswing in economic activity or recession, taxation revenue is reduced, increasing the deficit or reducing the surplus.

The automatic stabilisers in the budget therefore play a counter-cyclical role, in that they tend to smooth out the effects of booms and recessions on the economy. In booms, demand is automatically checked through higher tax revenue and reduced government expenditure. In a recession, increases in government expenditure (unemployment benefits) help stimulate the economy and raise aggregate demand.

Between 2002 and 2008 the mining boom and increased consumption of raw materials by China is estimated to have added $334 billion to corporate taxes paid by business to the Australian Government. This large increase in revenues allowed the government to deliver budget surpluses, tax cuts and save funds in national infrastructure funds ??“ all at the sa

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