Quick questions on Fiscal policy and the federal Budget (HSC Economics Topic 4)

Fiscal policy is the use of the federal Budget (and to a lesser extent state and territory budgets) to influence:

Three measures of the Budget outcome are commonly cited:

The stance of fiscal policy describes whether it is expansionary, neutral or contractionary:

Automatic stabilisers are features of the Budget that dampen cyclical fluctuations without any active policy change:

Discretionary changes are deliberate decisions to change tax rates, transfer levels or spending programs. Examples:

The fiscal multiplier is the change in GDP per dollar of fiscal stimulus. Treasury estimates Australian multipliers in the range of 0.6 to 0.9 for short-run output effects, depending on:

Funding deficits requires borrowing. Australian Government Securities (AGS) are issued by the Australian Office of Financial Management. Gross debt is around $930 billion in 2024-25; net debt around$530 billion (around 22 percent of GDP).

1. Time lags. Recognition lag (recognising a slowdown), decision lag (preparing legislation), implementation lag (rolling out programs), impact lag (multiplier effects take quarters to work). Total often 12 to 18 months.

The 2022-24 inflation episode highlighted the role of fiscal policy in supporting monetary policy. The 2023-24 Budget returned a surplus, helping the RBA's effort to bring inflation back to the 2 to 3 percent target. Treasury and the RBA increasingly coordinate (the "Statement on the Conduct of Monetary Policy" 2023 reaffirmed the framework).

Revenue minus expenditure, excluding net capital investment in financial assets. The headline measure quoted in every Budget.

UCB plus net cash flows from investments in financial assets (Future Fund earnings, etc.).

The Budget balance adjusted for the position of the economy in the business cycle. Strips out cyclical effects to show the underlying stance of fiscal policy.

Recognition lag (recognising a slowdown), decision lag (preparing legislation), implementation lag (rolling out programs), impact lag (multiplier effects take quarters to work). Total often 12 to 18 months.

Tax rises and spending cuts are unpopular.

Higher government borrowing may raise interest rates, partially offsetting the stimulus (limited in Australia given small bond market relative to global capital markets).