1303AFE Lecture Notes - Lecture 8: Exact Sciences, The Automatic, Output Gap

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Week 8 Economics for Decision making lecture notes
Fiscal policy
The commonwealth budget
The budget has two purposes:
o 1. To finance the activities of the federal government
o 2. To achieve macroeconomic objectives
fiscal policy is the use of the commonwealth budget to achieve the macroeconomic
objectives of dull employment and high sustained economic growth
Budget balance= revenue expenses
A balanced budget: revenue equals expenses (budget balance is zero)
A budget surplus: tax revenue exceeds expenses (budget balance is positive)
A budget deficit: expenses exceed revenue (budget balance is negative)
On the revenue side of the budget:
o The largest item is taxes and individuals. These are the taxes paid on wages,
interest and other incomes- income tax
o The second largest source of revenue is indirect taxes
o GST and taxes on the sale or petrol, beer, spirits, wine, tobacco, luxury cars
and fringe benefits
o Corporate income taxes, which are the taxes paid by corporations on their
profits (company tax)
On the expenses side of the budget:
o Transfer payments are payments by the commonwealth government to
individuals, businesses, other levels of government and the rest of the world
o E.g. unemployment benefits, subsidies paid to businesses
o Expenditure on goods and services (G from Y-C+I+G+NX) e.g. spending to build
public infrastructures, spending on public services
o Debt interest and other payments I mainly the interest on the government
debt
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The budget balance and debt
The government borrows to finance a budget deficit and repays its debt when it has
a budget surplus
The amount of debt outstanding that arises from past budget deficits is called
government debt.
Why do deficits and debts matter?
Deficits and debts for two important reasons. They:
o Lower credit rating and increase interest rate, thus affecting ability to borrow
further and increasing repayment rates
o Redistribute consumption across generations. If expenditure> revenue today,
we can spend more today but next generation must pay for it
But the extra spending today may be for the benefit of the next generation (e.g.
building schools, hospitals)
So, it depends on what we are spending today (schools or chocolates?)
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Document Summary

Week 8 economics for decision making lecture notes. The commonwealth budget: the budget has two purposes, 1. To finance the activities of the federal government: 2. The budget balance and debt: the government borrows to finance a budget deficit and repays its debt when it has a budget surplus, the amount of debt outstanding that arises from past budget deficits is called government debt. Why do deficits and debts matter: deficits and debts for two important reasons. They: lower credit rating and increase interest rate, thus affecting ability to borrow further and increasing repayment rates, redistribute consumption across generations. Views on fiscal stimulus (expansion: regarding fiscal expansion, historically there have been three main schools of thought: classical, keynesian and monetarist, the main debate is between keynesians and the rest (mainstream) million will eventually increase gdp by more than million.

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