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Budget 2017 is Here But What Does It Mean for the WACE Economics Exam?

Budget 2017 is here, but what does that mean to students completing Economics Unit 4 and revising the 'Fiscal Policy' section?

Budget Outcome

  • The budget outcome is now $29.4 billion or -1.6% of GDP

  • Budget deficit is predicted to decrease by $8.2 billion

  • The budget is not expected to return to surplus until 2020/21

Automatic and Discretionary Stabilisers

The lower budget deficit to $29.4 billion means that the government is predicted an increase in economic activity to cause the natural shifts in government revenue and expenditure.

Treasury predicts the following changes in economic indicators between 2016/17 to 2017/18.

  • Real GDP will increase from 1.75% to 2.75%

  • Unemployment will remain stable at 5.75%

  • CPI (Inflation) will remain stable at 2%

  • Wages (WPI) to increase from 2% to 2.5%

Due to these predictions suggesting a more positive economic outlook for the next financial year, the following changes will occur.

  • Income tax receipts will rise from $278.8 billion to $296.2 billion

  • Automatic Stabilisers - Increase in real GDP and Wage Growth will naturally push tax payers to higher tax brackets resulting in an increase in tax receipts

  • Discretionary Stablisers - Role of increases in Medicare Levies and Bank Levies will also have a role in the increase in income tax receipts

  • Social Security and Welfare will rise from $158.61 billion to $164.06 billion

  • Automatic Stabilisers - no effect due to the predict unemployment rate to remain stable at 5.75%

  • Discretionary Stablisers - NDIS being fully funded will see a $5 billion increase in disability expenditure

  • Other Discretionary Measures

  • $.5.3 billion in a new Western Sydney Airport

  • New Roads and Rail for Western Australia

  • $321 million boost to the Australian Federal Police

  • $18.6 billion in Additional School Funding

Crowding In and Out

Crowding In could occur as the government's infrastructure pledges such as Western Sydney Airport and Western Australia transportation plans could encourage further private investment into these areas and reduce future resource bottlenecks.

Crowding out could also occur as the government's deficit of $29.4 billion will draw up funds from the market of loanable funds, increasing demand and rising interest rates for private investment. However, the current low interest rate environment and an preexisting unwillingness for private firms to invest with a -14.4% in capital expenditure (ABS: 5625.0 Dec 15-16) would position little or no effect by government spending.

Deficit and the Business Cycle

Why is the budget planned to be in a deficit of $29.4 billion? It's to do with the business cycle. Our current position in the business cycle is likely to be at a trough or the start of an upswing. With current cash rates at a low 1.5%, lower than the cash rates in the GFC at 3%, suggests of very low levels of economic activity and general pessimistic global economy. The government must inject money in the circular flow of the economy to lift aggregate demand which will be likely multiplied to produce a higher increase in real GDP.

Government Debt

Public debt interest has increased from $16.6 billion to $17.2 billion (3.7% of government expenditure), which is more than half of the education budget at $33.8 billion. There are concerns of the growing rate of public debt interest which is presenting a growing opportunity cost on government expenditure.

Macroeconomic Objectives

  • Economic Growth - Deficit will achieve this objective through increasing aggregate demand which will be multiplied.

  • Unemployment - Increasing economic growth will decrease unemployment towards the rate required for full employment

  • Inflation - Budget deficit meet the objective of 'stable prices' as it will increase inflation towards the target of 2-3%.

What Students Need To Do?

Students, especially those doing Unit 4 with the Fiscal Policy section should remember the budget deficit figure and examples of automatic and discretionary fiscal policy in this year's budget. Students should revise examples of 2 discretionary revenue decisions and 2 discretionary expenditure decisions to aid in strengthening a fiscal policy essay in section 3 of the Semester 1 examinations.

Students should also gain an understanding of the links of the budget deficit with other unit 4 concepts including the business cycle and the macroeconomic objectives.

Best of Luck

- Christian

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