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The federal budget outcome can be the result of two componentsthe cyclical component of the budget, which refers to the changes to government revenue and expenditure brought about by changes in the level of economic activity. And the structural component of the budget, that is, the deliberate revenue and expenditure changes initiated by the government (the structural component reveals the governments fiscal policy stance).
The largest focus is upon the fiscal or budget outcome. There are three possible budget outcomes, they are
· A Balanced Budget Planned Economic Revenue = Planned Government Expenditure
· A Surplus Budget Planned Economic RevenuePlanned Government Expenditure
· A Deficit Budget Planned Economic RevenuePlanned Government Expenditure
The government's stance on fiscal policy is strong factor in budget outcomes. There are three possible stances
· An Expansionary Fiscal Policy Stance the aim is to create a smaller deficit or bigger deficit by reducing taxation revenue or increasing government expenditure. The effect would therefore be a rise in economic activity through a stimulation in demand.
· A Concretionary Fiscal Policy Stance the aim would be to create a bigger surplus or smaller deficit by an increase in taxation revenue and a decrease in government expenditure.This would reduce inflation but may run the risk of increasing unemployment.
· A Neutral Fiscal Policy Stance the aim is to generate a balanced budget where government revenue = government expenditure. There should be no effect on the level of aggregate demand and economic activity.
In deciding upon economic policy, the government is influenced by many interest groups that try to influence policy outcomes. These influential groups include
§ Political Parties
§ Interest Groups
§ Environmental Groups
§ Unions
§ Welfare agencies
§ Businesses
§ The Media
§ International Influences, e.g. Forex Market
The 000 budget aims at ensuring that increased tax income will help the budget drift back into surplus from a small deficit this year. The budget features no major policy changes. It includes increased spending on the governments recent priorities of defence, security and migration control.
The economy is expected to return to its longer-term average growth rate of around .75 percent. This growth is expected to reduce unemployment to 6 percent by June 00, leading to higher tax revenues and reduced pressure on welfare spending. Overall government spending will continue to rise and fiscal deficit is expected to turn to a surplus by 000.
In 00, fiscal policy is moving into a new phase of policy neutralityin effect, the government is moving towards fiscal policy inactivity. The budget may have a mild concretionary impact on the economy, but any such impact will be small.
It is Monetary Policy that will play the major role in economic management. Monetary policy will be used for the purpose of ensuring that growth is kept at a level that can be sustained. The primary objective of the strategy is maintaining budget balance, on average, over the course of the economic cycle.
Broader Policy Goals that are intended to be achieved include
1. Increased Government Spending On Priority Areas
Including
Ø Defence to support the U.S military response to the terrorist attacks of September 11.
Ø Increased spending on "border protection" in the prevention of asylum seekers.
. Shifting From Expansionary To a Neutral Policy Stance
Ø Economic growth now has its own momentum and does not need further stimulus. Monetary policy will play a major role in influencing the growth rate. The government is relying on the effect of automatic stabilisers to bring the budget back to surplus.
. Ensuring Interest Rates Remain Low
Ø In a year where economic growth is expected to be strong, inflationary pressures are likely to build, and this will mean that the Reserve Bank Of Australia will be raising interest rates.
4. Reduced Unemployment
Ø By adopting a relatively neutral fiscal policy this year the government believes it is most likely to foster sustained growth and therefore to help lower unemployment.
Government spending in 000 has shifted from health and welfare programs towards defence and security programs, reflecting a changed international environment and a continued focus on the issue of asylum seekers.
Spending cuts in the 00 0 budget have occurred in health and welfare, with a reduction in the growth in spending on the disability support program, and changes to the pharmaceutical benefits scheme.
The anticipated growth throughout 000 is supported by a number of factors
v Strong growth in consumer spending of 4 percent
v A 1 percent surge in business investment
v Export growth of around 6 percent
Over the course of 000, monetary policy is likely to play the main role in ensuring that economic growth is kept within sustainable limits. The modest tightening of fiscal policy means that there will be less pressure on the RBA to raise interest rates over the next year.
Australia enters 000 financial with the promise of surprisingly strong growth after the economic slowdown of 00001. While the international environment is far more uncertain and global economic conditions remain weak, Australia's prospects for continuing growth remain good in the short to medium term.
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