hey just done how is it?
The budget is a tool that the Government uses to exercise the fiscal policy, which is a macroeconomic policy that can influence resource allocation, redistribute income and reduce the fluctuations of the business cycle in an economy. Its instruments include government spending, taxation and the budget outcome. The budget illustrates the Government’s planned expenditure and revenue for the next financial year.
The budget outcome for the 2008/9 budget is a budget surplus of $21.7 billion. Which equates to a total of 1.8% of the GDP or Gross Domestic Product which is the total market value of all final goods and services produced in an economy over a period of time, namely a year. The budget surplus of $21.7 billion is the largest budget surplus since the Howard lead Government budget surplus of 1999/2000; and was double that of the predicted forecast.’
The economy is growing rapidly now so the government is trying to slow down the economy due to rising inflation; being the sustained increase in the general level of prices over a period of time usually one year and high consumer spending. The budget is a contraction budget as is aims to slow down the economy and spending. Inflation of CPI is set to be moderated at 3.25% down from 4% and there is also an expected rise in employment which refers to those person who want to work but are unable to find a job and as a result labour resources are not probably utilised, to 4.5% from 4.25%. Although the average earnings are set to remain the same and the current account deficit (CAD) lowering from -6.25 t0 -5.0. Employment growth is expected to drop from 2.5% to 1.25% due to an increase in cyclical unemployment. The government has delivered on promised tax cuts but limited other benefits which will now only apply to certain individual after meeting criteria.
Within the budget the government makes major decisions to the reallocation of resources, this determining where government revenue is to be spent. The major areas of government expenditure are: transfer payments, defence, education, industry, community service, health, and overall Government services. These major budgetary decisions have an effect on the five sectors in the circular flow of income in the form of leakages and injections. The budget was mainly built on net spending cuts, with $5.2 billion of spending offset by $7.2 billion of savings.
One of the major budgetary decisions in the 2008/9 budget was to ‘bank the surpluses and the forecasted surplus of $40 billion in 2009. this concept was first put into action in the 2006 when net government debt was eliminated meaning that the Commonwealth Government no longer needed to use the budget surplus to pay off existing Government debt. As a result, the government created the Future Fund-a Government savings fund also referred to as Sovereign Wealth Funds, established out of future surpluses and proceeds from the sale of Telstra. The fund is intended to finance the Governments superannuation liabilities owed to public sector employees by 2020. In the 2007/8 budget the government created two additional funds from that year’s surplus- the Higher Eduction Endowment Fund and the Communications Fund-to Fund University and communications infrastructure.
In the 2008/9 budget, the Rudd government has continued this policy of ‘banking’ the surplus. In addition to giving the Future Fund an additional $39 billion in funds, the government has created three new funds worth a combined $41 billion made up of current and previous year’s budget surplus. These three new funds with which the government will use to invest in the country are: the Building Australia Fund which absorbs the former Communications Fund and receives $20 billion to use for transport infrastructure investment. The Education Investment Fund, which absorbs the former Higher Education Endowment Fund and receives $11 billion for University infrastructure. The Health and Hospital Fund which will receive $10 billion to fund investments in hospitals and medical research.
However, these funds are not forms of Government expenditure, but rather a commitment to expenditure in future budgets. By saving the current surplus, the government can increase expenditure in the future without the need to borrow from the private sector-therefore reducing the call on national savings.
Increasing tax rates have allowed the Government to spend more revenue whilst still being able to compensate this expense with increased revenue. There has been an increase in taxes on luxury cars, private healthcare and alcohol. The Government justifies the ‘Alco-pop’ tax for social cost rather than revenue. There has also been the decision to means test the baby bonus and the family tax benefit B; this meaning that those who’s earnings are above the threshold of $150,000 in a joint family income will not be eligible for these benefits.
The implementation of the $55 billion Working Families Support Package which consists of tax cuts promised in last years election is also considered to be a major budgetary decision. This package is aimed towards middle income earners earning the average wage of $48,000 will receive a weekly $20 tax cut. The Medicare surcharge threshold will also rise from $50,000 to $100,000 for individuals and to $150,000 from $100,000 for couples; under the Working Families Support Package.
The budget has also produced an $8.7 billion cut in tax concessions over the next four years, and $47 billion worth of tax cuts on personal income tax over the next four years; this was done by raising the thresholds of the progressive income tax rates.
The effect of the major budgetary decisions namely the ‘banking of the surplus’ is to hopefully slowdown the economy with downward pressure on inflation. As the budget is a surplus budget $21.7 billion it is a substantial leakage of funds from the circular flow of income and forces the flow of income in disequilibrium as there is a greater number and amount of leakages than injections produced by the government . This disequilibrium will reduce cash supply and thereby make households spend and earn less, therefore firms will yield fewer profits which will slow down the rate of growth in the economy and place downward pressure on the rate of inflation. The effect of a reduction of the cash supply will be felt through the entire economy in appromisty six months through the transmission mechanism.
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