The three Federal Budget outcomes are budget surplus, budget deficit and balanced budget.
A budget surplus occurs when revenue collected exceeds government expenditure. This means that the government is taking more out of the economy through taxes and other methods of collecting revenue than it is putting in through expenditure. This has a contractionary effect on the economy, decreasing economic activity. This is as there is a negative multiplier effect, a greater than proportional decrease in the circular flow resulting from a leakage. Government debt will decrease.
A Budget deficit, the opposite of a budget surplus, is when government expenditure is greater than revenue. This means that the government is injecting more resources into the economy than it is taking out. Budget deficits have an expansionary effect as it increases the circular flow. There is a positive multiplier effect with the government injections circulating many times in the economy. The multiplier explains why small changes in spending can
induce much larger changes in the economy. The multiplier implies additional
spending will bring idle resources into production, leading to additional
real output rather than increased prices. Debt will increase as money needs to be borrowed in order to fill the gap between the amount spent and the amount collected.
A balanced budget occurs when revenue and expenditure are equal. It is said that a balanced budget has no real effect on the economy but in fact has a slightly expansionary effect. This is due to the average propensity to consume (MPC) for taxpayers is higher than the MPC for welfare recipients.
The federal budget consists of two components. The budget has cyclical components which are a result of automatic stabilizers and structural components, where deliberate changes in revenue or expenditure are initiated by the government. When put in place, automatic stabilizers need no intervention from the government. They continue to work automatically in response to changes in economic growth, reducing fluctuations of the economy and boosting aggregate demand. An example of this is the progressive tax system. As the economy expands, people move into higher tax brackets and therefore pay more tax. This means that the government is collecting more revenue, causing a budget surplus. This has a contractionary effect, slowing the rate of growth.
Structural components are discretionary measures and need constant reviewing and intervention by the government. They usually cause budget deficits in the short term as they inject more money into the economy. An example of a discretionary measure was the 2008 Rudd government stimulus package used to boost the economy through a positive multiplier effect and increase aggregate demand.
Fiscal Policy in Australia has recently become mildly contractional. This is because of the unexpected high economic growth seen by Australia recovering after almost experiencing a recession. The main reason for the contractionary stance is due to cyclical factors. The positive growth means that more revenue is being collected as people move into higher tax brackets and less needs to be paid out through welfare payments as part of Automatic Stabilizers. The fiscal deficit is expected to fall from -54.8billion to -39.6 billion in 2010-2011 for these reasons. Tax receipts in this period is anticipated to grow by $33 billion, which should see Australia return to budget surplus in 2012-2013.
This is a significant improvement on early last year when economic growth was negative and Australa was preparing for a recession. The Fiscal policy took on an extremely expansionary stance, injecting money into the economy through welfare payments, government subsidies and government funding.
Although cyclical factors are contracting the economy, discretionary policy changes continue mild stimulation. This discretionary policy has been limited however, with the government has announced a 2% cap on real growth in spending until the budget returns to surplus. This is par of its process of fiscal consolidation.
The main objectives of the FIcal Policy is to increase the level of infrastructure, improve education and increase the health sector of Australia. The 2010-2011 budget statement showed that 16% of government expenditure was going to improving the health system while another 9% was funding education systems. This shows that they are the main focuses of the discretionary component of the budget.