Stance of Fiscal Policy? (1 Viewer)

[freeeeee]

Okay guys on face value this question may be easy but if you think about it might not be...

Most people would obviously say the budget is seemingly contractionary (NOT DEEPLY!) however by definition contractionary is when the government wants to decrease the level of economic activity in the economy, this is not Mr Swan's intention! as contractionary will lead to a multiplied decrease in consumption and investment (which is not currently occuring)

The correct way of saying it is a Tighter stance of fiscal policy but that is not an impact (stance). Stances include: expansionary/contractionary/neutral

So what would be the correct way of saying it? Wondering if any of your teachers have told you the stance
I wrote seemingly contractionary on my trial and got it correct however i am not too sure...

 

[RishBonjour]

On our assessment task I said something like "Although the budget outcome is a surplus FROM A DEFICIT, that is, a contractionary stance, meticulous spending by the government has resulted in an overall expansionary effect"
which is true if you look at the areas they are cutting spending on and areas which they are spending.

 

[Bored_of_HSC]

Meh, they've given a definition so i'd just say you should follow it

If you REALLY wanted to be pedantic you could even say that it isn't even *that* contractionary:
1. The surplus partially comes from an accounting trick of postponing expenditure.
2. Much of the cuts to expenditure are in areas which DON'T effect AD (ie defence budget cuts).

In the end, it's what is "most" correct imo.

 

[RishBonjour]

Meh, they've given a definition so i'd just say you should follow it

If you REALLY wanted to be pedantic you could even say that it isn't even *that* contractionary:
1. The surplus partially comes from an accounting trick of postponing expenditure.
2. Much of the cuts to expenditure are in areas which DON'T effect AD (ie defence budget cuts).

In the end, it's what is "most" correct imo.

exactly what was in my essay
but yeah, sticking to syllabus is best. after all we are HSC students not economists.

 

[freeeeee]

so you guys agree with me that fiscal policy is contractionary but macro-policy combine will deliver expansionary effect?

 

[Bored_of_HSC]

so you guys agree with me that fiscal policy is contractionary but macro-policy combine will deliver expansionary effect?

Nothing really is expansionary is it?

 

[cookeemonstah]

Fiscal policy was a contractionary stance before the budget but it has since moved to an expansionary stance after achieving the desired surplus. You might have to confirm with your teachers for this one, but seeing how the exam was actually written in February, contractionary would be the better option.

 

[MasonT]

Okay guys on face value this question may be easy but if you think about it might not be...

Most people would obviously say the budget is seemingly contractionary (NOT DEEPLY!) however by definition contractionary is when the government wants to decrease the level of economic activity in the economy, this is not Mr Swan's intention! as contractionary will lead to a multiplied decrease in consumption and investment (which is not currently occuring)

The correct way of saying it is a Tighter stance of fiscal policy but that is not an impact (stance). Stances include: expansionary/contractionary/neutral

So what would be the correct way of saying it? Wondering if any of your teachers have told you the stance
I wrote seemingly contractionary on my trial and got it correct however i am not too sure...

You need to keep in mind a few things:
1) We are dealing with a dual-economy which sucks
2) The policy is contractionary no matter what the circumstances/implications are (tax revenue is higher than expenditure)
3) Fiscal policy only affects economic growth (thus consumption and investment) through direct investment of government expenditure ...

Theres a small circumstance backed by commodities and capital inflow because of the mining boom. In May, this approach was looked at because there was high economic growth, low unemployment, growing inflation and a high $A
Because of this, a contractionary policy was used ...

Because of this contractionary policy, what you would see is:
- Improving CAD (Which is happening - its fallen to $11.8 billion from $13 billion) (Keep in mind the twin deficits theory)
- Improving inflation (Which is happening - from 1.6% to 1.2%)
- Improving Australian Dollar (Which is happening - Budget outcome resulted in an increase in $A at the time)
- Worsening economic growth (Which is happening through GDP growth at 3.7%, compared to 4.3%)
- Worsening employment figures (Which is happening - IMF predicts 5.3% and economists believe over 6% next year)

Wayne Swan wants a surplus ... thus, by having a surplus we have sustained inflation levels and gives a reason for the RBA to keep interest rates down!! He has done this to protect families from cyclical changes in the economy!! If the government took an expansionary stance, then the RBA was predicting 4-5% economic growth and would of pushed interest rates up!!!

Also NOTE: Wayne Swan called this budget the spending of the 'benefits of the boom' ... the idea was to get the budget back to surplus (due to high economic growth) and NOT to have higher economic growth (he wants SUSTAINED economic growth)

 

[MasonT]

Nothing really is expansionary is it?

Sorry for double post ... but monetary policy would be expansionary. When they expand, interest rates go down and they increase money supply in the STMM

 

[Bored_of_HSC]

Sorry for double post ... but monetary policy would be expansionary. When they expand, interest rates go down and they increase money supply in the STMM

Yeah true. But i was just saying to label 'macroeconomic' policy overall as expansionary is a bit iffy..

(though it's very interesting how fiscal and monetary are going in opposite ways)

 

[Blocy]

I thought the whole point of the opposing macro policies was for fiscal policy to return to surplus, allowing for a larger "shock absorber", if you will, incase of further or future declining global conditions, this has the added effect of boosting consumer and investor confidence, whilst also allowing for movements of monetary policy to address further changes in the two-speed/patchwork economy, as fiscal has a slower working time as opposed to monetary. (The fiscal surplus is disregarding political constraints, of course.

 

[freeeeee]

^ You are almost correct, the only thing wrong is the bit you said at the end

Correct: fiscal policy is slower to implement but has a faster "working time" (more immediate impact on the economy). Monetary policy is faster to implement but has an associated time lag of 6-18 months to experience the full impact

 

[Blocy]

Oh whoops, dunno why I keep making these mistakes. I was trying to say that the seemingly contractionary FP would allow future MP changes to dictate the future path of the economy, as more varied changes could be made with reliance on MP rather than FP, although of course the effect of FP onto the economy is faster and may be of a larger scale.

 

[tarod]

Okay guys on face value this question may be easy but if you think about it might not be...

Most people would obviously say the budget is seemingly contractionary (NOT DEEPLY!) however by definition contractionary is when the government wants to decrease the level of economic activity in the economy, this is not Mr Swan's intention! as contractionary will lead to a multiplied decrease in consumption and investment (which is not currently occuring)

The correct way of saying it is a Tighter stance of fiscal policy but that is not an impact (stance). Stances include: expansionary/contractionary/neutral

So what would be the correct way of saying it? Wondering if any of your teachers have told you the stance
I wrote seemingly contractionary on my trial and got it correct however i am not too sure...

I don't think the definition of a contractionary stance is when the government wants to decrease economic activity in the economy but quite simply when T>G.
Even if it isn't Mr Swans intent to decrease economic growth, the economy will still slow down because of the Budget (more so than the 2011-12 Budget for instance.)
I know this Budget is still implementing a reasonable amount on spending in education and infrastructure, but we have to keep in mind that the spending is no where near the 2010-11 or 2011-12 budgets.
Hence, calling it contractionary should be correct (spending is declineing from 25.1% of GDP to 23.5%)

 

[freeeeee]

I don't think the definition of a contractionary stance is when the government wants to decrease economic activity in the economy but quite simply when T>G.
Even if it isn't Mr Swans intent to decrease economic growth, the economy will still slow down because of the Budget (more so than the 2011-12 Budget for instance.)
I know this Budget is still implementing a reasonable amount on spending in education and infrastructure, but we have to keep in mind that the spending is no where near the 2010-11 or 2011-12 budgets.
Hence, calling it contractionary should be correct (spending is declineing from 25.1% of GDP to 23.5%)

Contractionary stance is decreasing economic activty... -txtbook

 

[tarod]

Sorry I don't think I made my point very clear...
The decreased government spending is contractionary...I don't see how it is not. Even last year's budget was deemed contractionary (see leading edge text book for explanation)

You said a contractionary stance is "government wants to decrease the level of economic activity in the economy". Its just when the government's budget has a contractionary effect on the economy in terms of government spending - it doesn't matter if "consumption and investment is increasing." (and consumption is decreasing).

Just some definitions
Contractionary fiscal policy occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt. - Wikipedia

A Contractionary stance of fiscal policy occurs when net government spending is reduced either through higher taxation revenue or reduced government spending, or a combination of the two - riley textbook

 

[kwu1]

It's mildly contractionary. Reprofiling is responsible for making the budget look more than that.