StGeorgeDragons
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But costello said it was contractionary. So the stance is left up to interpretation?? Some say expans, some say contract....
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Budget Expansionary? (1 Viewer)
- Thread starter StGeorgeDragons
- Start date
the budget is still in surplus, but LESS so than last year, and what it was forecasted to be this year.
so: as gittens says, the budget is a stimulatory one as there will be much more stimualtion than last year, its all relative
so: as gittens says, the budget is a stimulatory one as there will be much more stimualtion than last year, its all relative
azza_3761
Member
This may help you understand:
Costello misses brake and hits accelerator
May 14, 2005
It makes for a thrilling ride but the destination might be unwelcome, writes Ross Gittins.
Peter Costello may yet make an excellent prime minister, but he couldn't hold down a job as a teacher of even high school economics. Ask him how fiscal policy works and he confidently gives you the wrong answer.
He was asked whether this week's budget - with its tax cuts worth $22 billion over four years - would stimulate the economy, adding to inflation pressure and thus increasing the chances the Reserve Bank would need to raise interest rates again.
Oh no, he replied. The way you work out whether a budget is stimulatory or contractionary is to look at the planned budget balance and compare it with last year's.
(If a surplus gets smaller or a deficit gets bigger, that means the budget will stimulate demand; if a surplus gets bigger or a deficit gets smaller, the budget will work to contract demand.)
And since his planned budget surplus for 2005-06 of $8.9 billion is little different from the $9.2 billion surplus he expects for this financial year, it's obvious the budget isn't stimulatory.
It's true that some people try to work it out that way but, when you think about it, it's quite wrong. You realise that when you remember the budget's "automatic stabilisers" and the role of "fiscal drag".
The budget is a bit like an ocean liner. It has built into it features that help to stabilise the economy as it moves through the ups and downs of the business cycle.
The two main stabilisers are dole payments and the progressive income tax scale. When unemployed people get jobs in the upswing of the business cycle after a recession, they stop receiving the dole.
This means their income doesn't increase by the full extent of their new pay packet. But it also means the government's spending on dole payments falls, thus causing the budget balance - whether deficit or surplus - to improve.
And there's a second reason their income doesn't increase by the full extent of their new wage: they have to start paying income tax.
Then there are all the people who kept their jobs during the recession but in the upswing of the cycle start getting pay rises again. Obviously, they have to pay income tax on those pay rises.
But because the tax scale is progressive - you pay a progressively higher rate of tax as your income rises - the income tax people pay rises at a faster rate than their income does. That is, their after-tax income rises more slowly than their pre-tax income.
So when economies grow, the budget's automatic stabilisers work to reduce government spending and increase tax collections, thus improving the budget balance. In the process, however, they cause domestic demand - the spending all of us do - to grow more slowly than otherwise.
Economists call this process "fiscal drag": when the economy starts taking off, the budget's automatic stabilisers act as a drag on demand, causing it to grow more slowly than it would have.
So the budget stops booms being as big as they would be - which economists think is a good thing. Why? Because it stops demand growing faster than supply and generating inflation pressure.
(During recessions, the stabilisers work in the opposite direction, causing private income and spending to grow more strongly that it otherwise would, but at the expense of the budget balance.)
So, all told, the budget works automatically to stabilise the economy as it moves through the business cycle. It reduces the amplitude of the cycle, limiting the falls during recessions and limiting the rises during booms.
It therefore works to limit the rise in unemployment during recessions and limit the rise in inflation during booms.
Now, the next point is that the budget does all this automatically - that is, without the government lifting a finger. So if you want to see what effect the budget would have on the economy if left to its own devices, you look at the change in the budget balance before the government decided to make the changes to taxes and spending that it made.
In the case of this week's budget, the budget balance would have moved from a surplus of $9.2 billion this year to a surplus of $14.7 billion next financial year. And it would have done this automatically so as to reduce inflationary pressure as income grows strongly.
Remember that, because of the continuing boom in world commodity prices, the increase in our export prices is expected to improve our terms of trade by a further 12 per cent, which will add 2 percentage points to real national income and cause it to grow by 5 per cent.
That extra 2 percentage points of real income represents a huge external stimulus to our economy. Obviously, with demand already running so close to supply, that extra stimulus carries with it a lot of inflationary risk.
Had it been left to its own devices, the budget would have absorbed a fair bit of the stimulus. But as we know, the budget wasn't left to its own devices. Costello initiated big cuts in income tax and other taxes as well as various increases in government spending.
These new, discretionary measures will cost $5.8 billion next financial year, rising to $9.9 billion the following year. Expressed as a proportion of gross domestic product, that's 0.6 percentage points, plus a further 0.4 percentage points a year later.
When the economy is in recession, governments often choose to add discretionary tax cuts and spending increases to whatever the automatic stabilisers are doing so as to heighten the stabilising effect; when the economy is booming, they sometimes choose to add discretionary tax increases and spending cuts to whatever the automatic stabilisers are doing.
With this year's budget, however, Costello has done the reverse. He's stepped in to override and countermand the automatic stabilisers, neutralising the budget's automatic contractionary effect.
That is, he could have allowed the budget to mop up some of the stimulus from the rising terms of trade, but he chose not to. He moved the stance of fiscal (budgetary) policy in a stimulatory direction.
So whatever misinformation Costello chooses to spread, this budget is clearly stimulatory and thus will cause inflation pressure to be higher than otherwise.
Will this prompt the Reserve Bank to raise the official interest rate further to ensure its inflation target is met? We'll have to wait and see.
Ross Gittins is the Herald's Economics Editor.
Costello misses brake and hits accelerator
May 14, 2005
It makes for a thrilling ride but the destination might be unwelcome, writes Ross Gittins.
Peter Costello may yet make an excellent prime minister, but he couldn't hold down a job as a teacher of even high school economics. Ask him how fiscal policy works and he confidently gives you the wrong answer.
He was asked whether this week's budget - with its tax cuts worth $22 billion over four years - would stimulate the economy, adding to inflation pressure and thus increasing the chances the Reserve Bank would need to raise interest rates again.
Oh no, he replied. The way you work out whether a budget is stimulatory or contractionary is to look at the planned budget balance and compare it with last year's.
(If a surplus gets smaller or a deficit gets bigger, that means the budget will stimulate demand; if a surplus gets bigger or a deficit gets smaller, the budget will work to contract demand.)
And since his planned budget surplus for 2005-06 of $8.9 billion is little different from the $9.2 billion surplus he expects for this financial year, it's obvious the budget isn't stimulatory.
It's true that some people try to work it out that way but, when you think about it, it's quite wrong. You realise that when you remember the budget's "automatic stabilisers" and the role of "fiscal drag".
The budget is a bit like an ocean liner. It has built into it features that help to stabilise the economy as it moves through the ups and downs of the business cycle.
The two main stabilisers are dole payments and the progressive income tax scale. When unemployed people get jobs in the upswing of the business cycle after a recession, they stop receiving the dole.
This means their income doesn't increase by the full extent of their new pay packet. But it also means the government's spending on dole payments falls, thus causing the budget balance - whether deficit or surplus - to improve.
And there's a second reason their income doesn't increase by the full extent of their new wage: they have to start paying income tax.
Then there are all the people who kept their jobs during the recession but in the upswing of the cycle start getting pay rises again. Obviously, they have to pay income tax on those pay rises.
But because the tax scale is progressive - you pay a progressively higher rate of tax as your income rises - the income tax people pay rises at a faster rate than their income does. That is, their after-tax income rises more slowly than their pre-tax income.
So when economies grow, the budget's automatic stabilisers work to reduce government spending and increase tax collections, thus improving the budget balance. In the process, however, they cause domestic demand - the spending all of us do - to grow more slowly than otherwise.
Economists call this process "fiscal drag": when the economy starts taking off, the budget's automatic stabilisers act as a drag on demand, causing it to grow more slowly than it would have.
So the budget stops booms being as big as they would be - which economists think is a good thing. Why? Because it stops demand growing faster than supply and generating inflation pressure.
(During recessions, the stabilisers work in the opposite direction, causing private income and spending to grow more strongly that it otherwise would, but at the expense of the budget balance.)
So, all told, the budget works automatically to stabilise the economy as it moves through the business cycle. It reduces the amplitude of the cycle, limiting the falls during recessions and limiting the rises during booms.
It therefore works to limit the rise in unemployment during recessions and limit the rise in inflation during booms.
Now, the next point is that the budget does all this automatically - that is, without the government lifting a finger. So if you want to see what effect the budget would have on the economy if left to its own devices, you look at the change in the budget balance before the government decided to make the changes to taxes and spending that it made.
In the case of this week's budget, the budget balance would have moved from a surplus of $9.2 billion this year to a surplus of $14.7 billion next financial year. And it would have done this automatically so as to reduce inflationary pressure as income grows strongly.
Remember that, because of the continuing boom in world commodity prices, the increase in our export prices is expected to improve our terms of trade by a further 12 per cent, which will add 2 percentage points to real national income and cause it to grow by 5 per cent.
That extra 2 percentage points of real income represents a huge external stimulus to our economy. Obviously, with demand already running so close to supply, that extra stimulus carries with it a lot of inflationary risk.
Had it been left to its own devices, the budget would have absorbed a fair bit of the stimulus. But as we know, the budget wasn't left to its own devices. Costello initiated big cuts in income tax and other taxes as well as various increases in government spending.
These new, discretionary measures will cost $5.8 billion next financial year, rising to $9.9 billion the following year. Expressed as a proportion of gross domestic product, that's 0.6 percentage points, plus a further 0.4 percentage points a year later.
When the economy is in recession, governments often choose to add discretionary tax cuts and spending increases to whatever the automatic stabilisers are doing so as to heighten the stabilising effect; when the economy is booming, they sometimes choose to add discretionary tax increases and spending cuts to whatever the automatic stabilisers are doing.
With this year's budget, however, Costello has done the reverse. He's stepped in to override and countermand the automatic stabilisers, neutralising the budget's automatic contractionary effect.
That is, he could have allowed the budget to mop up some of the stimulus from the rising terms of trade, but he chose not to. He moved the stance of fiscal (budgetary) policy in a stimulatory direction.
So whatever misinformation Costello chooses to spread, this budget is clearly stimulatory and thus will cause inflation pressure to be higher than otherwise.
Will this prompt the Reserve Bank to raise the official interest rate further to ensure its inflation target is met? We'll have to wait and see.
Ross Gittins is the Herald's Economics Editor.
StGeorgeDragons
Member
- Joined
- Aug 13, 2004
- Messages
- 527
its stimulatory....than according to gittins
that means everyone in the forum was wrong
thanks.
that means everyone in the forum was wrong
thanks.
xcept me, cos i read gittens before i posted.codereder said:
gittens apparently has a personal vendetta against costello cos he doesnt invite him to any conferences cos gittens wears informal clothing and makes a scene
nickyroony
BigBlogger
Then that's stupid cuz Gittens rox <3pete_mate said:
azza_3761
Member
So im not the only one who got that impression lol coolpete_mate said:
B
Bambul
Guest
Ross Gittins is correct, and he explains it very well. Unfortunately I believe that his rationale is too advanced for high school economics, where you are expected to stick to more simple theories. Therefore I would say that this budget is contractionary because it is in surplus, although not as contractionary as it would have otherwise been.
Ross Gittins makes a good move at looking at the structural budget balance (i.e. after taking the effects of the business cycle out of it), but I think you are only expected to look at the actual bottom line. That is, what effect does the budget have on the economy compared to a situation where there was no government (i.e. no T or G, only C, I, X and M). By that reasoning this would be a contractionary budget.
But like I said, Ross Gittins (as usual) is actually right, he's just too advanced for what you are supposed to be learning - unfortunately.
Ross Gittins makes a good move at looking at the structural budget balance (i.e. after taking the effects of the business cycle out of it), but I think you are only expected to look at the actual bottom line. That is, what effect does the budget have on the economy compared to a situation where there was no government (i.e. no T or G, only C, I, X and M). By that reasoning this would be a contractionary budget.
But like I said, Ross Gittins (as usual) is actually right, he's just too advanced for what you are supposed to be learning - unfortunately.
bambul?
hey bambul,
so what are you saying? that the 05/06 is in actual fact an expansionary budget (ie reduced surplus from 9.2bn in 04/05 to 8.9bn surplus in 05/06), but will do and earn us marks even if we say its contractionary? please dont confuse me EEK!
my teacher said in simple terms that increased govt spending compared to last year should generally be considered an expansionary budget. which is which??
hey bambul,
so what are you saying? that the 05/06 is in actual fact an expansionary budget (ie reduced surplus from 9.2bn in 04/05 to 8.9bn surplus in 05/06), but will do and earn us marks even if we say its contractionary? please dont confuse me EEK!
my teacher said in simple terms that increased govt spending compared to last year should generally be considered an expansionary budget. which is which??
Rafy
Retired
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- Female
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- 2008
YEs definately expansionary....
Now the surplus going from 9.2 bn to 8.9 is rather deceptive.
This is massive spending in this budget. and while on the surface the figures may look like it is moderately expansive a closer look at the figures would reveal otherwise
Tax receipts from company profits and increase household wages have lead to a substantial increases in government revenues.
You have to look at the 2004/05 surplus vs the automatic stabilised 05/06 surplus.
on the automatic stabiliser basis the 05/06 surplus is about $14bn! So this budget adds $5bn to overall government injections into the economy. (This is about 0.5% of gdp)
and most of this is being absorbed on tax cuts.
Now the surplus going from 9.2 bn to 8.9 is rather deceptive.
This is massive spending in this budget. and while on the surface the figures may look like it is moderately expansive a closer look at the figures would reveal otherwise
Tax receipts from company profits and increase household wages have lead to a substantial increases in government revenues.
You have to look at the 2004/05 surplus vs the automatic stabilised 05/06 surplus.
on the automatic stabiliser basis the 05/06 surplus is about $14bn! So this budget adds $5bn to overall government injections into the economy. (This is about 0.5% of gdp)
and most of this is being absorbed on tax cuts.
Last edited:
lilkiwicutie89
Member
yeahh me too i got to write a essay in 45 minutes on the budget... i still dont really get the budget...
This is not correct. What you need to look at is the change in the budget surplus from the first year to the second. If the surplus increases, or deficit decreases, this means that the budget in year 2 is contractionary. If the surplus decreases, or a deficit increases- the budget is expansionary. It is this change in the budget outcome that tells us the size of the injection, or withdrawal, that the Government is undertaking.iamsickofyear12 said:
The comment that a surplus budget is always contractionary is most incorrect, as you would now know, it is the change in the budget outcome from one year to the next that economists use to determine the governments fiscal stance. Fiscal stance cannot always be determined by simply looking at the underlying cash balance for the year of interest.
-Its good you guys raise these issues. May Keynes be with you.
This is not correct. What you need to look at is the change in the budget surplus from the first year to the second. If the surplus increases, or deficit decreases, this means that the budget in year 2 is contractionary. If the surplus decreases, or a deficit increases- the budget is expansionary. It is this change in the budget outcome that tells us the size of the injection, or withdrawal, that the Government is undertaking.iamsickofyear12 said:
The comment that a surplus budget is always contractionary is most incorrect, as you would now know, it is the change in the budget outcome from one year to the next that economists use to determine the governments fiscal stance. Fiscal stance cannot always be determined by simply looking at the underlying cash balance for the year of interest.
-Its good you guys raise these issues. May Keynes be with you.
This is not correct. What you need to look at is the change in the budget surplus from the first year to the second. If the surplus increases, or deficit decreases, this means that the budget in year 2 is contractionary. If the surplus decreases, or a deficit increases- the budget is expansionary. It is this change in the budget outcome that tells us the size of the injection, or withdrawal, that the Government is undertaking.
The comment that a surplus budget is always contractionary is most incorrect, as you would now know, it is the change in the budget outcome from one year to the next that economists use to determine the governments fiscal stance. Fiscal stance cannot always be determined by simply looking at the underlying cash balance for the year of interest.
The comment that a surplus budget is always contractionary is most incorrect, as you would now know, it is the change in the budget outcome from one year to the next that economists use to determine the governments fiscal stance. Fiscal stance cannot always be determined by simply looking at the underlying cash balance for the year of interest.
azza_3761
Member
I doubt many of the politians could tell you wat it is aboutlilkiwicutie89 said:
underthebridge
Member
proje is right but to add on, i wrote in my economics notes that to determine the GOvernment's fiscal stance you should look at the structural component of the underlying cash balance (its change from last year). The structural compnonet being the non-discretionary part. However I was thinking perhaps this is wrong considering the Government is aware of the effects of automatic stabilisers, o well Im sure it doesnt matter too much.