stuck in a past hsc questoin (1 Viewer)

[y510920]

In 2006 HSC paper, there is a question asking 'explain how fiscal policy could be used by a government to reduce a deficit on the current account.'

From the BOS it states that 'Better responses demonstrated an understanding of the ways fiscal policy could work to reduce a current account deficit. This generally required an outline of the mechanism involved. For example, responses that cited a policy of increasing taxes linked this to a restriction of disposable incomes and hence a probable moderation of the demand for imports and an improvement in the balance on goods and services. They used appropriate terms which enabled a more concise response.Weaker responses simply listed fiscal policies that could affect the CAD without sketching the mechanisms involved. Common errors included confusion of the budget deficit with the CAD and statements to the effect that the government could use a budget surplus to directly pay off the CAD or private foreign debt.'

however, dixon's text book says bringing budget back to surplus is exactly what the government is trying to do (p.261, 273 and 283)to increase national saving and reduce CAD....
pretty confusing, can someone please help explain? thanks

 

[oyuck]

In 2006 HSC paper, there is a question asking 'explain how fiscal policy could be used by a government to reduce a deficit on the current account.'

Common errors included confusion of the budget deficit with the CAD and statements to the effect that the government could use a budget surplus to directly pay off the CAD or private foreign debt.'

It's the "pay off the CAD or private foreign debt" which doesn't happen. Because the Government can't pay off private foreign debt - the govt only pays off public debt. The CAD isn't 100% government debt, most of it is private debt (i think) (i.e. individuals and firms).

Budget Deficit means the government SPENDS more than it RECEIVES through revenue and is not necessarily linked to the Current Account which records transactions Australia has with the rest of the world, a Current Account Deficit meaning Australia owes the world more money than it has received.

Hope this is useful.

 

[NubMuncher]

It's the "pay off the CAD or private foreign debt" which doesn't happen. Because the Government can't pay off private foreign debt - the govt only pays off public debt. The CAD isn't 100% government debt, most of it is private debt (i think) (i.e. individuals and firms).

This. And yes, most of Australia's foreign debt is privately owned, which is why we can sustain such a high CAD (pitchford thesis)

 

[dragons2011]

Yes but the most obvious answer to 'explain how fiscal policy could be used by a government to reduce a deficit on the current account.' would be to say the government allocates a greater amount of expenditure towards infrastructure to reduce bottlenecks therefore allowing exporters to take advantage of cyclical conditions --> increase export revenue and reduce CAD

 

[y510920]

but i still don't understand why the model response argues using taxation to reduce import spending hence CAD. like, i understand that CAD is mostly private, however, isn't increasing taxation contractionary? and isn't it bringing fiscal to surplus anyway?
also, when a budget is in deficit, the government will need to finance it through domestic private sector borrowing, and this will deplete the domestic saving pool and cause crowding out effect, doesn't this contribute t0 CAD because the private firms have to borrow from overseas?