Fiscal PolicyThe Government in the Economy

What is Fiscal Policy?

Fiscal Policy is….. How the Government of the day spends

its revenue? What the Government of the day does

with our taxes? How much money the government earns

in relation to how much it spends…… How Government Revenue and

Expenditure is manipulated to achieve an aim – growth, low inflation etc

Step 1: Revenue

Identify the sources of revenue for the

Government. Text pp. 312-315TaxationDirect : E.g. PAYE, RWT, Company, Gift

&EstateIndirect: E.g. GST, Excise, Tariffs,

DutiesFees/Fines:Court Fines, Motor Vehicle

Registration, etcInvestment:Cullen Fund , Dividends from S.O.Es,

etc

Step 2: Expenditure

Identify the areas for GovernmentExpenditure. Text pp. 315-319Current:Education, Health, Other Departments, SalariesetcCapital:New Hospitals, Roads, Schools, DefenceEquipment, Supreme Court…National Library Transfers: Welfare Payments, DBP, Sickness,

UE

Beau0cracy!

How many government departments can you name?

Agriculture, Forestry, Fisheries, Health,Education, Defence, Judiciary, Police,

LocalGovernment, Conservation, Internal

Affairs,Foreign Affairs, Social Development,

Labour,Transport, Housing, Cultural Affairs (?),

Trade,Enterprise, Maori/Pacific Affairs, IRD,

…..and on and on and on…….

NZ Fiscal Policy

So how much compared to other countries does the NZ Government spend?

Fiscal Policy is….

Check out pp. 320-321 and your own prior

Knowledge.Make notes which describe 1)what Fiscal Policy is 2) Define: The Government Budget,

Surplus, Deficit, Balanced, Operating Balance

3) Outline and describe the details of the Public Finance Act 2004

Fiscal policy defined

Is the government’s policy on its income and spending to influence economic activity.

It does this by issuing a plan of expenditure and revenue raising for 12 months. The Budget!

Economic Activity…? Economic Growth, Employment,

Inflation, Exchange Rate, BOP – Favourable Trade position, Social Equity/Concerns

The Budget can be in …..

Deficit…Government spending exceeds government revenue…

Balanced…Spend what they earn… Surplus…..Spend less than they earn… What is the effect of a deficit, surplus etc on..

Circular Flow Aggregate Demand The Economy Your Tax bill or student loan/allowance/education What is happening tomorrow afternoon that might

impact on the gov’t fiscal policy?

Public Finance Act 2004

Replaces the FRA 1994 Increased transparency with Fiscal Policy Plan for the long term Forecast what effects of intended policy are Independent assessment and reporting of

Fiscal Policy Public, Parliamentary Scrutiny of Fiscal and

other Economic Policy Reduce Public Debt to prudent levels to

guard against future adverse events, surplus until this is achieved

In other words…

Tell us what your doing exactly How it will effect us Give us a chance to evaluate it for

ourselves▪ (by using our reps)

Get the debt down! ▪ We used to have quite a lot!

FYI…

Taxation Accounts for 90% Govt revenue

Fines/Fees accounts for 1%Core Crown Revenue 2007/08

Corporate Tax PAYEOther Income Tax

GST

Other Indirect Tax

Fees, Fines etc

Sales of G & S Other Income Investment

The Nuts and Bolts of Fiscal Policy…

GO TO PP. 320-321LINK THESE WORDS IN A MINDMAP /FLOWCHART.

BudgetDeficitSurplusBalancedRevenueExpenditure ContractionaryExpansionaryAggregate Demand***

Fiscal Policy in action…

The Budge

t

SurplusSpends less than earns.

G ↓, possibly C & I as well.

AD ↓

Contractionary Fiscal Policy

DeficitSpends more than earns

G ↑, maybe C or I as well

AD ↑

Expansionary Fiscal Policy

BalancedSpend =

earn

Has T (Taxes) ↓ or

↑

Has G ↑ or ↓

What happens to AD if the Government:

Increases spending of Infrastructure? gives Tax cuts? Introduces a Capital Gains Tax? Increases GST to 15%? Decreases the unemployment

benefit? Raises the Retirement Age to 68? Builds a new prison? Gives the PPTA a 4% pay rise for 3

years?

Circular Flow…

Government Spending is a ? Taxation is a ?

Deficit….increase or decrease the flows? Surplus increase or decrease the flows?

Why would an increase in in Social Welfare spending not impact on GDP?

DO…..

Workbook Pp. 203 Q4, 5 Pp. 204 Q11 Pp. 205 Q12 – 17 Pp. 206 Q18, 20-22

Financing the deficit..

So the gov’t spends too much and then needs to pay for it. It can do this by running either a:

Monetised Deficit Non Monetised Deficit

Monetised

Borrow from RBNZ

Borrow from

Overseas on fixed

exchange rate

Monetised. Both increase the

money supply which increases

Inflation

Monetised Deficit

↑ G

↑ in bank deposits

↑ in Settlement

Cash Deposits At RBNZ

Secondary Expansion of Money Supply

Gov’t deposits at RBNZ ↓/Go

into Overdraft/↑ if borrow from O/S

Money Supply↑

↑ D for Money

meet by ↑ in S of Money

So interest rates stay

same

Inflationary!

Non Monetised

Borrow from Public

(Selling Gov’t Bonds and Securities)

Borrowing from

Overseas under

floating exchange

rate

Non Monetised (Both ↑ the D

for $ which will ↑ r )

Non Monetised Deficit

↑ G

↑ in bank deposits

↑ in Settlement

Cash Deposits At RBNZ

Secondary Expansion of Money Supply

But Public buys Gov’t

bonds which ↓

Bank Deposits

↑ D for Money

Not meet by ↑ in S of Money

So interest rates ↑

Not as Inflationar

y!

B/C ↑ in AD not as large