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Fiscal Policy

The Government in the Economy. Fiscal Policy. 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……

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Fiscal Policy

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  1. The Government in the Economy Fiscal Policy

  2. 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

  3. Step 1: Revenue • Identify the sources of revenue for the Government. Text pp. 312-315 Taxation Direct : E.g. PAYE, RWT, Company, Gift &Estate Indirect: E.g. GST, Excise, Tariffs, Duties Fees/Fines: Court Fines, Motor Vehicle Registration, etc Investment: Cullen Fund , Dividends from S.O.Es, etc

  4. Step 2: Expenditure • Identify the areas for Government Expenditure. Text pp. 315-319 Current: Education, Health, Other Departments, Salaries etc Capital: New Hospitals, Roads, Schools, Defence Equipment, Supreme Court…National Library  Transfers: Welfare Payments, DBP, Sickness, UE

  5. Beau0cracy! • How many government departments can you name? Agriculture, Forestry, Fisheries, Health, Education, Defence, Judiciary, Police, Local Government, Conservation, Internal Affairs, Foreign Affairs, Social Development, Labour, Transport, Housing, Cultural Affairs (?), Trade, Enterprise, Maori/Pacific Affairs, IRD, …..and on and on and on…….

  6. NZ Fiscal Policy • So how much compared to other countries does the NZ Government spend?

  7. 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

  8. 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

  9. 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? 

  10. 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

  11. 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!

  12. FYI… • Taxation Accounts for 90% Govt revenue • Fines/Fees accounts for 1%

  13. The Nuts and Bolts of Fiscal Policy… Go to pp. 320-321 Link these words in a mindmap /flowchart. Budget Deficit Surplus Balanced Revenue Expenditure Contractionary Expansionary Aggregate Demand***

  14. Fiscal Policy in action…

  15. 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?

  16. 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?

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

  18. 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

  19. Monetised

  20. Monetised Deficit Inflationary!

  21. Non Monetised

  22. Non Monetised Deficit • Not as Inflationary! • B/C ↑ • in AD not as large

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