The document summarizes contemporary fiscal policy in Australia, specifically focusing on budget repair efforts since the global financial crisis. It discusses how the government has aimed to return the budget to surplus through spending restraint and maintaining tax revenue in order to reduce high net government debt levels. However, budget repair has been a slow process due to economic weakness, revenue shortfalls, and difficulties passing savings measures. The document also outlines tax reform proposals to address bracket creep in the income tax system by expanding brackets to prevent more people being pushed into higher tax brackets over time due to inflation.

1. Contemporary (2019) Fiscal Policy in Australia
WACE Economics - Unit 13
Video 13.2 (2019)
© Andrew Tibbitt 2019

2. Contemporary Fiscal Policy in Australia
INTRODUCTION
After an emergency fiscal policy stimulus to deal with the post GFC downturn
the main theme of fiscal policy has been one of budget repair rather than
demand management.
Monetary Policy has been given the role of stimulating aggregate demand, even
though the impact of record low cash rates has been weak and patchy.
Budget repair involves:
Returning the budget balance to surplus
Using the budget surplus to reduce the level of net government debt
Returning the budget to surplus has been a difficult and relatively slow process.
Reducing government debt will also be a decade long process.
There have also been attempts to reform aspects of the tax and transfer (welfare)
system during this period.

3. Fiscal stimulus v fiscal austerity
Fiscal stimulus Fiscal austerity
Policy
measures
Direct injection of net government
spending (more G, less T)
Return budget to surplus to allow
reduction in government net debt by
spending restraint and sustaining tax
revenue.
Short-term
impact
Direct boost to aggregate demand
from government spending.
Indirect boost to aggregate
demand from rise in disposable
income after tax cuts
Fall in aggregate demand from reducing
the size of the budget deficit
Long-term
impact
Stimulus to aggregate demand
reduced by impact of crowding out
on interest rates, private sector
investment and exchange rate.
Negative supply-side impact of
higher net government spending
Debt problems develop (interest
payments, debt refinancing, threat
to credit rating)
Less scope to deal with next
financial crisis
Indirect boost to aggregate demand from
higher private sector investment, more
confident consumers, rise in net exports
from more competitive exchange rate
Supply-side gain from greater role of
private sector
Debt problems reduced and eventually
eliminated
‘War-chest’ to deal with next financial
crisis

4. Budget repair
What is the aim of budget repair?
Returning the budget balance to
surplus
Using future surplus budgets to
reduce government net debt
Why is it needed?
Avoids costs and constraints caused
by servicing (paying interest) and
sustaining (renewing) debts. Without
action net government debt would
have reached $1 trillion within a
decade.
Allows future governments to
provide ‘responsible tax relief’ to
households and business and spend
money on infrastructure to boost
productivity
Creates a buffer to allow economy to
withstand a future economic shock
How will it be achieved?
Cyclical factors
Higher rates of economic growth
(There is a positive relationship
between growth in nominal GDP and
growth in taxation revenue and a
negative relationship between growth
and welfare spending).
Structural factors
Governments showing spending
restraint (avoiding the spending bias
of politicians at election time)
Changes to the taxation of
multinationals (e.g. Multinational Anti-
Avoidance Law (MAAL) and Diverted
Profits Tax (DPT)
Targeting benefits - by extending
fraud detection and debt recovery
activities.
© Andrew Tibbitt 2019

5. Cyclical impact on budget balance
Increase in
economic
growth
More individual
income tax
More company
tax
More indirect tax
(e.g. GST, excise
duty)
Reduced welfare
spending
More employment,
higher incomes
Higher company
profits
More production and
spending
Reduced numbers
needing support

6. Budget repair has been a slow process
Why has budget repair been a slow
process?
‘Budget sabotage’ - ‘savings’
measures not passed by parliament
due to perceived unfairness of
measures
Until recently the economy
performed worse than budget
forecasts, giving government an
earnings or revenue problem
Economic recovery after GFC was
slow and patchy. Budget repair
slows recovery in the short-run
because it is deflationary.
The impact of an accommodative
(expansionary) monetary policy
stance has been weak
How long will the process take?
Budget repair or austerity will have
been the main theme of fiscal policy:
From 2008-09 (following the fiscal
stimulus that provided short-term
relief from impact of Global
Financial Crisis)
To perhaps about 2029-30. The
Government is hoping Budget will
be in surplus by 2020-21, and that
surpluses will continue after that.
© Andrew Tibbitt 2019

7. Source: 2018-19 Budget Papers
Payments (Expenditure)
Receipts (Revenue)
SurplusDeficitSurplus
Global
Financial
Crisis
Control of government spending and an improving
economy leads to budget surpluses
© Andrew Tibbitt 2019

8. Caution
Outcomes Reliable, but ‘lagging’ or actual past data
Forecasts
Projections
Less reliable, ‘leading’ or future data
Very unreliable, basically forecasts projected into the future

9. According to the 2018-19
Budget:
Government net debt is set
to peak at about $482b, or
25.4% of GDP.
By 2028–29, it will be down
to $118 billion, or only
3.8% of GDP
Budget surpluses lead to a fall in net government debt
© Andrew Tibbitt 2019Source: 2018-19 Budget Papers
Surpluses
Deficits

10. Note the Rudd/Gillard/Rudd Labor government had to deal with the GFC
Recent control in growth in government spending
Source: 2018-19 Budget Papers © Andrew Tibbitt 2019

11. What is special about this figure?
Target is political rather than economic -
suggesting Coalition Government is better
than Labor at keeping the burden of taxation
under control
Control of government spending
© Andrew Tibbitt 2019Source: 2018-19 Budget Papers

12. Will budget repair be successful?
Factors affecting success include:
Will economy perform as well as the assumptions about economic
performance made in the budget? Will nominal GDP growth reach and stay at
projected level of 4.5% and not be thrown off-course by external shocks (e.g.
trade disputes, downturn in housing market)?
Will wages growth return to trend rates of 2.75% then go above trend to 3%),
higher than the rates achieved since the GFC?
Will recent government revenue ‘windfalls’ (e.g. from mining profits) become
a permanent feature?
Will inflation will continue to be in the middle of its 2% to 3% target range?
Will the government ‘bank’ (i.e. save) the budget surpluses and show a high
degree of restraint in its future spending?
© Andrew Tibbitt 2019

13. Government revenue is already sufficient to meet
recurrent spending (everyday expenses)
© Andrew Tibbitt 2019Source: 2018-19 Budget Papers

14. Has budget repair been the right policy?
ADVANTAGES
Deals with spiralling net government
debt to reduce the actual and
opportunity cost of servicing payments
Builds ‘war-chest’ to be in a position to
deal with next financial crisis
Avoids crowding out effects (i.e. higher
interest rates and their impact on
private sector investment and
exchanges rates)
Positive supply-side influence on
consumer and producer confidence
linked to better control of public
finances
DISADVANTAGES
Deflated economy in short-run when
it needed a stimulus to overcome
weak global factors and an
ineffective monetary policy.
The impact of austerity measures
has been uneven and unfair (e.g.
affecting people on welfare or
relying on government provided
public and merit goods
© Andrew Tibbitt 2019

15. Tax reform
Tax changes should be judged against the principles of taxation, namely
fairness, simplicity, efficiency, sustainability, competitiveness and cohesion.
Income changes outlined in the 2018-19 budget address aspects of bracket
creep. When wages rise with inflation, tax payers in a progressive tax
system experience bracket creep. Without changes to tax brackets and
thresholds, people pay more tax even though the level of their real income
(as opposed to their money or nominal income) may not have changed.
Everybody experiences bracket creep not just those who move into a higher
tax bracket because it is the average rate of tax rather than the marginal
rate of tax that is important.
Someone on average full-time earnings currently sitting at the top of 32.5%
bracket would, without reform, have moved well into the 37% bracket by
2024-25. With the proposed reform they will be 2/3rds of the way along the
enlarged 32.5% bracket.
© Andrew Tibbitt 2019

16. Tax reform - proposed changes to income tax
First bracket Second
bracket
Third
bracket
Fourth
bracket
2017-18
Under current
system
Up to $37,000*
22% of taxpayers
Marginal rate
19%
$37,001 to
$87,000*
53% of
taxpayers
Marginal rate
32.5%
$87,001 to
$180,000*
22% of
taxpayers
Marginal
rate 37%
Above
$180,000*
5% of
taxpayers
Marginal
rate 45%
2024-25
Under current
system
Up to $37,000*
16% of taxpayers
Marginal rate
19%
$37,001 to
$87,000*
47% of
taxpayers
Marginal rate
32.5%
$87,001 to
$180,000*
29% of
taxpayers
Marginal
rate 37%
Above
$180,000*
8% of
taxpayers
Marginal
rate 45%
2024-25
Under
reformed
system
Up to $41,000*
21% of taxpayers
Marginal rate
19%
$41,001 to
$200,000*
73% of
taxpayers
Marginal rate
32.5%
Above
$200,000*
6% of
taxpayers
Marginal
rate 45%
* Taxable income
© Andrew Tibbitt 2019

17. Existing income tax brackets
Bracket creep by 2025 without reform
What will happen under the new tax plan

18. End of video 13.2
© Andrew Tibbitt 2019