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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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actual and estimated budget outcomes

The Department of Treasury releases the ‘actual’ budget figures for the previous financial year in November of each year (more than one year after the release of the budget itself). There will typically be a difference between the estimated budget outcome (released at the time of the budget speech in May) and the actual budget outcome for any given year, because the estimated outcome depends heavily on forecasts for economic growth (and other key statistics) that will never be 100% accurate.    

To illustrate, assume that we are currently at the end of year 2 in time, as per the hypothetical example used in section 10.5 above).  We have a budget deficit of $20B for year 2 and we prepare the Budget for year 3, where a budget deficit of only $3B is estimated.  This $3B estimated deficit is clearly dependent on the ‘discretionary’ changes the government expects to make to the budget, as well any anticipated changes to the ‘cyclical’ component of the budget.  For simplicity, let’s assume that the government decided to make no discretionary changes.  Then it must be the case that the government expects the deficit to decrease by $17B purely because it expects the economy to grow relatively strongly (e.g. by 4% for the year).  However, what would happen to the ‘actual’ budget outcome if economic growth was much lower, for example at 1%?  Would the deficit be higher or lower than $3B?  

The actual deficit will be higher because the government overestimated tax receipts and underestimated outlays.  This failure to correctly forecast economic activity has resulted in budgetary policy becoming less effective.  If it correctly anticipated the low growth rate, it would have implemented the much needed additional discretionary measures to stimulate activity.  While these discretionary measures may be introduced over the course of the year via mid-year announcements (or mini-budgets), the failure to forecast accurately has caused a delayed policy response that is detrimental to the economic recovery.  

Not only will the budget forecasts for economic growth and tax receipts be inaccurate, but any additional ‘discretionary’ changes made to the budget after the handing down of the May budget will further widen the difference between the estimated and actual budget outcomes.  For example, after estimating a $3B deficit at budget time, political and economic factors may force the Government to spend money on ‘priority matters’ not anticipated at budget time which further increases the actual deficit above the estimated $3B.

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