Goals of budgetary policy
Cash v underlying outcome
Composition of revenue
Composition of expenditure
Financing a deficit
Dealing with a surplus
Actual v estimated outcome
Auto v discretionary stabilisers
Expansionary v contractionary
Rationale for budget surplus
Fiscal drag/bracket creep
BP and economic goals
BP strengths + weaknesses
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rationale for delivering a budget surplus
Fiscal consolidation is a term commonly used to describe a government consolidating its finances by reducing expenditure and raising revenue in order to reduce the deficit or return the budget to surplus. The potential for a budget surplus to have expansionary effects was briefly discussed above in relation to the downward pressure a surplus places on interest rates and the stimulus (crowding in) this gives to Investment, Net exports and AD over the longer term. The economic rationale for fiscal consolidation and/or budget surpluses include the following points.
- It can help to buffer Australia against future economic decline as surplus funds can be saved and then spent when the economy requires fiscal stimulus.
- It helps to generate greater international investor confidence in the Australian government finances thereby preserving Australia’s excellent AAA credit rating and reducing the cost of future debt issues.
- It allows the cyclical component of the budget to do its job of automatically reducing the deficit as the economy recovers.
- It allows monetary policy to better manage the economy (particularly the rate of inflation) as the RBA can loosen policy with less fear about its inflationary effects.