The two components of a federal budget are the structural component and the cyclical
component.
The budget’s cyclical component includes changes in the level of government
spending and taxation which are determined automatically due to the behaviour of
the economy which could move from a trough to a peak within the business cycle.
The changes that take place could have nothing to do with direct government policy.
The cyclical component of the federal budget consists of automatic stabilisers(also
referred to as “built in stabilisers) which act to smooth out any fluctuations in the
level of economic activity. The two main automatic stabilisers are the provision of
transfer payments(unemployment benefits etc.) and the progressive income tax
system.
For example when there is a cyclical downturn in the economy there is an increase in
unemployment due to reduced spending and investment and therefore income tax
revenue(as well as tax revenue) for the government will automatically decline, whilst
the provision of unemployment benefits will automatically increase to provide for
domestic economic stability.
The federal budget’s structural component includes the discretionary/deliberate
changes in government spending or tax rates in order to restrain or stimulate the level
of economic activity towards the achievement of the management area of domestic
stability. For example , in the 2007-08 Budget a deliberate change made by the
government to the superannuation contributions Benefits paid to retirees from a taxed
fund to be tax exempt. $1.1 billion boost to some low income earners by doubling cocontributions. At the same time the government created the Higher Education
Endowment Fund to generate earnings to fund capital works and research at
universities. First input of $5 billion. Extra tertiary places Extra $768 million over
four years. Extra 3500 Commonwealth Learning Scholarships for students from low
income backgrounds. Cap on domestic full fee paying places to be removed.
Budget automatic stabilisers are taxes and transfer payments. The role of each
automatic stabiliser is to automatically adjust to a cyclical change in the level of
economic activity in order to smooth out the fluctuations in the level of the economic
activity which often occur due to the volatile nature of the economy and the notorious
“boom bust” cycle. Company tax is an automatic stabilser.
Domestic economic stability is one are of the government economic management
achieved when the level of economic activity is growing at a satisfactory and
manageable rate when considering the objectives the government has in terms of the
domestic economy. The budget’s automatic stabilisers assist in the achievment of
domestic stability by modifying the natural fluctuations within the economy through
automatic adjustments in income tax revenue and the provision of transfer
payments(especially unemployment benefits).
For example, when the economy is growing at a strong and sustainable rate, there will
be a rise in employment due to increase in spending and investment which will
automatically cause a reduction in government spending on unemployment benefits,
whilst income tax revenue for the government automatically increases. This has the
same effect as deliberately adopting a contractionary budgetary policy approach as
through increased taxation revenue and a ruction in spending on welfare, the rate of
the money supply in the economy is reduced which thereby restricts economic
activity and dampens and undue inflationary pressures that have come out of the
woodwork.
On the other hand , when the economy is experiencing a so called trough period the
there is slow or negative growth accompanied with a higher unemployment rate and
generally low inflation, income tax revenue will automatically decrease and the
government expenditure on unemployment benefits will rise due to more people being
out of work.
An automatic reduction in taxation revenue and increased government spending
generated through a cyclical downturn in the economy, has the same effect as
adopting a discretionate expansionary approach to budgetary policy by increasing the
rate of money supply in the economy and therefore stimulating an increase and
consumer spending and business investment which will create employment. If
inflationary pressures can be retrained, then there should be stability in the domestic
economy due o the impact of the automatic built-in stabilsers.