The Government in the Economy

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
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

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

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…….


So how much compared to other countries
does the NZ Government spend?
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



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
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? 
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






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!


Taxation Accounts for 90% Govt revenue
Fines/Fees accounts for 1%
Core Crown Revenue 2007/08
Corporate Tax
PAYE
Other Income Tax
GST
Other Indirect Tax
Fees, Fines etc
Sales of G & S
Other Income
Investment
GO TO PP. 320-321
LINK THESE WORDS IN A MINDMAP /FLOWCHART.
Budget
Deficit
Surplus
Balanced
Revenue
Expenditure
Contractionary
Expansionary
Aggregate Demand***
Surplus
Spends less
than earns.
The
Budget
Deficit
Spends more
than earns
Balanced
AD ↓
G ↓, possibly C &
I as well.
Contraction
ary Fiscal
Policy
AD ↑
G ↑, maybe C or
I as well
Has T (Taxes) ↓
or ↑
Spend = earn
Has G ↑ or ↓
Expansiona
ry Fiscal
Policy








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?


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?

Workbook
 Pp. 203 Q4, 5
 Pp. 204 Q11
 Pp. 205 Q12 – 17
 Pp. 206 Q18, 20-22



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
Borrow
from
RBNZ
Borrow
from
Overseas
on fixed
exchange
rate
Monetised. Both
increase the
money supply
which increases
Inflation
↑ in
Settlement
Cash Deposits
At RBNZ
↑G
Gov’t deposits
at RBNZ ↓/Go
into
Overdraft/↑ if
borrow from
O/S
↑ in bank
deposits
Inflationary!
Secondary
Expansion of
Money Supply
↑ D for Money
meet by ↑ in S
of Money
Money
Supply↑
So interest
rates stay
same
Borrow from
Public
(Selling
Gov’t Bonds
and
Securities)
Borrowing
from
Overseas
under
floating
exchange
rate
Non
Monetised
(Both ↑ the
D for $
which will ↑
r)
↑ in
Settlement
Cash Deposits
At RBNZ
↑G
↑ in bank
deposits
But Public
buys Gov’t
bonds which ↓
Bank Deposits
Not meet by ↑
in S of Money
↑ D for Money
Not as
Inflationary!
Secondary
Expansion of
Money Supply
B/C ↑
in AD not
as large
So interest
rates ↑