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Exercise 3
The cyclical component of the Budget refers to changes in revenue, expenditure and budget outcomes that result from changes in the level of economic activity. These are known as automatic stabilisers and include unemployment benefits and PAYG tax receipts. For example, the 2009/10 Budget was framed in the context of the global financial crisis which resulted in global recession and a downturn in the Australian economy. The global recession was estimated by Treasury to reduce Australia’s tax receipts by $210 billion over four years, this being a cyclical factor forcing the Budget into deficit. Further, rising unemployment was expected to increase expenditure in the cyclical component of the deficit.
On the other hand, the discretionary component of the Budget refers to deliberate decisions by the Government to alter revenue and expenditure levels, as identified in the fiscal stance. Discretionary changes designed to deal with the effects of the global financial crisis and recession, namely recession in Australia and rising unemployment, included: the $22 billion nation building infrastructure project; budget cut-backs of $22.6 billion; delivering on previously promised tax cuts; increases to pensions; $2.7b boost to tertiary education, research & innovation funding; $1.5b for the Jobs and Training Compact; 50% small business tax break; extension of the First Home Buyers grant for 6 months. Such changes were designed to stimulate aggregate demand in the economy as well as boost infrastructure and aggregate supply over the medium to long term.
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