budget surplus and IR (1 Viewer)

[clairegirl]

Errm.... my notes from class say this and i don't know how it comes about

"The government argues that budget surpluses will enable the lowering of taxation rates and will help to keep interest rates from rising?"

Huh wha??! HOW??

 

[~DuMbEr~]

i guess it will help get rid of 'bracket creep' and coz if they are in surplus they retire commonwealth debt so the public sector demand for funds is also reduced which would result in lower I rates. Thats what i think neways..

 

[clairegirl]

hrrmm
so maybe it's like
a budget surplus (the government has money whoo hoo!) so they don't have to get so much from income earners coz dey gots money baby :d

and as for keeping interest rates down.... urrm... they use the surplus funds to pay off debt from the private sector by buying back CGS's which means theres more money in the short term money market... meaning interest rates are lowered

i think i gots it! :d:d WHOO HOO!! (errm correct me if i'm wrong plz hehe)

Thanx Dumber

 

[saves.the.day]

This may sound to simple but:
Wouldn't the budget surplus, by definition have a contractionary effect on the economy? In effect, this means that it will dampen aggregate demand, meaning that demand pull inflation wont be a threat, allowing the RBA to maintain lower interest rates.

 

[Blondie]

doesnt it depend on the fact if that surplus is smaller/larger than the previous year. as far as i know, you cant judge a budget for one year, you have to look at what its doing to the economy this year in comparison to last year.

 

[clairegirl]

that sounds right too
thanx dude

 

[meh]

well about the IR - if the fiscal policy is in surplus, that means they addopt a more contractionary aproach - which could be matched with a relatively expansionary monetary policy - otherwise we will have a reccession caused by the same thing as the early 90s recession, too contractionary macro.

 

[monkey187]

i think your write claire... its like what happened this year tax cuts were given caus the govt is getting to much cash

i think it is more of a political thing though

people like tax cuts there for they vote for polititions but if the budget is in deficit then they would have to borrrow for these tax cuts which would not be economicly smart

 

[timmii]

I think its a combination of what you guys have said.

1 - budget surplus means that they can add to the level of national savings and they also won't be borrowing, this means that there won't be pressures on the interest rates to rise (as may happen in the crowding out effect).

2 - Lowering tax rates has a less stimulatory effect on AD than does outright govt expenditure (this is because a reduction in taxes changes your disposable income, some of which is saved, some of which is spent...while outright govt spending is directly raising aggregate expenditure). That being said, by using the surplus (yes - possibly contractionary fiscal policy) to provide a tax break instead of having a budget deficit, AD is boosted, but to a lesser effect ---> less inflationary pressures ---> less pressure on interest rates to rise.


3 - ok, this is a rather obscure one, but perhaps still valid. By reducing tax rates, labour supply may increase since people have greater incentive to work more hours/enter the labourforce etc...This then increases AS (shifts the short-run aggregate supply curve to the right) and in doing so allows for there to be a greater level of output at a lower price level ----> less pressure on interest rates.