Economics

[sat0004]

Hi guys!
I was wondering if you could help me out with these economics question for Unit 4.
1) Suppose economic growth is below 2.75% (forecast). Explain how this would likely impact on the budget outcome. In your answer refer to automatic stabilisers. [This question is worth 4 marks]
2) Referring to the 2019 budget outcome, explain its likely impact on aggregate demand, ceteris paribus.  [this question is worth 3 marks]

Also another question, why is taxes considered a leakage?

Thank you very much!

[AbyssFenix]

1) Economic growth being below the expected forecast (2.75%) would indicate that the government would be collecting less receipts (revenue) relative to outlays (expenditure) than previously expected. This is because the lower growth would signal that people are receiving less income than expected (due to less derived demand for labour, leading to less employment, leading to less wages) and so the government would be collecting less receipts in the form of PAYE income tax which is an automatic stabiliser. In addition, there would be more people than expected who would still rely on transfer income from the government in the form of the Newstart Allowance (which is an automatic stabiliser) due to a lower than predicted economic growth creating lower than predicted derived demand for labour, and thus lower employment. These factors affect the budget outcome negatively as the projected budget surplus of $7.1bn would not be met because the government would be receiving less receipts and spending more on outlays, moving the budget towards a deficit.

2) The 2019 budget outcome reveals that the government budget is moving from a $4.5bn deficit to a projected $7.1bn surplus meaning that they will be collecting relatively more receipts (revenue) than outlays (expenditure). This will have a contractionary effect on the economy and more specifically AD (ceteris paribus), meaning that AD will decrease due to decreased consumption (C) as the increased receipts the government collects (e.g. through increased PAYE income tax) would render consumers with less disposable income. Also Government Expenditure (G1+G2) would be decreasing as the government is spending less on outlays (e.g. infrastructure projects & Newstart Allowance).

3)Taxes are considered a leakage as it is money collected by the government and thus it is money moved away from the economy. That is until the government utilises that same money which goes back into the economy in the form of government expenditure (G1+G2), which is an injection.

Hope this helps