Unit 1
Unit 4 
Policy Impact
Standard of Living
At a very basic level, it is possible to argue that all changes to the federal budget are made to increase our standard of living. The significance of the federal budget is that this policy can be implemented in such a way that living standards for a very small sub-set of the population can be affected in a dramatic way.
As was the case with monetary policy, both an expansionary and a contractionary stance will be used to increase living standards. From a macroeconomic perspective we can see that these options will be used to manipulate aggregate demand. When the government opted to hand down deficit budgets during (and after) the global financial crisis, they were working to ensure that jobs and output would be protected. While studying Unit 3 you learned that these are worthwhile economic goals because they add to living standards. For example, an increase in economic growth will mean that there are more goods and services available, which means that we will be able to satisfy more of our needs and wants. It will also mean that new jobs are created, which helps to ensure a more equitable distribution of factor income.
On the other hand, a budget surplus can also help to ensure long term living standards are maintained. Despite the need for large deficit outcomes during the crisis, it was apparent in May 2010 that the government was keen to return to surplus budgets as quickly as possible. This is clearly something that is seen as positive by the general electorate, as during the election campaign in August 2010 Julia Gillard announced that the budget would return to surplus even faster than had been anticipated in May of the same year. As you know, a budget surplus will have a contractionary impact on aggregate demand. This will help to remove pressure on inflation, which will mean higher real wages and increased international competitiveness.
When analysing the impact of budgetary policy it is also worth remembering that the discretionary stabilisers within the budget can also have a direct impact on living standards. For example, in the 2010/11 budget the government made several changes to the way in which income tax is collected. One of these changes resulted in an effective increase in the tax free threshold to $16,000. (It should be noted that this was not a broad based change; low income earners receive rebates which mean that they don’t pay tax on the first $16,000 that they earn, while high income earners will still pay a small amount of tax on this money.) This change has a direct impact on living standards for those on the lowest incomes. The direct result of this change is that the distribution of disposable income will be more equitable, and the people who benefit from the rebates will be able to satisfy more of their needs and wants. The key fact here is that the government was able to use the budget to target a specific sector of the economy.
Similarly, in the same budget the government announced that they would provide specific help for people earning less than $37,000 per year to increase their superannuation balances. In this case the government agreed to pay some (or all) of the contributions tax that would normally be payable by the worker. In this way the employee gets far more than just the small amount (up to $500) that would normally be paid in tax; they will also benefit from the return on this money that is earned in their superannuation fund over the course of their working life.
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