Unit 1
Unit 4
Policy Approach
Policy Tools
In general, it can be said that there are two main tools of fiscal policy – budget revenues and expenses. By subtracting the expenses from the revenues, we can determine the fiscal balance. It is worth taking a moment to understand this term.
Students who are studying Accounting as well as Economics will quickly grasp that the government is using the accrual method of accounting – they are subtracting expenses incurred from revenues earned. This means that the final result will not match the cash balance. For students who are not studying Accounting, you will only need a basic understanding of this concept in Economics.
Revenue is any amount which has been earned by the government. This means, we include it in the calculation of the budget regardless of whether we will actually receive it during that financial year. For example, the government may recognise that many businesses are late when paying the income tax that they collect when paying wages. Although this money may not have been received by the government, we can still budget for it on the basis that the government has already earned it.
Similarly, an expense is recognised as soon as the obligation exists. This is true whether it has actually been paid or not. For example, if the government is due to pay for a certain expense in the final week of the financial year, but due to other circumstances they are aware that this payment will not be made until the following week, this payment must still be recognised.
The Australian government follows “Australian Accounting Standard Number 31 (AAS31) – Financial Reporting by Governments” when preparing the federal budget. This means that they must calculate the fiscal balance using the approach dictated above. However, they are also required to calculate and report on the headline and underlying cash balances. You can see each of the main reporting outcomes in this table:
The headline cash balance (the figure at the bottom of the table) is simply all cash receipts minus all cash payments. It is a basic measure, however it is useful in determining the amount of cash that the government actually has available at any given time.
On the other hand, the underlying cash balance is calculated by removing certain one off effects on the headline balance. For example, in the years when the federal government is selling government assets, this can make a significant contribution to receipts at that time. As this does not reflect the true cash situation of the government (due to its one off nature), it is removed when reporting on the underlying balance. This is the figure that is announced in the budget speech; in the 2010/11 budget this figure was a deficit of $40.8 billion.
However, it is the fiscal balance that many economists now view as significant. As discussed above, this figure represents the difference between revenue that has been earned by the federal government, minus any expenses that have been incurred.
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