C4 Government finance and fiscal policy
ACTIVITY C4.1
1 a direct
b indirect
c direct
d direct.
2 a 69.4%
b 30.6%
Solutions to Activities in Senior Economics 2e, NCEA Level 3 44
By Geoff Evans © Pearson Education New Zealand 2008
3 Revenue increases steadily from $69.8 billion to $82.1 billion, whereas T as a
percentage
of GDP remains relatively unchanged at 43.44%.
4 Increases as a result of increased income tax, company tax returns and GST
payments.
5 Wage inflation pushes more income earners into higher tax brackets. The
government
could increase the tax thresholds.
6 Ensure tax rates are not too high.
ACTIVITY C4.2
1 a Social welfare, health and education.
b Health, 57% increase.
c Increased steadily from $36.7 billion to $60.8 billion.
2 Current expenditure: includes salaries for the education and health sectors.
Capital expenditure: includes investment spending for new hospital, school, etc.
Expenditure on transfers: includes welfare benefits which will increase private
consumption.
3 $56.1 billion × 18% = $10.1 billion. Expenditure on transfers.
4 There are four types of organisation in the state sector – crown entities,
government
departments, crown research institutes and State Owned Enterprises (SOEs).
ACTIVITY C4.3
1 Sets out the government’s plans for its revenue and expenses for the coming
year.
2 Minister of Finance, usually each May.
3 (Government’s revenue – expenses) + net surpluses from SOEs, etc.
4 a $billion.
b Remained positive, between $2 billion and $5 billion.
c Because T > G.
5 a T < G.
b T > G.
c T = G.
ACTIVITY C4.4
1 Changes in T and G to influence the level of AD in order to meet the
government’s
economic objectives.
2 a See Figure C1.4.
b G is an injection (J), T is a withdrawal (W).
3 a J > W, leading to an increase in AD.
b J < W, leading to a decrease in AD.
c J = W, meaning there is no change in AD.
4 a contractionary
b expansionary.
5 Because J > W, there is a net injection which will stimulate AD.
6 Economic growth will increase T because it is induced. An increase in national
income
will increase income taxes, etc. However, G is autonomous and will instead be
influenced
by political considerations. Therefore an increase in T and no change in G will
increase
the operating balance.
7 Budget deficit will need to be financed from borrowing, which leads to an
increase in
debt.
ACTIVITY C4.5
1 It increases the risk of default (not being able to repay the debt), which will
reduce the
economy’s credit rating. Lenders will therefore ask for higher interest rates to
balance the
risk.
2 Using funds from operating expenses or asset sales.
3 The higher the operating surplus, the greater the chance of lowering the level
of public
debt.
4 Managing the public accounts, operating balance and levels of public debt in a
safe and
sustainable manner.
5 Requires the government to run a balanced budget over the extent of the
business cycle,
until prudent levels of debt have been achieved.
6 Most New Zealanders would prefer to pay less tax. Demands for tax cuts arise
because
people see the government running operating surpluses and see governments in
other
countries (notably Australia) also cutting taxes.
7 Because the operating balance may be required for SOEs, contributions to the
national
superannuation fund, to pay for investments in the public sector and student
loans, etc.
ACTIVITY C4.6
1 a Increase in national income leads to an increase in income taxes; increased
consumption spending leads to increased sales revenue leading to increased
company
profits therefore increases in company taxes revenues, as well as increases in
GST
receipts and returns to SOEs.
b No direct changes other than a possible decrease in transfer payments.
c Operating surplus.
2 Net withdrawals takes some of the ‘steam’ out of the economic boom and
provides a net
injection in a recession, therefore smoothes out the business cycle.
3 In an upturn, increases in national income mean that T > G leading to a
decrease in %∆
GDP, whereas in a downturn national income falls so that T < G, leading to an
increase in
%∆ GDP.
4 Answers should be consistent with New Zealand’s position on the business
cycle, other
macroeconomic variables and the state of the government’s finances. For
instance, it
could include tax cuts to increase consumption spending in a recession.