Jargon Buster – Federal Budget Edition

Written and accurate as at: 14 May 2014

You don’t need to be an economic whiz to understand the Federal Budget, just take a quick look at our “Jargon Buster – Budget Edition” for the plain English explanation of key terminology used by politicians, economists and the media when talking about the budget.

Federal Budget
The Federal Budget is the Government’s spending plan, issued annually, based on assumptions and predictions of income and expenditure. When a budget is presented it is for the next financial year starting 1 July, and the following three financial years. This four-year period is called the “forward estimates”.

The assumptions (such as growth, inflation and unemployment rates) used for the budget are referred to as the “parameter variations”. These assumptions are subject to change, which means that the budget measures and outcomes are also subject to change.

Fiscal Policy
Fiscal Policy is the way the government adjusts the spending levels and tax rates to monitor and influence Australia’s economy. For example, the 2014 Federal Budget includes some tax increases and service decreases. This may have a short term effect of slowing the Australian economy. The other way to influence the economy is Monetary Policy. Fiscal Policy is different to Monetary Policy, which refers to the Reserve Bank of Australia’s decisions on interest rates.

Fiscal Drag
Fiscal Drag is the outcome of excessive taxation or a lack of Government spending, which causes the Australian economy to lag. An example of Fiscal Drag is “bracket creep” where tax rates do not keep up with wage increases, meaning that as people’s wages increase they are moved up to higher tax brackets (increasing the tax received by the Government and reducing the income received by Australian taxpayer).  

Fiscal Consolidation / Expansion
When the Government announces increased taxes and reductions to Government spending it is referred to as fiscal consolidation in order to reduce the deficit. Fiscal expansion occurs in times like the Global Financial Crisis, when the Government reduces taxes and increases spending to help stimulate the economy.

Government Levy
A levy is another word for tax or a fee imposed by the Government to help increase revenue. Levies are generally temporary with an exception to this being the Medicare Levy , which has been a permanent levy, imposed on Australian taxpayers since 1976. The 1.5% Medicare Levy that the majority of Australian taxpayers pay, helps the Government fund the cost to provide access to health care to all Australian residents.

Other levies imposed by past Governments include the Gun Buy Back Levy, East Timor Levy and Temporary Flood and Cyclone Reconstruction levy. These levies were payable by Australian Taxpayers by way of an increase to the existing Medicare levy.

Government Deficit & Surplus
A balanced budget occurs when the government’s annual spending is equal to what it receives in taxes and other revenues. If the Government spends less than its revenue, then it’s said to be running a surplus.

The Government tends to run in deficit during economic downturns as they increase spending and reduce taxes as a way to stimulate the economy and help lessen the negative impact on businesses and services. In strong economic times, the Government then tries to repay the deficit debt.

A structural deficit occurs when Australia posts a deficit even when the economy is operating at its full potential. This differs from a cyclical deficit in that a cyclical deficit only occurs when an economy is not performing to its full potential (for example, if an economy is currently struggling through a recession). If the country is in a structural deficit then even if the country is in a strong economic position, the Government will still post a deficit. The only way for a country to get rid of a structural deficit is to cut spending or raise revenues (increase taxes).
Government Debt
When the Government is in deficit (i.e. there isn’t enough revenue to fund planned expenditure), then they must borrow the shortfall. To borrow, the Government issues bonds to investors who are paid a return (interest) for lending the money to the Government.

The issue of government bonds increases the level of Government debt. If the budget returns to a surplus in any given year, it does not mean that the debt incurred from previous deficits disappears. Instead, the Government can use the surplus to repay some of the debt from previous years.

Another term often used is “net debt”. Net Debt is the level of Government debt compared to the level of all the Government’s assets.  In a similar way to how we may compare our mortgage (debt value) to the value of our house (asset value).

GDP or Gross Domestic Product, is one of the main ways to measure the health of Australia’s economy. It represents the total dollar value of all goods and services produced over a specific period. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 2%, this is said to mean that the economy has grown by 2% over the last 12 months. When the term net GDP is used, it refers to the gross domestic product figure that hasn’t been adjusted for inflation and is expressed in current prices.

Terms of Trade
This is the ratio between what Australia receives (is paid) for exported goods and services and what it pays for imported goods and services. Rising terms of trade means that Australia is getting higher export prices and paying less for imported goods and services. Vice versa, falling terms of trade means import prices are higher than export prices. The position of the Australian dollar can have a significant influence on the Terms of Trade.
Tax Expenditures
Tax expenditures represent the potential revenue the Government goes without due to the tax concessions offered to Australian taxpayers. Some examples of tax expenditures include superannuation concessionstax-free pension concessions for people over 60 years old, the capital gains tax exemption on the family home as well as a range of small business capital gains tax concessions. These concessions all represent sources of revenue that the Government isn’t collecting.

An adjustment made to the value of a good or service, to a predetermined index. For example, the Australian Government social security payments (pensions and allowances) are generally indexed by either inflation or by a measure of average wages (AWOTE).

Means Testing
A “means test” is the way the Government determines whether a person has the means to provide for themselves or whether they require financial assistance. The Government typically uses a certain income and/or asset test to determine whether someone qualifies for a financial-assistance program either in full, part or not at all.