Acc201 Accounting For Corporations | Assessment Answers

1 When is the federal Budget prepared?

2 Who is responsible for preparing the federal Budget?

3 How is the final federal Budget determined? Explain in detail how the government creates its Budget.

4 What percentage of the gross domestic product (GDP) is represented by the federal Budget?

5 What are the revenue sources for the federal Budget? Indicate the percentage contribution of each of the major sources.

6 How does Australian spending as a percentage of GDP compare with government spending in other countries?

7 How are deficits financed?

Introduction

Just like other federal states, the Australian government is expected to prepare a budget every year (Seifert, Perozzi, & Li 2015, p. 42). However, this budget is often made available to the public, unlike other private or for-profit companies. The entire process of the federal budget is also established as per the constitution of Australia that ensures the government makes possible the availability of a considerable amount of information on the federal budget. This paper gives background information on the federal budget in general by presenting clarifications on when the budget is prepared, responsible stakeholders of the preparation, federal budget determination and creation by the government, and the percentage of the GDP represented by the federal budget.

Background information on a federal budget

According to Levasseur (2015), the federal budget is defined as an item plan that shows the annual public expenditure for a federal state. The systematic review by Rollins (2015) points out that federal budget is often used in financing a variety of the federal expenses. These range from the payment of federal employees, the dispensation of essential resource equipment such as agricultural subsidies, making payment for the military equipment. The federal budget is often calculated annually with the fiscal year depending on the state. For instance, the fiscal year for the Australian federal budget often begins on the 1st of October while it ends on the 31st September of the subsequent year, which is the year for which the naming of the budget is done.

 All the expense made in the budget are often classified or considered as either discretionary or mandatory spending. The mandatory expenses are also called the permanent appropriations are stipulated by the law of the state and include all the entitlement programs such as medical care, Medicaid, and social security as pointed out by David and Redmond (2014, p. 6). Discretionary spending is considered the spending that must be approved by the states’ individual appropriations bills. Levasseur (2015) also points out that the federal budget is also funded by the tax revenues. However, there are often moments when the state can operate from a budget deficit where its spending outstrip its revenue as it has been for the United States since 2001.

When is federal budget prepared?

According to Lonwa (2013, p. 67), the Australian government budget is essential as it provides a picture of the forecast financial programs of Australia as well as the fiscal policy of the government for the subsequent year. The federal budget as well includes the expenses for the Commonwealth and government revenue estimates over a specified period. The annual Australian federal budget starts in November or December where the ERC (the Expenditure Revenue Committee of Cabinet) considers portfolio new proposals of the minister as well as the expected major pressure so as to establish the priorities of the federal budget. Between February and April of every year, the ERC carries on with the federal budget development process based on the background of the social, political, and economic governmental priorities.

Who is given the mandate of preparing the budget?

The preparation of the budget varies from one state to another depending on the laws and constitutional guidelines of that country. For instance, the congress is given the mandate of creating a new budget every year in the US, and the annual congressional budget is often referred to as the appropriation process according to Lonwa (2013, p. 67) The appropriations bill is hence essential in specifying how much money will be allocated to different programs and government agencies. The congress also has the responsibility of passing a legislation that gives the federal government the legal authority of spending the allocated finances and the laws are referred to the authorization bills. As a result, the US federal budget is complete as a responsibility of the president, the senate, and the appropriation committees (American Transplant Congress 2013).

The federal budget sets out the economic plan of the Australian Governments to ensure it has a continuous and successful transition from the mining boom of investment to a more diversified and stronger new economy as pointed out by Country Report Australia (2013). The mandate of the budget preparation hence involves an important body of the government called the Expenditure Revenue Committee of Cabinet chosen by the government head of state. These committee targets at achieving three major objective frontiers while preparing the budget draft.

Fast, it focuses on ensuring the budget sticks to the plan of the government for jobs and growth. This aspect can be achieved through a tax evaluation plan that will boost new investments, support, and create jobs to increase real wages. The process has to project a continued investment in the science agenda and the national innovation that can support new small and large-scale businesses. The budget plan should also focus on opening more export opportunities based on trade agreement opportunities to deliver new jobs of the service providers, manufacturers, and the general public.

Second, it should focus on fixing tax system challenges to enable a sustainable coverage of the government responsibilities for the next fiscal year. In doing this, it plan should combat tax avoidance mainly by multinational corporations to ensure they pay a tax of what they earn in Australia. The committee also needs to focus on the need of financing the activities of the hard-working population by boosting the small business that employs them so as to create a tax relief (Country Report Australia 2013).

Thirdly, the committee needs to ensure that the proposed budget plan will help the Australian Government to live within its means to ensure a balance the budget and reduce the long-term budgets. In achieving this objective, the federal budget should be able to keep the growth of government spending under control to ensure that the government spending is effective efficient and well-targeted to the economy improvement as possible. The strategy also helps in ensuring the government responsibly spends on infrastructural projects such as rail, roads, communication, etc while injecting funding to the basic needs of the population such as healthcare and education.

Determination of the federal budget- how the government determines its federal budget

According to Country Report Australia (2013), the vision of Australian democracy is ensuring that the federal budget and all the related activities of the federal government reflect the value of the Australian population. However, most of the people do feel that the federal budget have no reflection on the values of the majority of the population due to the distinct social classes created and often blamed on the budget. Cowie et al. (2016) point out that most of the people also view the budget as too difficult to understand or at times cannot just make the difference with the annual update of the budget. The federal budget determination is hence a complicated process that is shaped by many forces some of which are written in the federal constitution while other forces originate from the economic reality and the political system of the state as pointed out by Dockery, Seymour, and Koshy (2013, p. 1694).

According to Levasseur (2015), the federal budget determination process governs the decision-making for allocating public resources to the policy priorities stipulated in the law. It is also through the budget determination process that the Australian Government gains the authority and right of the parliament to spend the relevant finances through the passage of the annual appropriation act as well as other legislations establishing special appropriations. The government thus allocates the finances to other relevant Commonwealth entities and the departments of the state. As a result, /// denotes that the ability of the Australian Government to deliver on the policy requirements to its citizens depends on the policy commitments of the government while the achievement of its goals is based on the effective budgeting by the government.

According to the Australian construction, the Charter of Budget Honesty Act of 1998 sets out requirement and principles that guide the management of the government on fiscal policy. The Charter hence directs the government to carry out four main procedures. These include;

• Setting out the medium-term strategy along with the short-term targets and fiscal objectives that are then published in the budget papers
• Reporting for the General Government Sector (GGS) estimates based on the annual reporting cycle and the economic assumptions that underlie the federal budget estimates.
• Reporting against any externally specified standards of reporting
• Listing all proposals for revenue changes as well as the current and capital expenses in the forthcoming reporting cycle

Percentage of the GDP represented by the federal budget

The relationship between the Gross Domestic Product and the federal budget often vary from state to state and from one budgetary year to another as pointed out by Bebbington (2016, p. 78). According to the Australian Revenue Statistics report (2016), the tax to the Gross Domestic Product (GDP) in Australia has recorded an increase since 2010 as depicted in figure 1. For instance, the GDP increased from 27.7% to 27.87% in 2015 and 2016respectively.

Figure 1: The percentage progress of the GDP and the Australian federal budget

Revenue sources and percentage contribution of the sources for the federal budget

According to a report by the Revenue Statistics (2016), around 80% of the federal budget in Australia comes from the individual income tax as well as the payroll taxes that are responsible for funding social insurance programs as shown in figure 1. The individual income taxes forms 46% while the social insurance or payroll taxes accounts for 33.9%. The same study denotes that another 11% is financed from the corporate income tax while the rest of the percentages are from other sources. The Australian individual income tax is identified to be the leading single source of federal budgetary revenue since the 1950s as pointed out by OECD (2017).

For instance, it amounted to 46% of the total with a gross domestic product of 8% in 2016. However, the value has been seen to be on the rise from time to time to as high as 6.1% of the GDP in 2010 after the long-term global economic recession between 2007 and 2009. The other sources include the revenue the government collects from the gift and estate taxes, earnings from federal revenues and reserve systems, and customs duties among various charges and fees. Revenue Statistics, report (2016) points out that the figure has increased to over 6% from 2014 as a result of the unusually high profit earned from the Federal Revenue Board in relation to its effort of stimulating the economy since 2008.

Figure 2: Federal budget revenue for Australia for the year 2016/2017 (Adopted from the Revenue Statistics, 2016)

Table 1: Federal budget revenue for Australia for the year 2016/2017 (Adopted from the Revenue Statistics, 2016)

Australian Spending compared with other countries

In a systematic review by OECD (2017), the study reports that the general government spending as a share of its gross domestic product and per individual gives an insight on the size of the government across other states. The same study denotes that the general government spending is often consisting of the local and state governments as well as the government social security funds. In other words, the larger variation of the expenditure indicator highlights the approaches adopted by a variety of countries in their attempt of delivering public goods and services while providing the necessary social protection and not just on the resources spent. OECD (2017) also points out that the indicator is often measured in terms of the thousand US Dollars per capita or as a percentage of the gross domestic product. The lower GDP in Australia is recorded as a result of the high number of unemployment rates, stagnation of wages mainly for the low-income families, inadequate investment plans to boost the deteriorating infrastructure (Marks 2016, p. 2), rapid rise in the medical costs, increased pension costs for the aging population, budget deficits, and energy shortages among other challenges (Seifert, Perozzi, & Li 2015, p. 42).

According to Meyers (2012), the Australian economy has often experienced in increase in economic growth but not as drastic as other developed states like the US. The GDP of the United States is currently standing at $18 trillion and is known to be the highest GDP globally. The Australian GDP is $1.34 trillion US Dollars and is ranked 12th on the global scale and with a difference of over $6.5 trillion US Dollars. However, the value difference is often related to the demographics of the countries showing that the US has a population of 321 million making it the third most populated globally as pointed out by the American Transplant Congress (201). On the other hand, Australia has a population of 23.8 million people making it the 53rd most populated country globally. The United States is also identified to have the most powerful technological economy leading to $49,800 per capita GDP, hence considered a market-oriented economy.

Figure 3: Comparison of the GDP of Australia and the United States.

Financing the deficits in the federal budget

A deficit in the federal budget is an indicator of the financial health of the federal state where the revenue is exceeded by the expenditure. It occurs when current government expenses exceed the amount of income that is received through the standard operations. In his study, Raey (2017) denotes that correcting a budget deficit hence require a state to cut back on certain expenditure while increasing income generating activities or even employ a combination of the two if there is a possibility. In their study, Davig and Redmond (2014) also point out that a state can counter its budget deficit by increasing taxes, reducing government spending, and adopting strategies that promote economic growth. For instance, the economic condition of the country can be improved by the reduction of enormous business regulations and simplified tax regimes. Blendon and Benson (2011) denote that such a step will help in the increasing or improve economic conditions as it will increase the treasury inflows from the taxes.

Bebbington (2016) also denotes that the government expenditure can be reduced by implementing economic strategies to reduce expenditure on defense and social programs or even the reformation of entitlement programs like the pensions of the state so as to achieve less borrowing. OECD (2017) also denotes that at extreme federal budget deficits, a nation can as well print more currency that can be used in covering the debts owned through the issuance of securities such as bonds and treasury bills. Even though it can be used as a mechanism of making payments, it is a risky method of funding the federal budget deficit as it can risk the government performance by devaluing the currency of the nation.

The government can also increase the domestic tax on the goods and services within its trade industries so as to inject more income to the government treasury. Davig and Redmond (2014) also point out that when a federal budget deficit occurs, it becomes a burden on the future generation in two main ways. The future generation will have to be taxed so as to pay off the public debts that resulted in the increased consumption of the public resources by the present generation. The increase in consumption by the present government reduces the growth of capital goods and crowd out investments Dockery, Seymour, and Koshy (2013, p. 1697). The future generation will thus have smaller capital stock and wealth.

Conclusion

Just like other federal states, Australian government also prepares an annual budget that will help the state govern its financial economy and economic progress. The budget is then presented to the public so as to have their view towards what the country expects in its subsequent budgetary year. However, the process is a responsibility of the heads of state and should be established as per the constitution of Australia that ensures the government. The federal budget thus helps to ensure the government remains within its financial spending limits so as to avoid cases of reduction in the currency and federal deficits for the future generation.

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