ECO100 Economics for Business

Provide an analysis of the differences between the Federal Government, a State Government and a Local Government Area (LGA) budget. (In my Case the city of Sydney) For the first question, you need to consult the ABS (Australian Bureau of Statistics) publication as described in the lecture:

The tables of interest are in the download section are Table 130 (for the Commonwealth or national Government) and Table 231 for NSW. Got to Table 1 (general operations) and Table 4 Expenditure by purpose. You are also asked to use
the annual report from a local government area (perhaps where you live or the City of Sydney) to provide some equivalent data (even though it will be hard to provide an exact comparison). The main aim here is to provide percentages rather than absolute numbers.

The second question uses a case I gave out in class in Lecture 1. I have repeated the text below:
• You are constructing a sewerage plant for a release area that will eventually have 100,000 households.
• A large plant, which can cater for 100,000 households, will generate substantial economies of scale. It can be built at a cost of $1,050 per household.
• A smaller plant that will cater for 50,000 households will cost $1,250 per household.
• The sewerage plant will be funded from rates. It is expected that 10,000 households per year will locate in the area. The sewerage rate is based on a metropolitan average and is $500.
I. Should you go for the cheaper(larger) plant
II. What are the pros and cons of each option
III. How would you decide.

The federal budget in Sydney largely allocates funds for federal programs. These programs include defense programs and at times it also includes funding for other programs which may be operated at a state level such as public transport, hospitals and school education. It therefore has more access to funding compared to the states. It is observable that the federal government budget is higher than that of the state and local budget. Most of its allocations are to deal with national defense facilities and other allocations to state agencies. Also, it may have a higher allocation in order to deal with externa affairs as well as integration and pension (Wang, 2015).

Looking at the revenues, it is clear that the federal government has more allocated funds by nearly more than half compared to the combination of state allocations. The state allocations are mostly retrieved from gambling taxes, vehicle tax, payroll taxes and property taxes.  On the other hand, the federal revenues are retrieved from the tax from individuals as well as corporate tax.

 

The headline expenses in the federal budget in Sydney in Sydney include the security and welfare budget, education, defense, housing, transport and communications. Also, the budgetary allocations are higher than those of the state budgets (Smith and Williams, 2013). The state budgets largely deal with social security, housing, transport and communication, education and health. Subject to a few special cases. Quite, area 90 of the Constitution gives the government selective control over the lucrative income surges of traditions and extract obligations (imposes on products, for example, liquor, tobacco and fuel). Until the Second World War, Australians paid pay duty to both state and governments (Wanna and De Vries, 2015).

However since 1942, the government has been the sole authority of wage charge. The government has additionally gathered organization assess for more than 100 years, and the GST since 2000. The states could at present gather wage impose on the off chance that they needed to, yet pick not to for political reasons. Segment 96 of the Constitution accommodates the national government to give a noteworthy extent of its income to the states that the Parliament may allow money related help to any State on such terms and conditions as the Parliament thinks fit. This circulation of income takes two structures – general income help and installments for a particular reason. The unfastened financing that states get from the central government is generally comprised of the cash that the government gathers from the GST. The states can spend this cash as they see fit (Rubin, 2013).

Notwithstanding, the passing on of the GST income is not unqualified. It's restrictive on the states surrendering the accumulation of a number various states charges. The perplexing undertaking of cutting up the GST income between the states is left to the Commonwealth Grants Commission. The yearly procedure dependably appears to leave a minimum one state guaranteeing it ought to get a more prominent offer of the pie. The government may likewise give subsidizing to the states to a particular reason. The states need to agree to getting the subsidizing (which is not ordinarily an issue), but rather it means that the government can't force programs on the states that they fervently restrict (Reddick and and Puron-Cid, 2017). 

In general, the following differences are highlighted:

• The proportion of the allocations is highest in the federal budget in Sydney followed by the state budget and the local government budget.
• Also, the type of budget is different in the sense that the federal budget mostly deals with defense issues while state budgets deal with welfare and the local government budgets mostly deal with public transport and communication.
• The other difference concerns the nature of revenues for the budget. It is clear that while the federal budget obtains its revenues from individual and corporate taxes, state revenues are obtained from trade excises and levies. The local government obtains its revenues from licenses, rates and rent (L’Ecuyer and Huffman, 2015).

 For the first option, the project requires a high value of initial cash outflow despite the fact that people expected to settle in the sewerage area are 10 000 per year. In this case, the project results in a negative NPV given that the rate of capital expenditure is higher than the rate of revenue generated by the project (Fjeldstad and Moore, 2008).

It is clear that with high discount rates, the NPV is lower compared with the low discount rates.

 For the second option, the project incurs two main capital outlets. First in the first year and the next in the second year. Similarly the proposed costs are higher than those provided by the rate of the people who settle in the company. Also, higher discount rates provide lower NPV than the lower discount rates (Daley and Hunter, 2014).

From the analysis it is clear that the cheaper plant is Option 1. Since despite them both being negative NPV, Option 2 has more negative NPV compared to that of option 1. This is because it undertakes two cash outflows when all the costs incurred are yet to be recovered.

In this case, the cheaper plant is the larger plant. It depends on the financial capacity of the firm. In case the firm has access to a large sum of funds in the beginning, they are able to finance the project appropriately (Chubb, 2014). On the other hand, in case the firm has no immediate finds the smaller project would be the best option. However, it would also be prudent to deal with the project in a phase wise basis and therefore undertake the smaller project (Andrews, 2014). This will enable the stakeholders involved to consider the impact of the project and assess whether their projections for settlement are at par. In this way amendments can be done along the way compared to have been undertaken a huge sum of money initially. The cheaper plant may therefore not be a feasible option especially where the project only requires testing for effective implementation (Bruno, 2015).

Pros

• The firm undertakes the initial cash outflow at once
• The initial cash outflow is spread over the entire project in its duration

Cons

• The initial cash outlay may be too expensive an undertaking
• The project may not be feasible throughout the entire projected period

Pros

• The firm’s cash outflow is incurred at different points of the project which allows for the revenues recovered for the second part of the project.
• The project can be stopped at any time

Cons

• The company undertakes two cash outflows in the project
• The project might underestimate the expected settlements in the project which limits the revenues received.

I decide on the basis of the feasibility of the project. This is because I believe that it being a social project it should be able to generate sufficient revenue for the project to fund itself. I therefore believe that option two is best suited to be selected since it gives the management the option to opt out and select better alternatives if the method is not feasible (Smith and Williams, 2013). 

References

Andrews, M., 2014. Budget boost for Australian resources sector. Australia's Paydirt, 1(217), p.10.

Bruno, R., 2015. Investments in Public Education, Investments in Public Infrastructure, and a Balanced State Budget.

Chubb, I., 2014. Australia needs a strategy. Science, 345(6200), pp.985-985.

Daley, J., McGannon, C. and Hunter, A., 2014. Budget pressures on Australian governments 2014. Grattan Institute.

Fjeldstad, O.H. and Moore, M., 2008. Tax reform and state building in a globalized world. Taxation and state-building in developing countries: Capacity and consent, pp.235-260.

L’Ecuyer, T.S., Beaudoing, H.K., Rodell, M., Olson, W., Lin, B., Kato, S., Clayson, C.A., Wood, E., Sheffield, J., Adler, R. and Huffman, G., 2015. The observed state of the energy budget in the early twenty-first century. Journal of Climate, 28(21), pp.8319-8346.

Reddick, C.G., Chatfield, A.T. and Puron-Cid, G., 2017, June. Online Budget Transparency Innovation in Government: A Case Study of the US State Governments. In Proceedings of the 18th Annual International Conference on Digital Government Research (pp. 232-241). ACM.

Rubin, I., 2015. Past and future budget classics: A research agenda. Public Administration Review, 75(1), pp.25-35.

Santamouris, M. ed., 2013. Energy and climate in the urban built environment. Routledge.

Smith, M., Whitelegg, J. and Williams, N.J., 2013. Greening the built environment. Routledge.

Wang, X.S., 2015. The Chinese economy in crisis: state capacity and tax reform. Routledge.

Wanna, J., Lindquist, E.A. and De Vries, J. eds., 2015. The Global Financial Crisis and Its Budget Impacts in OECD Nations: Fiscal Responses and Future Challenges. Edward Elgar Publishing.