NATURE AND OPERATION OF SUPPLY SIDE BUDEGTARY POLICIES

SUPPLY-SIDE BUDGETARY POLICY INITIATIVES

Budgetary policy is generally considered to be a demand management policy to Increase aggregate demand in the economy.

However, budgetary measures, taxes and expenditure can be used to incentivise households and business to act in a certain way to increase productivity, effort and lower costs.

SUPPLY-SIDE BUDGETARY POLICY INITIATIVES

The four ways this can be implemented are as follows:Changing taxesIncreasing labour force participationExpenditure on Infrastructure and

education spendingPromoting national savings

CHANGING TAXES

The government can manipulate the levels or rates of taxes (the tax mix) in order to boost aggregate supply.

In particular, tax incentives are often designed to motivate people or business to increase their effort and productivity or encourage further investment in capital in order to lift the nation’s productive capacity.

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EXAMPLES - TAXATION POLICIES

1. Personal Income Tax Rates affect work incentives In July 2012 Australians benefited from tax cuts,

including the lifting of the Tax Free Threshold from $6,800 to $18,200 replacing the Low Income Tax Offset which meant anyone earning under $30,000 paid no tax on the first $16,000 earned.

Lower income tax rates can encourage individuals to participate in the labour force rather than rely on welfare benefits where there is a burden on taxpayers.

This increases the labour force participation rate, leading to higher levels of AS.

Lower income tax rates can help motivate people to work harder or seek longer hours.

EXAMPLES - TAXATION POLICIES

2. Company tax rates (tax on company profits) Since 2000 the company tax rate has been

decreased from 36% to its current rate of 30%. . Lower rates of company tax means that

companies retain more of their profits. This creates a powerful inducement for

businesses to use their extra retained profits to invest in new plant, equipment and technology.

This may help improve efficiency and productivity and increase AS and productive capacity.

INCREASING LABOUR FORCE PARTICIPATION

The government has used the budget to try and increase the labour participation rate in Australia through welfare changes.

This is particularly important as the more potential labour resources there are the better able we are to increase our productive capacity and AS.

The retirement age for people to receive the pension has been lifted to 67 and in the last budget will be lifted to 70 by 2035.

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EXAMPLES – TIGHTENING WELFARE

working for the dole maintaining a jobs interview diary forcing the unemployed to turn up to job interviews by

suspending the payment of benefits requiring some people on disability benefits and single

parents whose children have reached school age to undertake at least 15 hours of work a week

encouraging the aged to defer retirement and build up their superannuation

allowing welfare recipients to earn more income before benefits are lost (to reduce the welfare trap as recipients

start work)

EXAMPLES – TIGHTENING WELFARE

Changes like these were seen as necessary to help increase efficiency in the use of Australia’s labour resources, grow productive capacity, boost aggregate supply and accelerate the sustainable rate of economic growth.

EXAMPLE – AFFORDABLE CHILDCARE

Many parents are prevented from participating in work because quality childcare is not available or is too expensive.

Sometimes, given the high cost of childcare, it is simply not worthwhile for some parents to seek part- or full-time work, especially for those on low pay.

There are at least two ways whereby the budget could help to correct this problem by making childcare more affordable: subsidising childcare providers to enable them to offer

childcare more cheaply for those on low incomes using tax rebates or tax deductions for childcare to help

parents lessen the cost, again making the service more affordable.

INFRASTRUCTURE SPENDING Economic infrastructure involves the provision of

capital equipment, such as roads, railways, telecommunications and water supply, often by governments, that is mainly used collectively by firms to produce other goods and services.

Social infrastructure focuses on the provision of collective community services, such as education and health.

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INFRASTRUCTURE SPENDING An increase in economic infrastructure increases the

amount of infrastructure (capital) resources available for business to use.

Provide the vital surroundings needed for the efficient and internationally competitive operation of profitable businesses.

Infrastructure boosts national productivity and increase productive capacity (AS) to achieve long term sustainable economic growth and improved living standards.

EXAMPLE - INFRASTRUCTURE SPENDING

The last budget in May 2014 allocated $50 billion for infrastructure spending on the Roads to Recovery Program including 11.5 Billion on Westconnex in Western Sydney and Perth Freight link.

INFRASTRUCTURE SPENDING Providing infrastructure usually means that there

must be budget outlays to allocate resources towards government capital or investment spending (G2).

Although this expenditure affects the level of aggregate demand (AD = C + I + G1 + G2 + X - M), it also grows productive capacity and aggregate supply, making transport and distribution more productive by cutting transport times and costs for business and households.

EXAMPLES - INFRASTRUCTURE SPENDING

2. In the 2011-12 budget the Government announced a $36 billion in investment in roads, rail and ports, including $1 billion in funding for the duplication of the Pacific Highway.

The Nation Building program of construction and maintenance for Australia’s land transport network targets those projects that deliver the highest benefits to the nation.

The building of new road, rail and port infrastructure would help to speed up transit times and reduce fuel costs, also helping local firms to reduce prices and increase their international competitiveness.

SOCIAL INFRASTRUCTURE SPENDING Budget expenditure on education is designed to

grow the skills and hence productivity of the labour force.

By increasing skills and productivity, our labour resources can potentially produce a bigger output, growing Australia’s productive capacity, reducing labour costs, increasing our international competitiveness, and lifting incomes and living standards.

SOCIAL INFRASTRUCTURE SPENDING In the 2012-13 budget the Labour government

announced a $43 million in the national workforce development fund to give an extra 15 000 people training places.

It also provided $225.1 million to the jobs, education and training childcare assistance program which allows parents studying accredited Certificate II or higher coursers to claim up to 50 hours of childcare a week.

It also committed $23.4 million of extra funding over four years to help low-income and disadvantaged students reach and stay in tertiary education.

PROMOTING NATIONAL SAVINGS The government over the years has established

special funds plus enhanced Superanuation legislation (compulsory retirement savings) to increase national savings into areas required for investment.

In the last budget the government announced it was establishing a Medical Research Future Fund to raise $20 billion to fund medical research in Australia.

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