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 taxes
 Increasing labour force participation
 Expenditure on Infrastructure and
education spending
 Promoting national savings
CHANGING TAXES
1
 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.
EXAMPLES - TAXATION POLICIES
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.
1.
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.
2
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 fulltime 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
3
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.

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
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.
2.


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
4
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.
