Budgetary policy and low inflation
The problem of high inflation is primarily tackled by the RBA. However, budgetary policy is generally framed with some consideration given to likely inflationary impact. For example, the intention to return the budget to surplus in 2012-13 was partly done to assist RBA efforts to contain inflation, thereby making room for the RBA to loosen monetary policy in an effort to focus more on jobs and growth.
Generally speaking, budgetary policy can assist the RBA in a number of ways:
If inflation is largely supply driven (e.g. increases in labour costs due to labour shortages) the government could assist by introducing spending initiatives designed to boost training (e.g. more funding for TAFE or skilled apprentices), or announce measures that are designed to attract skilled labour from overseas, or simply reduce business taxes. Similarly, the government could boost Investment spending on infrastructure or capital works, to assist in boosting the nation's productive capacity and easing inflationary pressure over time. Alternatively, the government could provide private sector incentives to increase Investment (such as accelerated depreciation allowances or tax concessions for R&D expenditure) that can once more boost productive capacity and ease inflationary pressure in the medium to longer term. These types of measures will be explored when considering Aggregate Supply policies.