Budgetary policy supply side initiatives
As discussed earlier in the section on budgetary policy as a demand management tool, there are instances where the government's use of the budget is designed to achieve supply side improvements to the macroeconomy. In particular, the use of the government's tax system, as well incentives to increase infrastructure spending (including direct government provision via an increase in G2), are seen as important arms of government policy in order to boost the productive capacity of the economy. It is generally accepted that without government incentives, or direct provision, the private sector will tend to under-invest in infrastructure. This is particularly the case for large infrastructure projects requiring substantial funding, or where there is some public good element associated with the investment. This includes projects such as ports, roads, railways and communication networks. In addition, the private sector will tend to under-invest in research and development expenditure (see market failures) that is a crucial building block for the advancement of productivity and efficiency over time.
BP supply side initiatives have been particularly important in recent budgets, given the capacity constraints that surfaced in the late 2000s, Australia's relatively poor productivity performance, and the problems associated with an ageing population. Governments have introduced a number of supply side initiatives to overcome these issues. In particular, the government has introduced measures that seek to boost infrastructure (such as the investment in the broadband network), increase labour force participation rates (such as higher child care rebates), expand the population (such as the now defunct baby bonus) and those policies designed to address skills shortages in areas including engineering and the trades (such as skilled immigration).
Whilst BP supply side initiatives generally involve cuts to business taxes, the provision of industry support and investment in infrastructure, the government increasingly refers to individual income tax cuts as a means of boosting both labour force participation and productivity. By lowering tax rates, it provides individuals with greater incentive to either join the labour force and/or increase work intensity (as less of any given level of income goes to the government in tax). This should increase productivity and provide the economy with supply side benefits.
Review some supply side budgetary policy initiatives that have been announced in the recent budgets at www.budget.gov.au.