Spending restraint and targeted assistance for most vulnerable is best govt formulae to fight inflations, says IMF

As the federal government's Expenditure Review Committee goes "line-by-line" through the budget ahead of next month's release, the IMF has released research showing that every 1 percentage point of gross domestic product increase in government spending adds 0.5 of a percentage point to inflation - and the opposite also holds.

"When central banks act alone - without the support of fiscal policy - they need to hike interest rates substantially to fight inflation. Fiscal tightening makes it possible to increase interest rates by less to contain inflation," the IMF said.

The remarks will add to the pressure on the government to hold spending down in next month's budget, including directing any revenue windfalls to reducing debt.

High commodity prices, low unemployment and strong company profits have boosted government finances.

As a result of the surge of revenue, the budget deficit as at February was more than $20 billion smaller than had been predicted in the October budget.

Finance Minister Katy Gallagher said the government was "absolutely focused on not making the inflation problem worse", including investing revenue upgrades back into the budget.

"We've got a budget under enormous stress, with the pressures coming towards the budget accelerating, not reducing," Senator Gallagher said.

The minister said the Expenditure Review Committee was going through spending "line by line" and looking at "sensible savings where we can".

The government is facing major cost pressures, particularly a rising interest bill on debt repayments and rapidly growing expenses in disability, defence, health and aged care.

Senator Gallagher said providing cost of living relief for vulnerable households was also "front of mind" for the government.

But opposition treasury spokesman Angus Taylor accused the government of adding to inflation pressures, describing the last budget in October as a missed opportunity to exercise spending restraint.

"The May budget is an opportunity to take pressure of Australians," Mr Taylor said. "The government is talking a big game on restraint but we haven't seen it. They've given up the ghost on getting budget cuts despite the fact they're seeing record levels of commodity revenues."

The IMF said that, through spending restraint and targeted assistance, governments can not only support central banks in fighting inflation but ameliorate the worst effects of rising living costs on the less well-off.

"While monetary policy is in the driver's seat in the battle against inflation, fiscal policy can help," the IMF said in its April 2023 Fiscal Monitor. "Well-targeted fiscal restraint can be designed to support monetary policy in attaining price stability while protecting the vulnerable from the cost-of-living crisis."

The organisation admitted this would involve tough choices for government.