The Evolution of Fiscal Policy in Australia

This paper examines the evolution of Australian fiscal policyand the fiscal policy framework over the past quartercentury.Following the early 1980s recession, a sustained fiscal consolidationsaw the general government budget balance (for all levels ofgovernment) move from a deficit of 3 per cent of GDP in 1983/4to a surplus of 1 per cent 5 years later in 1988/9. A severerecession in the early 1990s interrupted this process, and thebudget returned to sizeable deficits which peaked at 4 per centof GDP in 1992/3. The second half of the 1990s saw a repeatof the experience a decade earlier, with the budget returningto surplus in 1997/8. In contrast to the 1980s experience, however,the general government sector (for all levels of government)has recorded surpluses for the subsequent 8 years to the present.The paper outlines Australia's macroeconomic experience overthis time and argues that there have been two significant medium-termfactors motivating the extended periods of fiscal consolidation.The first factor, relevant since the mid-1980s, has been thelarge Australian current-account deficits since that time, andthe associated build-up of net foreign liabilities. The secondfactor, which entered the public debate more recently, is adesire to provide fiscal policy flexibility to respond to theageing of the population and the projected rising public costof health services—both influences that are likely tobe of increasing importance over the next generation or so.The paper discusses the introduction and evolution of Australia'smedium-term fiscal framework which has been put in place torespond to these challenges. Footnotes ¹ E-mail addresses: dgruen{at}treasury.gov.au; asayegh{at}treasury.gov.au