Document Index Budget Paper 1 Budget Statement 1

Part II: Economic Framework

In 1999-2000 the Australian economy will continue to benefit from sound medium-term fiscal and monetary policies implemented in the Government's first term. The recent financial crisis in Asia has demonstrated the social and economic dislocation that can occur when financial markets lose confidence in the domestic policy framework.

This year's Budget is set against continuing uncertainty in the international economy. While there are signs of recovery in some Asian economies, continuing structural problems, particularly in the financial and corporate sectors, raise questions about the sustainability of any improvement. The effects of the Asian financial crisis and the associated slowdown in the world economy in 1998 and 1999 are likely to persist into the coming year. Nevertheless, sound domestic economic fundamentals and policy settings should continue to minimise their adverse impact on Australia.

Following very strong growth in excess of 4 per cent in 1997-98 and 1998-99, the Australian economy is expected to grow by a solid 3 per cent in 1999-2000. This outlook compares very favourably with other developed economies and countries in the region.

As discussed in Statement 2, the expected moderation in growth in 1999-2000 reflects the impact of continued below-trend growth in the world economy on the domestic economy.

Some moderation in employment growth is expected over the course of 1999-2000 in line with the moderation in domestic economic growth. Nevertheless, employment growth is expected to remain solid, with the unemployment rate consolidating recent falls to remain around 7½ per cent over 1999-2000.

The inflation rate is expected to rise only modestly, from an average 1¼ per cent in 1998-99 to 2 per cent in 1999-2000. It is now clear that the impact on inflation of the depreciation in the Australian dollar since the onset of the Asian downturn will be less than that implied by past experience, reflecting enhanced competitive pressures, both domestically and internationally.

The favourable combination of a real exchange rate depreciation and continued low interest rates made possible by sound macroeconomic policy has been a major contributor to the economy's recent resilience. Financial markets have retained confidence in Australia's economic fundamentals and policy settings and long-term interest rate differentials with the United States have remained low. As the exchange rate depreciation has not been dissipated in higher domestic inflation the economy continues to enjoy the benefits of improved competitiveness, while maintaining relatively low interest rates.

The Government's main policy priorities are to maximise sustainable growth to improve living standards and create conditions to further reduce unemployment. Achieving these goals will require ongoing policy attention to ensure that inflation and current account pressures do not constrain the economy's capacity for growth. Policy must maintain discipline on inflation and public saving, consistent with the medium-term frameworks for monetary and fiscal policy, taking account of the need to maintain adequate demand growth.

As discussed in Statement 3, improvements in the macroeconomic policy framework and structural reforms should allow the Australian economy to continue to grow strongly over the medium term. Provided the macroeconomic policy framework is sustained and continued progress is made on structural reform, average economic growth of 3½ to 4 per cent could be sustained over the early  years of the next decade. Such a growth rate would see a further substantial reduction in the unemployment rate.

Continued adherence to the Government's medium-term fiscal strategy is a particularly important component in achieving sustained, strong economic growth. Restoring the Commonwealth budget to surplus has helped limit the rise in the current account deficit, and has played a very important role in retaining the confidence of financial markets and helping to maintain a low interest rates environment. The current account deficit is expected to average 5¼ per cent of GDP in 1999-2000, slightly down from an expected 5½ per cent of GDP in 1998-99.

Importantly, the increase in the current account deficit reflects private saving and investment decisions, rather than government borrowing. Private sector saving and investment decisions are now better based than they have been in past cycles as a result of microeconomic reform and low inflation. In this environment the nation's ability to service external debt should not be at issue.

Good macroeconomic policy is a necessary condition for sustaining strong growth and significantly reducing unemployment. But there are limits to what macroeconomic policy alone can achieve. As noted above, policy needs to continue to address structural barriers to raising productivity and lowering unemployment, with particular emphasis on tax reform and further labour market reform. Such reforms, combined with sound macroeconomic policy settings, are necessary for a sustained reduction in unemployment.

The 1999-2000 Budget is an integral part of the policy framework necessary for sustained high economic growth. It delivers on the Government's commitment to maintain budget surpluses while economic growth prospects remain sound. The Budget continues the Government's commitment to fiscal responsibility, while providing a comprehensive package of measures targeting priority areas of health, education and training, mutual obligation, research and development, and the social and economic infrastructure of regional and rural Australia. In addition, the introduction of accrual budgeting also represents an important step in the Government's financial management and reform programme.