Document Index Budget Paper 1 Budget Statement 3

Part V: Conclusion

The recent performance of the Australian economy would not have been possible in the absence of a sound domestic policy framework. The institution of sound and credible frameworks for monetary and fiscal policies in recent years, and the return of the Budget to surplus, have been fundamentally important. Reforms in the areas of competition policy, the labour market, the financial sector and corporate law have also contributed to creating an economy that is more efficient and flexible, subject to more competitive pressures and more conducive to productivity growth.

Sound policy has been assisted by the fact that the downturns affecting our East Asian trading partners have occurred against a background of other international developments that have been favourable. World growth has been supported by the strength of the United States and European economies, together accounting for a little more than half of world GDP. In addition, the fall in our terms of trade from lower commodity prices has been limited by an international environment that has been reducing the world prices of Australia's imports.

In this environment, the economy has been assisted by a large currency depreciation that has given Australian producers a competitive boost that has assisted export diversion to other markets. Large currency depreciations, however, cannot be effective unless sustained as real depreciations, a demanding policy requirement.

The favourable combination of exchange rate depreciation and continued low interest rates made possible by sound macroeconomic policy has been the key. Financial markets have retained confidence in Australia's economic fundamentals, and long-term interest rate differentials have remained low. As the exchange rate depreciation has not been dissipated in higher domestic inflation, the economy has been able to enjoy the benefits of improved competitiveness, while maintaining relatively low interest rates; and the negative effects of international developments have been cushioned by ongoing strength in domestic demand.

As a result of sound macroeconomic policy and structural reforms, the Australian economy should be able to continue to grow strongly over the medium term and to achieve further sustainable reductions in unemployment. The extent to which the economy can grow and unemployment can be reduced will depend on continued adherence to sound macroeconomic policy and further microeconomic reform -- including, in particular, reform of the taxation system and further action to improve the functioning of the labour market.