Statement 4: Assessing the Sustainability
of the Budget
Challenges for fiscal policy
The global economy is in the midst of its worst recession since the Great Depression, and this is severely affecting the Australian economy. The challenges for fiscal policy are to stimulate aggregate demand in the short term and to return the budget to surplus in the medium term, while also investing in the long‑term drivers of productivity and economic growth.
Recessions have significant costs. A rise in unemployment has immediate economic and fiscal impacts, and can lead to a loss of skills and work readiness. It also has significant negative impacts on self‑esteem and health, and increases the risk of poverty. Supporting aggregate demand early, so as to lessen the depth and duration of the economic downturn, is the most effective way to support employment.
Fiscal policy is supporting aggregate demand and employment through the operation of the automatic stabilisers. The global recession has resulted in substantial downward revisions to tax revenues, which has inevitably reduced the budget balance. Given the size of the global shock, it is also important to use temporary fiscal stimulus to boost aggregate demand and thereby minimise the costs of the recession.
A responsible fiscal framework allows the budget balance to adjust to short‑term movements in the economic cycle, while maintaining fiscal sustainability. Policy actions to offset these adjustments would be inherently pro‑cyclical, making the impact of the global recession on the Australian economy more severe. There would be a greater loss in output and employment and the budget deficit in the medium term would be likely to be higher. The Government is allowing the automatic stabilisers to work while maintaining a focus on fiscal sustainability.
Enhancing economic growth is also a longer‑term objective of fiscal policy. In the current environment, the best policy responses will address the short‑term challenge of stimulating aggregate demand, allow resources to be allocated to their most productive uses, and invest in future productive capacity. In addition, policies must be fiscally sustainable, as this is important for sustainable economic growth.
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