Statement 4: Fiscal policy in the current economic environment (Continued)
Conclusion
Sound fiscal policy involves ensuring that fiscal settings are sustainable over the medium term, while allowing the fiscal position to vary in response to economic conditions in the near term so as to contribute to macroeconomic stability.
The preceding analysis shows that the Government is striking an appropriate balance. Australia's public finances remain in good shape, with low net debt and the Government's fiscal credibility underpinning a stable AAA credit rating from all three major credit rating agencies. The Government's long‑term savings measures and its commitments to limit real spending growth and allow tax receipts to recover naturally will strengthen the sustainability of the fiscal position over time, without undermining economic growth or threatening jobs.
Recent falls in global commodity prices and subdued recovery in financial asset prices following the GFC highlight the extent to which the budget surpluses in the years leading up to the GFC were supported by temporary factors. Conditions in the real economy have also been more challenging since the GFC for those sectors that are not connected to the resources sector. This reflects, in particular, the high Australian dollar and a more cautious approach to spending and borrowing by households.
While the main concern for macroeconomic policy in the pre‑GFC period was the risk of inflationary pressures in the context of the largest terms of trade boom in our history, the main priority at present is maintaining solid economic growth and low unemployment as the resources investment boom reaches its peak and the economy transitions to other drivers of growth.
Recent sizeable revenue write‑downs have increased the fiscal adjustment needed to return the budget to surplus at a time when there is a greater risk that further near‑term fiscal tightening might slow the economy excessively. Australia's low level of government debt and the credibility of the Government's medium‑term fiscal strategy provide the flexibility to phase in the fiscal adjustment over a longer period than previously envisaged.
The Government's plan to return the budget to surplus, including the long‑term savings measures announced in this Budget, strengthens fiscal sustainability on a timeframe that does not risk undermining the strength of the Australian economy. This will ensure that Australia maintains a strong fiscal position, including compared to most other advanced economies.
Maintaining fiscal sustainability is not only about implementing savings measures. Fiscal sustainability can also be assisted by policies that increase long‑term growth in the economy, contributing to higher revenues. Hence, this Budget also funds critical social and economic reforms in areas such as education, disability care and infrastructure to boost the nation's productivity and set Australia up for future prosperity.
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