Statement 4: Fiscal policy in the current economic environment
Sound fiscal policy — as embodied in the Government's medium‑term fiscal strategy — 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.
This Statement highlights the contrast in economic and fiscal circumstances between the pre‑ and post‑GFC periods. Budget surpluses in the years leading up to the GFC were supported by temporary factors that boosted revenue growth, including the high terms of trade, an economy operating for a time above sustainable levels and buoyant asset prices. Temporarily high revenues were used to fund spending increases and tax reductions, weakening the medium‑term budget position.
In contrast, the period since the GFC has been characterised by relatively weak growth in nominal GDP and a decline in the tax‑to‑GDP ratio, which reflects, in particular, an increased share of profits coming from the resources sector and a large fall in capital gains tax. Together, these factors have reduced the Government's tax receipts and created a more challenging fiscal environment.
Recent sizeable revenue write‑downs have increased the fiscal adjustment needed to return the budget to surplus. In the current environment, offsetting substantial write‑downs in the near term would risk depressing economic growth and undermining jobs growth. 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 economic growth or threatening jobs.
This Statement shows that Australia remains well‑placed in terms of fiscal sustainability, particularly in comparison to most other advanced economies, reinforced by the Government's clear and credible plan to return the budget to surplus. The budget deficit at present is low as a share of GDP, with the budget projected to return to surplus ahead of most advanced economies. Net government debt as a share of GDP is lower than for almost all other advanced economies, and the net interest burden is also relatively low. This highlights that the Government is striking the right balance between reinforcing fiscal sustainability over the medium term and limiting adverse impacts on economic growth and jobs in the near term.
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