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How Big Was the Effect of Budget Consolidation on the Australian Economy in the 1990s?

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Author Info
Lei Lei Song
John Freebairn

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Abstract

This article evaluates the effects of budget consolidation on the Australian economy in the 1990s. As the economy recovered from the 1991-92 recession, the need to improve the fiscal balance to lift national saving became the dominant influence on fiscal policy. The article argues that spending cuts by the Australian federal government announced in 1996 had immediate effects on financial markets, with reduced long-term interest rates of about 50 basis points in 1996-97. Using a modified version of the Treasury macroeconometric model of the Australian economy (TRYM), the article simulates the net macroeconomic effects of the expenditure cuts, fiscal consolidation and lower long-term interest rates. The article finds that the program of budget consolidation had a sizeable short- and medium-term impact on the economy, raising Gross Domestic Product by up to three-quarters of a percentage point and reducing unemployment by 0.3 percentage points over the next two to three years. Copyright 2006 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.

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Article provided by The University of Melbourne, Melbourne Institute of Applied Economic and Social Research in its journal Australian Economic Review.

Volume (Year): 39 (2006)
Issue (Month): 1 (03)
Pages: 35-46
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Handle: RePEc:bla:ausecr:v:39:y:2006:i:1:p:35-46

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Martin Mühleisen & Christopher M. Towe, 2004. "U.S. Fiscal Policies and Priorities for Long-Run Sustainability," IMF Occasional Papers 227, International Monetary Fund.
  2. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier. [Downloadable!] (restricted)
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  3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  4. Gruen, David & Pagan, Adrian & Thompson, Christopher, 1999. "The Phillips curve in Australia," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 223-258, October. [Downloadable!] (restricted)
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  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.. [Downloadable!] (restricted)
  6. Summers, Peter M., 2001. "Forecasting Australia's economic performance during the Asian crisis," International Journal of Forecasting, Elsevier, vol. 17(3), pages 499-515. [Downloadable!] (restricted)
  7. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  8. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March. [Downloadable!] (restricted)
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  9. Douglas W. Elmendorf, 1996. "The effects of deficit-reduction laws on real interest rates," Finance and Economics Discussion Series 96-44, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Nilss Olekalns, 1998. "The Macroeconomic Implications of Current Fiscal Policy," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 31(1), pages 66-72. [Downloadable!] (restricted)
  11. Thomas Laubach, 2001. "Measuring The NAIRU: Evidence From Seven Economies," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 218-231, May. [Downloadable!] (restricted)
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  12. Otto, Glenn & Voss, Graham M, 1994. "Public Capital and Private Sector Productivity," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 121-32, June.
  13. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-85, July. [Downloadable!] (restricted)
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  14. Lye, J N & McDonald, I M & Sibly, H, 2001. "An Estimate of the Range of Equilibrium Rates of Unemployment for Australia," The Economic Record, The Economic Society of Australia, vol. 77(236), pages 35-50, March. [Downloadable!] (restricted)
  15. Meredith Beechey & Nargis Bharucha & Adam Cagliarini & David Gruen & Christopher Thompson, 2000. "A Small Model of the Australian Macroeconomy," RBA Research Discussion Papers rdp2000-05, Reserve Bank of Australia. [Downloadable!]
  16. Lewis, Philip E T & MacDonald, Garry, 2002. "The Elasticity of Demand for Labour in Australia," The Economic Record, The Economic Society of Australia, vol. 78(240), pages 18-30, March. [Downloadable!] (restricted)
  17. A. J. Hagger & Nicolaas Groenewold, 2003. "Time to Ditch the Natural Rate?," The Economic Record, The Economic Society of Australia, vol. 79(246), pages 324-335, 09. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marika Karanassou & Hector Sala, 2008. "Labour Market Dynamics in Australia: What Drives Unemployment?," Discussion Papers 2008-26, School of Economics, The University of New South Wales. [Downloadable!]
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