Australia’s economic outlook is for another year of strong growth. The international economy remains supportive, the underlying economic fundamentals continue to be favourable and policy is directed at raising Australia’s long-term growth potential. Of particular importance for the 1996-97 outlook, inflation is subdued, asset prices are stable and business and consumer confidence remain positive, while corporate profits and the net rate of return on investment are both healthy. In addition, the constraining influences of the housing and stock cycles felt through 1995-96 appear to be waning.
It is against this favourable economic backdrop that the longer-term benefits of fiscal consolidation are being sought. Those longer-term benefits of structural improvements in the budget balance are widely accepted. There is less certainty about the net short-term impacts. In the short term, the direct effects of changes in real Commonwealth expenditure and net transfer payments to individuals and other governments are reasonably clear, but the indirect effects on confidence in the business and household sectors and on financial markets are more difficult to assess. To the extent that private sector activity is boosted because confidence is improved, or market interest rates or the exchange rate are lower than they otherwise would be, the indirect effects provide offsetting influences to the direct contractionary impact of the consolidation. The forecasts presented here incorporate an assumption that possible confidence effects, while significant, do not fully offset the direct short-term effects of the measures, resulting in a small net contractionary impact on activity in 1996-97.