Australia’s economy isn’t broken — it’s better than we think. Growth, jobs, and low inflation show smart policy still matters. Stephen Koukoulas reports.
SOMETHING MORE of a think piece today as the debate on tax, interest rates, housing, government spending, superannuation, productivity reforms and everything else linked to the ‘economy’ remains at a fever pitch.
Issues relating to the management of the economy by the government of the day are important for all Australians. Mismanagement can have disastrous consequences, as we saw during the Fraser Government, parts of the Howard Government and more recently, with the Abbott and Morrison Governments.
Some of the problems can linger for many years, decades, even. Think of the Abbott Government’s repeal of the carbon price and mining tax; the Howard Government’s decisions, freezing the superannuation contribution and then spending the windfall gains from the terms of trade bonanza in the period up to 2007.
Then there was the incredible record of the Fraser Government, when John Howard was Treasurer, to be the only Australian Government on record to deliver double-digit unemployment, inflation and interest rates all at the same time.
To name a few.
What should economic policy aim for?
Below is a list of some of the key issues in economic management. As you go through the list, it should be apparent that, despite the hand-wringing from many vested groups and contemporary fear mongers, economic conditions are in good shape.
To be sure, they are far from perfect, but there are few countries in the world that get close to matching the scorecard for Australia.
Policies that grow the economy are critical. As the economy grows, the population benefits from rising living standards — there is more money to enhance the essentials in life and to spend on discretionary or nice-to-do things. These benefits are either self-provided as personal incomes and wealth increase, or are the domain of progressive government policies that are funded by rising revenue as the economy expands. Think Medicare, aged care, pharmaceuticals, roads, infrastructure and education, to name just a few.
A growing economy also generates employment. As businesses expand in line with the overall expansion of the economy, more workers will be needed and, as a result, the unemployment rate will be low. Indeed, the ultimate aim for the labour market, full employment, is defined as a society where those in the labour force can find a suitable job relatively quickly and relatively easily.
It almost goes without saying that paid employment enhances living standards and it is why the recent revamping of the RBA elevated "full employment" to one of its core mandates.
Low inflation has been a key plank of policy for 35 years. It helps workers with the cost of living as wage growth exceeds price increases and effectively forces business to be entrepreneurial to grow and build profits, which is a key part of the productivity equation.
Just think back a year or two to the damaging effects of high inflation. The post-COVID surge in inflation to eight per cent delivered what was, thankfully, a transitory jolt to living standards and acted as a major impediment to business investment, which is still taking some time to recover.
The good news now is that inflation is low, on target and set to remain on target for as far as the eye can see.
The budget is the tool used by governments to tax, spend and balance the economy. It remains paramount that at the headline level, the approximate aim is to achieve a broadly balanced outcome over the course of an economic cycle or two.
This means that budget deficits are important economic policy tools and, indeed, essential during times of private sector weakness and/or when essential spending is needed on infrastructure or national security. A good rule of thumb is “the weaker the economy, the larger the deficit.”
The converse is important too. When the economy is strong, overheating and there are upside pressures on inflation, economic policy should aim for surplus. The last three years have been perfect examples of good budget management. During the inflation surge that was driven by excessive private sector demand in the period from late 2002 to mid-2024, the government delivered two budget surpluses. No one was expecting these and they were a critical factor behind the RBA lifting interest rates by a lesser amount than most other central banks.
As the private sector faltered from mid-2024 to now, the budget slipped back into a (small) deficit.
There are other textbook examples in both directions of prudent and proactive fiscal management in recent years.
During the global financial crisis in 2008 to 2010, the government moved the budget to a large deficit to support the economy and cap the increase in unemployment. It worked. A similar approach was in place during the COVID pandemic, although the problem with economic policy at that time was the Morrison government maintained loose budget settings into 2022, even as the economy and inflation kicked higher.
A further aspect of the goals of good economic policy is to look after the needy or those who "fall through the cracks" of society via unemployment, ill health or some other circumstance.
Here, policies that skew the tax take to those who can afford to pay a little more tax so that these essential services in a decent modern economy can be paid is part of the skill of good policy makers.
These policies are not only good for society but do help growth. Low-income earners, the main beneficiaries of such policies, tend to spend more of their income than high-income earners, hence a stronger economy.
In the end, a good economic manager grows the economy in a fair and sustained way, with moderate inflation and full employment.
As 2025 draws to a close, Australia is close to these objectives.
Stephen Koukoulas is one of Australia’s most respected economists, a past chief economist of Citibank and senior economic advisor to an Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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