Dogged pursuit of structural reforms across a very broad front, and prudent macroeconomic policies firmly set in a medium-term framework, have combined to make the Australian economy one of the best performers in the OECD, and also one notably resilient to shocks, both internal and external. Incomes growth has remained brisk, employment is expanding, inflation is under control, and public finances are healthy. All the indications are that the continuing effects of previous reforms will continue to help the economy to combat shocks in the immediate future. In order to meet the longer-term objective of raising living standards towards the highest in the OECD, further reforms to labour, product and financial markets and to social policies will be needed, that will encourage more people to join the labour force, remain in it, and steadily raise their productivity.

The Australian economy has continued to grow strongly, despite the cyclical downturn which hit most OECD countries in the second half of 2001 and in 2002. GDP is estimated to have grown by 3¾ per cent in 2002, up from 2.7 per cent in 2001. The expansion in 2002 was led by buoyant domestic demand, which entailed a widening of the current external deficit to around 5 per cent of GDP in the second half of the year, although even larger external deficits were registered in the late 1990s. Part of the buoyancy of domestic demand owes to the loosening of the fiscal stance, which brought the move to general government surpluses to a temporary halt. Economic activity was further supported by distinctly easy monetary conditions, brought about by a series of interest rate cuts by the Reserve Bank in 2001 and a low Australian dollar. Notwithstanding robust growth and a lower exchange rate, consumer price inflation – adjusted for the effect of the introduction of the goods and services tax (GST) in mid-2000 – has been kept in line with the Reserve Bank’s 2 to 3 per cent inflation target. However, the employment gains made during the past two years have sufficed to reduce the average unemployment rate to around 6¼ per cent. This still leaves a small margin of cyclical unemployment....

Australia’s monetary and fiscal policies are set in a medium-term framework. The objective of the Reserve Bank (RBA) is to maintain the inflation rate on average at around 2 to 3 per cent over the course of the business cycle while keeping monetary conditions conducive to sustainable growth in output and employment. At the Commonwealth level of government, fiscal policy aims at a balanced budget, also on average over the economic cycle. The medium-term orientation of economic policies has helped to achieve a degree of macroeconomic stability which is reflected in lower inflation and lower variability of inflation and output growth since the early 1990s (Figure 12). Together with the structural reforms discussed in the next chapter, this has provided a supportive framework for sustained growth....

Australia’s growth performance during the 1990s in overall terms and per capita has exceeded that of most other OECD countries, and is still on a rising trend (Figure 24). This is all the more remarkable as in recent years the Australian economy could have been potentially more affected than other OECD countries by two major external shocks, the 1997-98 East Asian crisis, and the global economic slowdown in 2001-02, which was associated with a slump in primary commodity prices as well as world equity prices. Nevertheless, Australia has experienced an only mild version of the sharply reduced business and consumer confidence in OECD countries. During both episodes, Australia’s GDP growth stayed well ahead of nearly all other OECD countries.94 This chapter throws some light on the reasons for the improved growth performance, and suggests ways in which it could be maintained or even strengthened....

This chapter looks at migration and its interactions with economic developments and economic policies in Australia. After a brief survey of the past history of immigration into the country over the last century, the evolution of immigration policy and the detail of existing arrangements are outlined, covering both entry policy and the situation of migrants once in Australia. The economic aspects of immigration are dealt with in terms of their impact on the labour market, on output and incomes, on public finances and on trade and the balance of payments.