The Australian economy has been one of the most resilient in the OECD during the global economic and financial crisis. The impressive results, which are only partially due to links to fast-growing China and India, have shown that the economy was well-prepared to face major shocks. Years of sound policies left ample room for monetary and fiscal policy to act rapidly and forcefully when the crisis struck. A key to the good outcome was the interaction of appropriate macroeconomic policy with structural flexibility of markets, especially financial and labour markets. The strong policy response and encouraging outlook restored confidence rapidly, and exit from the stimulus is underway.

The performance of the Australian economy has remained solid. It weathered the world financial and economic crisis better than most of the OECD and, indeed, avoided a recession. Unemployment has already fallen back to near its structural level, and the government balance sheet is healthy. Although these remarkable results were in part due to the dynamism of the Asian markets, they illustrate both the structural resilience of the economy, well-functioning financial and labour markets and the timely and strong policy response to the crisis. Managing the exit strategy is less problematic in Australia than in most OECD countries thanks to the sound fiscal position and favourable outlook, although policy vigilance is required as the new cycle starts with inflation around the middle of the medium-term target and little spare capacity.

Australia weathered the world recession well, and economic prospects are, overall, favourable both in the short and medium term. Managing the exit strategy from the global economic and financial crisis is less problematic than in most of the OECD thanks to the sound fiscal position and positive economic outlook, although the new upswing starts with inflation around the middle of the medium-term target and little spare capacity. Over the medium term Australia needs to ensure a balanced expansion in the face of a mining boom and potentially volatile terms of trade movements, and strengthen supply to ensure non-inflationary growth. This chapter assesses recent performance of the economy, the main sources of its resilience, the outlook, and monetary and fiscal policy stances. The chapter then highlights some key medium-term policy challenges: bolstering weakening productivity, boosting housing supply and further reducing risks associated with a likely widening of the current account to finance mining investments.

Although the budgetary outlook remains strong, Australia’s fiscal policy will be challenged by a number of efficiency issues and the expected rise in volatile mining revenues. In contrast to many OECD countries, low public debt and good growth prospects leave ample fiscal space to respond to future shocks. However, there is scope to improve efficiency of public interventions as the authorities have started implementing their fiscal exit strategy. The new mining boom is an opportunity for the Australian society, but it raises questions on sharing the rents from increased mineral wealth; on how to use the expected higher tax revenues from the exploitation of nonrenewable resources; and on how to deal with uncertainty generated by commodity price movements. Volatility can lead to biases in fiscal policy; this was the case during the mini-boom of 2000s. The second part of this chapter assesses the fiscal measures adopted and planned so far to deal with this challenge. Furthermore, although Australia has one of the lowest tax burdens in the OECD, the system includes numerous taxes with low yields and high administrative costs. Some taxes and the complex transfer system can also blunt incentives to work and thereby weaken growth. The detailed review of the system released in 2010 identified many of these problems. However, most of its recommendations are not in the pipeline for implementation. Tax reform is analysed in the last part of this chapter.

Adequate and well-functioning infrastructure is a key ingredient to growth and well-being. The benefits to activity of efficient spending in energy, water, transport and communication sectors go well beyond their contribution to capital accumulation. Good infrastructure facilitates trade, bolsters market integration and competition, fosters the dissemination of ideas and innovations and enhances access to resources and public services. These benefits are particularly important for Australia because of its size, the geographical dispersion of its population and production centres, and its remoteness from other markets. Nevertheless, Australia has an important infrastructure deficit. This is in part due to underinvestment in the 1980s and 1990s, while the rebound in capital spending at the beginning of the 2000s has been insufficient to deal with capacity shortages exacerbated by the strong demand generated by the mining boom, expected population growth, technological progress and environmental concerns. To ease these shortages, the authorities have put bolstering infrastructure to the top of their economic policy agenda. This entails greater government expenditure in this area, but also structural reforms to optimise public and private investment choices and the use of existing facilities with better regulation. This chapter reviews the state of Australia’s infrastructure and the government’s action programme.

Australia faces the mutually reinforced challenges of boosting labour supply and promoting social inclusion. Labour underutilisation is especially prevalent among groups such as lone parents, people with disability, and Indigenous Australians. These are also groups at greatest risk of social exclusion. Thus better integration of these groups into the labour market would enhance inclusion. In general, labour utilisation can be increased by training, improving the functioning of labour market institutions, reforming the tax and transfer system, and maintaining labour market flexibility. Beyond labour market policies, the multiplicity, inter-relatedness and complexity of social inclusion problems call for a comprehensive and integrated approach focusing on individual needs. The elements of the strategy include an education system that better promotes equity and integrated service approaches to help people with disabilities and the homeless. Recent efforts in all these areas by the government are welcome.