The Effectiveness of Fiscal Policy in Australia – Selected Issues

Abstract

Comley, Anthony and Ferguson assess the effectiveness of discretionary fiscal policy in the Australian context, where the medium term framework designed to ensure a balanced budget over the cycle also allows the use of fiscal policy as a demand management tool. Their paper focuses on two factors: private sector saving offsets and interest rate effects. Concerning the former, Comley et al. distinguish between structural and cyclical components of government savings and – in contrast with previous Australian studies – find evidence of significant private savings offsets, mostly in response to changes to the structural component of government savings. This finding points to a greater effectiveness of automatic stabilisers (changes in cyclical government saving) with respect to discretionary policy changes (changes in structural government saving). As to the link between fiscal policy and interest rates, Comley et al. find evidence that higher budget deficits (or lower surpluses) can have a significant effect on interest rates in Australia. However, they warn that these results should be treated with some caution since the estimates refer to a period of relatively high public debt and further debt reduction may no longer have large effects.