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Australian Federal and State Budgets - An Overview

Federal Government Budget Deficits as a Percentage of GDP: 1979-80 –

1981-8214

1979-80

1.6%

1980-81

0.7%

1981-82

0.3%

Fraser’s reduction of the deficit, during an international slump, was a reflection of a global reversal of policy with regard to the management of fiscal policy during a recession. Following the publication in 1936 of Keynes’s General Theory of Employment, Interest and Money, governments, which had previously balanced budgets (whether conditions where good or bad),15 tended to accept Keynes’s view that, in a recession, governments should allow their budgets to fall into deficit: for the long-range purpose of expanding demand and increasing employment.16 A s u d d e n i n c r e a s e i n t h e p r i c e o f o i l i n t h e e a r l y 1 9 7 0 s , i n s t i g a t e d b y t h e A r a b contributed to the development (in countries during the 1973 Arab-Israeli War,17

both western Europe and the USA) of rising unemployment and rising inflation. Budget deficits, as a response, appeared to do nothing to remedy the situation. Gradually, as Jean-Claude Chouraqui and his colleagues have described,

Policy-makers in OECD [Organisation for Economic Co-operation and Development] countries became unsatisfied. . .with the use of fiscal policy for short-term demand management purposes. . .the failure of budgetary policy to offset the negative impact on output of what was, in large part, a supply shock associated with the oil price increases of the early 1970s resulted in widespread scepticism about the efficacy of demand management policies. . .many governments [instead] chose to reduce public indebtedness. . .In addition, measures were taken to reduce the size of government through expenditure reductions and privatisation. 18

On a global level a number of OECD countries began to tighten fiscal policy to deal with the 1980s crisis: rather than revert to budget deficits. As Giancarlo Corsetti and Nouriel Roubini wrote the 1980s witnessed a “period of fiscal consolidation. . . Significant reductions [in debt] occur in Japan, the United Kingdom, Denmark,

14

Walsh, n.11, p.37.

15

Professor Charles Bastable, in his foundation text on public finance, wrote that “under normal conditions, there ought to be a balance between these two sides [expenditure and revenue] of financial activity. Outlay should not exceed income. . .tax revenue ought to be kept up to the amount required to defray expenses.” See Charles Bastable, Public Finance, third edition (MacMillan, London, 1903), p.611.

16

David Hyman, Economics, fourth edition (Irwin, Chicago, 1997), p.605.

17

Philip Klein and Michael Niemira, Forecasting Financial and Economic Cycles (John Wiley and Sons, New York, 1994), p.291.

18

Jean-Claude Chouraqui, Robert Hageman and Nicola Sartor, Indicators of Fiscal Policy: A Re-Examination (Organisation for Economic Co-operation and Development, Paris, 1990), p.1.

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