Limitations of the Budget as an Instrument of Macroeconomic Policy in 1992–93

Philip Adams () and Peter Dixon

Australian Economic Review, 1992, vol. 25, issue 4, 41-50

Abstract: The major macroeconomic challenge facing the Government is to reduce the unemployment rate without increasing inflation and the current account deficit. The Budget for 1992–93 gave the Government an opportunity to set out its policy for meeting this challenge. In this article we assess the Budget from a macro‐economic point of view. We ask whether the Government could have done more to address the problem of unemployment. Our analysis is in two parts. In the first, we answer the question: has the Government made believable forecasts for 1992–93, given its assumptions and the set of Budget policies. In the second part we consider whether, given the Budget assumptions, the chosen policy is the best one. To answer the first question, we used the COPS short‐run forecasting model (see the Appendix to the article) to obtain projections for 1992–93 under Budget policies and assumptions. These projections are almost identical to those of the Government, prompting a ‘yes’ to the first question. To answer the second question, we used our model to set out the effects of a more stimulatory budget strategy under five different sets of assumptions. These differ with respect to the exchange rate, private investment and wage rates. We find that a more stimulatory policy might help in increasing GDP and employment growth. However, nervousness in the foreign exchange market concerning the PSBR, resistance in the labour market to real wage reductions and sensitivity of private investors to increases in interest rates all combine to make the more stimulatory policy a risky one.

Date: 1992
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