By Professor Fabrizio Carmignani, Dean (Academic), Griffith Business School
The context of this federal budget is characterised by a favourable alignment of political and economic incentives. Given 2018 is an election year, the political incentive for the government is to strengthen its consensus by adopting “expansionary” budget measures such as lowering taxes and increasing expenditure (possibly targeted to key constituencies). At the same time, with the Australian economy still running below potential, these same expansionary measures will help stimulate aggregate demand and close the gap between actual and full-employment potential Gross Domestic Product.
This alignment of incentives means that the government does not have to choose between what is good for the economy and what is politically convenient. The only possible downside risk is that by engaging in expansionary measures, the government could compromise its fiscal consolidation strategy and hence disrupt the path towards a fiscal surplus. However, the estimates available from