Australia’s economic performance has been impressive in recent years. Growth has been healthy, with real output climbing by more than 25 percent between the 1991 cyclical trough and the end of 1997. Moreover, in contrast with previous cycles, this growth has been evenly paced; “boom-and-bust” experiences have been avoided, and the expansion has been well balanced on both the demand and supply sides. Another striking aspect of this recovery has been the low rate of inflation. Since 1991, underlying inflation has averaged just 2¼ percent, and has never exceeded 3⅓ percent. Thus, with respect to both growth and inflation, Australia has compared very favorably with other Organization for Economic Cooperation and Development (OECD) countries in the 1990s.
For much of the postwar era, Australia’s economic performance has been relatively disappointing. From the 1960s through the 1980s, per capita growth rates were significantly lower than those of other industrial countries, causing Australia’s income rank to slip steadily from one of the highest in the OECD to merely average levels.1 Based on GDP levels per capita, measured in purchasing power exchange rates, Australia was the third-richest country in the OECD in 1960, after the United States and Switzerland, and its per capita income level was more than 50 percent higher than that of the European OECD average. But, because of its persistently lower growth performance, Australia fell to fifteenth place within the OECD in 1992, surpassed by most industrial countries in Europe. At the same time, unemployment gradually increased, from low levels in the 1960s to OECD average levels in the 1980s.
Australia has recorded current account deficits for most of the postwar period. From the 1950s through the 1970s, these deficits were relatively small and reflected a high level of investment associated with the development of the country’s natural resources, a high rate of population growth, and a large need for physical infrastructure. Since the beginning of the 1980s, however, Australia has suffered a significant structural deterioration in its external position. The current account deficit has widened to double its earlier levels, generating a large increase in the stock of net external liabilities, which is now quite high by industrial country standards. The deterioration of the current account can be attributed to a trend decline in national saving, which has fallen markedly since the mid-1970s, to one of the lowest levels in the OECD, rather than to a rise in investment, which has actually declined as a share of GDP in the 1990s, after remaining broadly unchanged throughout the 1970s and 1980s.
National saving has declined sharply since the mid-1970s. About three-quarters of this decline can be attributed to the public sector, particularly the Commonwealth government (Table 4.1). Private saving has also fallen due to lower household saving. In the early 1970s, Australia’s national saving rate was around the OECD average, but currently it is one of the lowest in the OECD.
A key feature of Australia’s economic performance in the 1970s and for most of the 1980s was relatively high inflation. In the 1970s, inflation rose more sharply than in other OECD countries and, in the 1980s, it came down more slowly than elsewhere. The high inflation brought with it significant real costs. It interacted with the tax system and distorted investment incentives, and it increased uncertainty surrounding relative price signals. As a result, investment flowed to property rather than to more productive uses (see Chapter 2).