How Big Was the Effect of Budget Consolidation on the Australian Economy in the 1990s?

Melbourne Institute Working Paper No. 30/04

Date: November 2004


Lei Lei Song
John Freebairn


This paper evaluates the effects of budget consolidation on the Australian economy in the 1990s by using a modified version of TRYM. By identifying the effects on long-term interest rates of the expected reduction in budget deficits in the 1996/97 financial year, the paper simulates the model for would-be impacts on the economy, had interest rates not fallen due to no budget consolidation. It is found that the program of budget consolidation did have a sizable impact on the economy, raising GDP by up to three quarters of a percentage point and reducing unemployment by 0.3 percentage points in two to three years.

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