How Potent is Fiscal Policy in Australia?

Abstract

This paper examines the efficacy of fiscal policy in Australia, focusing on the relationship between changes in the economy’s consolidated fiscal imbalance and private sector saving over recent decades. We first examine the macroeconomic significance of the offset co-efficient between public saving and private saving, whose size effectively determines the effectiveness of fiscal activism. The approach innovatively suggests that these estimates simultaneously reflect Ricardian and other non-Keynesian explanations of private consumption, such as the life cycle and permanent income theories. Econometric estimation of the offset coefficient for Australia over the period 1980 to 2008 yields values of between 0.75 to near unity, which imply a small or near-zero fiscal multiplier, and that running budget surpluses to lift national saving is ineffective.