NO.080

The 1999-2000 Mid-Year

Economic and Fiscal Outlook (MYEFO), released today, demonstrates the continuing

impressive performance of the Australian economy. The forecast for economic growth in

1999-2000 has been revised up from 3 per cent to 3 per cent. Economic growth

in 2000-01 is expected to be 3- per cent. This is an excellent outlook given

the impact of the Asian crisis over the past two years.

Australia will benefit from an improved international outlook, with continuing strong

US growth, a pick-up in growth in Europe, and a stronger recovery in Asia.

The underlying cash surplus is expected to be $3.4 billion in 1999-2000. Surpluses are

projected to extend through the forward estimates period, although the transitional costs

of The New Tax System will reduce the surplus in 2000-01. In addition, Australia’s

contribution to the United Nations peacekeeping operation in East Timor is expected to

involve significant additional expenditure over the forward estimates.

To partially offset the costs of Australia’s involvement in East Timor, the Government

has announced that it will implement a temporary Defence – East Timor levy (as an addition

to the Medicare levy) in 2000-01. Revenue from the levy will ensure that overall fiscal

settings in 2000-01 remain appropriate to the needs of the economy.

The Government remains firmly committed to keeping Australia in a strong fiscal

position and will be maintaining a disciplined approach in the lead-up to the 2000-01

Budget.

Employment growth is expected to be stronger than forecast at Budget, with unemployment

now expected to be 6- per cent by the June quarter 2000, compared with the

Budget forecast of 7 per cent. Employment growth in 2000-01 is expected to remain at

around 2 per cent, raising the prospect of further declines in unemployment.

Inflation is forecast to be 2 per cent through the year to the June quarter 2000. The

modest increase reflects the effects of higher commodity prices, in particular petroleum

prices.

The introduction of the Government’s tax package, The New Tax System, is

expected to lead to a one-off increase in the CPI of around 2- per cent through

the year to the June quarter 2001. However, leaving aside the direct effects of

the tax package on consumer prices, ongoing inflation is estimated to remain around

2 per cent in 2000-01.

In 1999-2000 the current account deficit is expected to remain around

5 per cent of GDP in year-average terms, but with a declining trend over the

year. This forecast is below peaks in previous cycles, and is underpinned by stable

domestic fundamentals, including a sound fiscal position and low inflation, together with

a pick-up in export growth as world growth strengthens.

In line with continuing surpluses, further significant reductions in general government

net debt are expected over the next four years.

When the Government was elected in 1996, it set fiscal targets of turning the budget

deficit of $10 billion into a budget surplus in its first term and halving the ratio of

Commonwealth general government net debt to GDP from 20 per cent to 10 per cent by

2000-01. The Budget was returned to surplus one year ahead of target, notwithstanding

significant adverse international developments such as the Asian financial crisis. Halving

the net debt to GDP ratio will also be delivered one year ahead of target – in

1999-2000.

The 1999-2000 MYEFO has been prepared in accordance with the Charter of Budget

Honesty Act 1998.

CANBERRA

25 November 1999