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 Australia’s main economic challenges are medium-term. Australia weathered the world recession well. Managing the exit strategy is less problematic than elsewhere thanks to sound fiscal position and positive economic outlook, although the new upswing starts with a relatively high inflation and little spare capacity. Over the medium term Australia needs to ensure a balanced expansion in the face of a mining boom and potentially volatile terms of trade movements, and strengthen supply to ensure non-inflationary growth. This requires bolstering weakening productivity, boosting housing supply and further reducing risks associated with a likely widening of the current account to finance mining investments.

The effectiveness of fiscal policy should be enhanced. Although the budgetary outlook remains strong, the quality of public interventions should be assessed, as there is considerable scope to rationalise assistance. The mining boom is an opportunity, but it raises questions on sharing the rents from increased mineral wealth and on how to use the expected higher tax revenues from the exploitation of non-renewable resources and take into account and shield the budget and the real economy from the expected volatility of commodity price movements. Moreover, although Australia tax burden is relatively low, the system includes numerous taxes with low yields and high administrative costs. Some taxes and the complex transfer system can also blunt incentives to work and thereby weaken growth.

Responding to infrastructure needs is important. Adequate and well-functioning infrastructure is key for growth and well-being, particularly in Australia because of its size, the geographical dispersion of its population and production centres, and its remoteness from other markets. Nevertheless, Australia has an important infrastructure deficit. This deficit, which is in part due to past underinvestment, is exacerbated by the strong demand generated by the mining boom, population growth, technological progress and environmental concerns. Easing these shortages requires better regulation to promote a more efficient use of existing facilities and well targeted public and private investment decisions.

Enhancing labour utilisation in a socially inclusive society. Raising labour supply would ease bottlenecks and help tackle social inclusion, an important aspect of wellbeing in Australia. Reforms in tax-transfer, education policies and labour market institutions would be key in this regard, but should be subject to fiscal constraints. Given the multiple and inter-related characteristics of social exclusion  - homelessness, health/disability problems, insufficient education and training, poor social networks  - a comprehensive approach to service delivery is needed. 

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