The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

13 May 2008

NO.032

Economic Background to the 2008-09 Budget

The 2008-09 Budget has been developed at a challenging time, with the Australian economy facing powerful countervailing forces. The economic outlook remains positive, but risks have heightened, emphasising the need for a responsible and disciplined Budget.

Ongoing and widespread financial market turbulence stemming from the sub-prime crisis is affecting countries around the world, including Australia, as is the sharp slowdown in the US economy and associated weakness in other developed world economies.

However, despite the weaker outlook for the world economy, strong growth is expected to continue in emerging economies, particularly in China. This growth is expected to drive further large increases in Australia's already high terms of trade through strong rises in iron ore and coal prices.

The increase in the terms of trade will support domestic growth, but comes at the same time that the economy is facing elevated inflationary pressures, with underlying inflation currently at a 16-year high. In response to these price pressures the Reserve Bank has repeatedly tightened monetary policy, and banks have further increased borrowing costs as a result of the global credit crunch. These developments will moderate the recent strength in domestic demand.

In framing the 2008-09 Budget, the Government has been mindful of these countervailing forces. The Budget is a vital component of the Government's plan to tackle inflation and interest rate pressures on working families. The Budget will also make important nation-building investments to strengthen and modernise the Australian economy. This will help Australia withstand global pressures and enjoy strong, sustainable, low-inflationary growth into the future.

13 May 2008