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Statement 3: Maintaining Low Inflation and Strong Growth

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Statement 3: Maintaining Low Inflation
and Strong Growth

Part I: Introduction

Australia is entering the new millennium with the introduction of a modern taxation system which will sustain the economy's longer-term growth potential. The New Tax System will provide more robust taxing arrangements for both Commonwealth and State Governments. It will lead to more efficient investment decisions throughout the economy, with significantly reduced business costs; and Australians will keep a higher proportion of their before-tax earnings, providing greater incentives to work and save.

As with all significant advances, there will be an adjustment process but this will quickly give way to visible lasting benefits.

There will be a one-off increase in consumer prices when The New Tax System is introduced. This price effect will not endanger the combination of strong growth and low inflation that has been achieved over the last few years. Competition should ensure that price adjustments associated with The New Tax System do not re-ignite inflation; and there will be no need for employees to seek higher wages because the generous compensation package will boost their real after-tax incomes.

The New Tax System is being introduced at a time of strong competition and dynamic markets. These have not come about by accident. Rather, they are the result of deliberate policy action, pursued at both the macro and microeconomic levels. Credible medium-term monetary and fiscal policy frameworks have provided the stable and supportive investment climate to ensure that Australian businesses take full advantage of the wide range of structural reforms that have been pursued.

Increased competition and more dynamic markets have contributed to lifting the medium-term potential growth rate of the Australian economy to around 3½ to 4 per cent per annum. This means that the rate of growth that the Australian economy can sustain without producing significant inflationary pressures is now above the average rates of growth achieved during the past three decades.

The benefits of sustained strong economic growth are already evident with the unemployment rate around the lowest in almost a decade. If this strong growth is to be sustained, the current macroeconomic policy framework and the ongoing structural reform agenda must be maintained, including the implementation of The New Tax System. In these circumstances, there would be the opportunity to drive the unemployment rate much lower still, potentially to its lowest level for more than a quarter of a century.

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