* 1973 * usa japan germany france italy uk canada sweden belgium netherlands average of above 4. 5 1. 3 0. 7 1. 3 5. 4 1. 4 3. 9 1. 2 2. 5 1. 0 2. 1 4. 9 1. 4 1. 2 2. 7 6. 7 2. 1 5. 6 2. 5 3. 7 3. 9 3. 1 australia 1. 6 2. 3 for 1965, figures are the average for the year ; for 1973, they are the average for the first three quarters ( i. e. pre - opec i ). table 3 : inflation rates in g10 countries and australia usa japan germany france italy uk canada sweden belgium netherlands average of above 1. 7 5. 9 3. 8 2. 3 3. 3 4. 4 2. 8 6. 7 4. 0 6. 8 3. 2 6. 9 12. 6 6. 9 7. 4 11. 8 9. 2 8. 2 9. 1 8. 8 8. 4 8. 4 australia 4. 1 10. 4 year to december 1965 and to september 1973 ( i. e. pre - opec i ). there was now no longer an anchor to the international financial system. thus, the post - war period should really be divided into two sub - periods, with the us tax cuts of 1965 marking a convenient dividing line. thereafter, us policy became expansionary, and it ceased to provide a constraint on the actions of other countries. it is instructive to see what happened in a range of countries during this second period, that is between the turning point in us policy in 1965 and the opec shock at the end of 1973. the story is very similar for all oecd countries. their economies continued to grow strongly, but they were not able to get their unemployment any lower than the already low starting point ( see table 2 ). the main effect of these expansionary policies was to push inflation to levels that were not consistent with sustainable economic growth. as a general rule, most countries ’ unemployment rates rose slightly, but their inflation rates doubled ( see table 3 ). by 1972 and 1973 the world economy was in an inflationary boom. how did australia fare in this period? our story was very similar to the general pattern, although the deterioration in inflation was more marked here. our inflation rate, which had been about 4 per cent in the mid - 1960s, reached 10. 4 per

we are considering, demand management policy was quite restrained and, where necessary, restrictive. certainly its guiding principle was keynesian, but it was operated in a very balanced way and was, in any case, subject to an important constraint, which i will come to later. that this was the case should not be a surprise to people who remember the period. for example, the fadden “ horror budget ” of 1951 / 52 and the “ credit squeeze ” of 1961, which nearly cost the menzies government office, have gone into folklore. of course, there were also periods where policy was expansionary, but on average the result was relatively balanced. while growth was high, on average, there was also a business cycle operating during this period, with a couple of reasonably clearly defined recessions and booms. the fact that policy was well balanced can be shown for fiscal policy by a couple of graphs. unfortunately, comparable data do not go back earlier than 1961 / 62, so we will have to lose the 1950s from our comparisons. diagram 1 shows the best general measure of the underlying budget deficit. in the 12 years from 1961 / 62 to 1973 / 74 the budget was, on average, diagram 1 budget balance * per cent of gdp % % 1. 5 1. 5 0. 0 0. 0 - 1. 5 average 1961 / 62 to 1973 / 74 - 1. 5 - 3. 0 - 3. 0 average 1974 / 75 to 1995 / 96 - 4. 5 - 4. 5 - 6. 0 65 / 66 70 / 71 75 / 76 80 / 81 85 / 86 90 / 91 - 6. 0 95 / 96 * general government on an underlying basis. in surplus to the extent of ½ per cent of gdp, and the fluctuations around the average were not very large. in the period since then, the budget has nearly always been in deficit, with an average deficit of nearly 2 per cent of gdp. you can see the three attempts made to bring it back towards surplus - the first one when mr. howard was treasurer, the second one under mr. keating as treasurer, and the third one which is being continued at the moment by mr. costello. in summary, it is the more recent period that could be characterised as activist and expansionary in that there are bigger swings in the budgetary position and, on average, it tends to show a much bigger deficit. diagram 2 general government outlays per cent of gdp % % average 1961 / 62