applying increased amounts of labour, and particularly capital, to production. business investment in recent years has risen to a very high level relative to gdp, one of the highest among the developed economies ( graph 2 ). employment growth has also been strong. nonetheless, the slowdown in productivity growth has meant that gdp growth in the latest decade was not as fast as in the previous decade. graph 2 disciplined economic policies also contributed to the good economic performance of the past 20 years. they have prevented the build - up of imbalances that might otherwise have threatened the economy, as occurred frequently in the 1970s and 1980s. government budget finances were greatly improved during the period. budget surpluses were recorded in 10 of the 19 years since 1991. government debt was reduced sharply, leaving australia as one of the best positioned developed economies in terms of government finances. monetary policy helped keep inflation low, providing a stable environment in which businesses and households could plan and undertake their economic activities. since inflation targeting began in 1993, inflation has averaged 2. 7 per cent, a little above the midpoint of the target range ( graph 3 ). graph 3 4. how has this growth been distributed through the economy? economic growth is important because it allows living standards to rise and more people to find work. the benefits that have flowed to australians in this respect over the past couple of decades have been impressive. since june 1991, 3. 5 million new jobs have been created and income per household has risen by a cumulative 30 per cent in real terms ( graphs 4 and 5 ). graph 4 graph 5 the increase in jobs, which represented a rise of 2 per cent per year on average, was faster than the growth in the population, and was met partly by an increase in the proportion of the working - age population that is in the workforce, and partly by a decline in unemployment. over the period, the unemployment rate fell from 9 per cent to a little over 5 per cent. one question of interest is how the benefits of this growth were distributed through the community. there are various ways to look at this : one is across the states ; another is across the income distribution ; and a third is across industries. let me start with a comparison of the states. the key point that stands out is that all the states shared in the growth over the period, though queensland and western australia grew faster than the others. as can be seen in table 2, growth in gross state product in queensland averaged 4. 8 per cent per year

manner. in fact, this is underpinned by past data. comparing developments in the rate of increase in wages per hour and that in the cpi in phases in which prices were rising, the rate of increase in wages has been exceeding that in the cpi on most occasions. there have been only two periods since 1971 when things did not go that way and the rate of increase in the cpi was higher than that of wages – the second oil shock in 1980 and a surge in international commodity prices during 2007 and 2008 ( chart 11 ). both episodes occurred when the bis central bankers ’ speeches inflation rate surged temporarily due to a supply shock ; namely, to external factors other than domestic demand. therefore, the real options we are faced with are whether to aim at a world in which both wages and prices rise moderately, or to aim at a world in which wages and prices decline, as has been the case over the past 15 years. the choice is obvious. in the situation the bank aims at, in which a 2 percent inflation rate continues stably, wages and prices would rise moderately in the normal course of things. this is the kind of economy in which each economic entity acts on the assumption that prices will rise by about 2 percent annually, even when the economy is in a normal state. in such a society, a 2 percent price increase will be factored into wage setting. in this regard, in japan, an increase in base pay – a scheme that was lost amid protracted deflation – has gradually been restored recently. this can be regarded as a step toward transferring to a new social economic system in which a 2 percent price increase is built in as a social norm, and this deserves focused attention. the extent to which nominal wages will increase in excess of inflation, or in other words, the extent to which real wages will increase, will hinge over time on the extent to which labor productivity – the amount of goods and services produced by an input of one unit of labor – will increase. an increase in real wages, which is a critical challenge, will ultimately be attained through an improvement in productivity. in this regard, in addition to efforts by individual firms, it is important to prepare an environment in which to improve productivity through various growth strategies and deregulation. the government has demonstrated that measures to raise the growth potential of the economy will be accelerated and reinforced through implementation of its japan revitalization strategy. it is expected that further improvement in productivity will be achieved through such initiatives.