what should be thought of as a temporary rise in revenue and what can be assumed to be permanent ). it strikes me that in the popular discussion about fiscal policy, many participants talk past each other because they are looking at different time dimensions. it is not unreasonable to say that if the budget is perpetually in surplus, there is no debt to speak of and no other looming large unfunded liability, taxes should probably, over some long run horizon, be lower. this, it seems to me, is the economic case for structural reductions in taxes, which some observers articulate. others argue that such reductions should be delayed, for cyclical reasons, given that demand needs to slow to contain inflation. so there is a structural case for taxes to fall, and a cyclical case for them not to. it is no doubt difficult for any government to reconcile these two, equally valid, points of view, the more so if the same tension persists for a number of consecutive years. leaving that aside, let us give some thought to just how effective an instrument budgetary policy is likely to be. if inflationary pressures were just due to specific, narrow issues ( which, as is clear above, i doubt ), precise targeting of the sources of inflationary pressure via tax and spending measures could nonetheless be exceedingly difficult at a technical level, let alone politically. if it is accepted, on the other hand, that inflation is sufficiently general that overall demand has to slow, the amount of slowing has to be the same regardless of whether it comes via monetary policy or fiscal policy. it would be somewhat differently distributed across sectors and regions, as the impact of interest rate and exchange rate effects obviously would not overlap exactly with the tax or spending measures that would occur in their place. i would hazard a guess, though, that a good many people who are today paying higher interest rates would instead pay higher taxes in a world where fiscal policy was used more actively to manage the business cycle. we are unlikely, i submit, to witness a situation where income taxes are raised only for those without home loans, or only for those living in western australia and queensland, or those working in the mining sector. then there are the time lags in implementing fiscal measures. the budget occurs once a year, and has a very long and gruelling process in the lead up. i am not expecting to be stampeded by people in this room wishing to do that more often. the economy could conceivably

economy. we cannot know because that alternative scenario cannot be run, but as everyone knows, the board has on occasion in the recent past considered larger movements. so the idea of larger changes is not absurd. yet it is hardly as though interest rate changes were so small that no one noticed. there are few issues reported at more length than interest rates ; no one could say they were unaware of what was happening. beginning with the march 2005 rate change, moreover, the extent of coverage in the media has been far more intense than it had been prior to then, and far more intense than is the case in other comparable countries. we could debate the reasons for that, but they do not matter for present purposes. on every one of those occasions, there was no shortage of dramatic media coverage, and no shortage of predictions of serious consequences for indebted households, the economy and so on. if we were looking for announcement effects, surely they should have been at work through this period. my own view is that monetary policy is most effective when actions are seen to be consistent with the factual evidence available on the economy, a sensible assessment about future risks, and a framework that has a clear medium term objective for policy. apart from that, we have to accept that the likely effect of any one move of 25 or even 50 basis points is, while uncertain, probably only modest. it is the combination of changes, and more particularly the level reached, that will do most of the work. a second version of the “ ineffectiveness ” argument holds that ( 1 ) the price rises are coming from factors beyond the control of any australian policy, and particularly from abroad, from which it follows that ( 2 ) monetary policy cannot do anything about them. for some people, it follows that it is therefore ( 3 ) futile, and unnecessarily disruptive, to try. i have already addressed the question of whether all the price rises can be put down to a few special factors, obviously not under our control. the fact is that the price rises are broader than that. but even if all the initial impetus for higher prices comes from events abroad, we still have to decide how we will respond to that shock. in the case of energy prices, while the world price of oil in us dollars certainly is completely outside our control, it is the australian dollar price of oil that actually matters for the australian motorist. that price is lower at present than it might have been, because of the rise in