Economic Policies Amid Global Uncertainty

Key Chapter Title List

1. Recent Economic Development Trends
2. The New International Paradigm
3. How Are Countries Responding to Global Uncertainty and Fragmentation?
4. Australia's Response
5. Enhancing Resilience Through Productivity
6. Dynamic Markets: The Role of Competition and National Competition Policy
7. Climate and Energy
8. Skilled Workforce: Mobility and Housing
9. Technology Adoption and Innovation
10. The Care Economy
11. Fiscal Outlook
12. Conclusion

Document Introduction

This report is based on the post-budget speech delivered by Dr. Steven Kennedy, Secretary of the Australian Treasury, to the Australian Business Economists Association on May 28, 2025. The core context of the report is that the global economy is entering a new period of sustained high uncertainty, characterized by intensified strategic competition among major powers, erosion of international rules and norms, and accelerated economic and political fragmentation. As a medium-sized open economy whose prosperity heavily relies on a stable global order, Australia must reposition its economic policies within this new paradigm.

The report first analyzes recent economic developments, focusing on the significant tariff measures announced by the U.S. President in April 2025 and the resulting market volatility. Although a subsequent tariff de-escalation occurred between the U.S. and China, tensions are expected to persist. The report notes that tariff escalation and the ensuing policy uncertainty have led the International Monetary Fund (IMF) to downgrade its global growth forecasts, with particularly significant downward revisions for China and the U.S. This environment poses direct and indirect risks to the Australian economy through trade, investment, and supply chain channels. The Treasury has quantified the potential impacts on the real GDP of Australia, the U.S., and China under different scenarios (tariffs only, tariffs plus uncertainty, U.S. sovereign risk, etc.) through a series of scenario analyses.

The report then proposes a new international paradigm, suggesting that the United States is reshaping the global economic and political order in a more assertive manner to safeguard its own interests, leading it into deeper strategic competition with China, the world's primary manufacturing power. Concurrently, geopolitical events such as the Russia-Ukraine conflict mark a turning point in Europe's strategic and economic policies. Domestically, many societies are becoming more divided and polarized, with rising nationalist sentiments making consensus-building difficult. Faced with this global uncertainty and fragmentation, the report identifies three major trends in national policies: enhancing economic resilience through structural reforms; promoting trade and economic diversification to reduce dependencies; and increasing investment in deterrence capabilities, including higher defense spending and strengthened security agreements.

Regarding Australia's response strategy, the report elaborates from three dimensions: resilience, diversification, and deterrence. Increasing the rate and stability of productivity growth is identified as the most critical pathway to enhancing national resilience. The government has tasked the Productivity Commission with developing a reform blueprint centered around five pillars (creating a more dynamic and resilient economy, investing in cheaper and cleaner energy, building a skilled and adaptable workforce, harnessing data and digital technology, and delivering quality care more efficiently). On diversification, the report opposes responding to trade barriers with more barriers, advocating instead for risk reduction by strengthening existing trade architectures (e.g., CPTPP) and exploring new markets. On deterrence, Australia plans a steady increase in defense spending but simultaneously emphasizes the need for careful consideration of the balance between defense procurement and maintaining sovereign capability, avoiding harm to industries where it holds a comparative advantage.

The subsequent sections of the report delve into specific reform areas for boosting productivity. These include strengthening market competition through mechanisms like the National Competition Policy, promoting road user charging reforms to optimize infrastructure use, designing efficient market mechanisms (such as the Safeguard Mechanism) for low-cost emissions reduction, reforming the National Electricity Market to accommodate the renewable energy transition, optimizing environmental approval processes, enhancing labor market mobility and housing supply through national occupational licensing and prohibiting certain non-compete clauses, and encouraging technology adoption and innovation. The report pays special attention to the productivity challenges in the care economy (healthcare, aged care, etc.), noting that current fee-for-service models may hinder outcome-based efficiency gains, and shares experiences from aged care reforms introducing price signals and moderate co-payments.

Finally, the report examines Australia's fiscal prospects. Although the government has achieved consecutive budget surpluses and maintains a AAA credit rating, the structural budget remains in deficit, and the fiscal positions of some states and territories are deteriorating. The report concludes that with inflation under control and unemployment at historic lows, future policy focus will shift towards addressing the government's five policy pillars, particularly enhancing productivity and resilience. In a riskier, more unpredictable world, Australia needs to pursue prudent policy adjustments, adhering to traditional economic principles of budget constraint, trade-offs, and cost-benefit analysis while adapting to new challenges like economic security, in order to preserve its democratic capitalist economic model.