Australian monetary sovereignty: origins, evolution and implications for federal spending

This article examines how Australia obtained a high degree of monetary sovereignty which increased the federal government’s freedom to spend. It examines key episodes in Australia’s history, culminating in the float of the Australian dollar in 1983, to demonstrate that the Australian government need not tax before it spends, because its powers to create and spend Australian currency are limited by political choices — not any need to first acquire the currency. While the Commonwealth nonetheless aims to match its spending with tax receipts, with any shortfall met by selling government bonds, these are self-imposed conventions intended to restrain government spending to protect the currency’s purchasing power. Although historically, political actors believed there were constitutional limits on the Commonwealth’s power to more directly manage inflation, these debates were ideologically informed and constitutional interpretations have since critically changed, creating possibilities for more innovative economic solutions. Curbing such innovation, however, political restraints on government spending have yet to appropriately adapt to Australia’s achievement of monetary sovereignty. The article argues that better understanding the implications of Australia’s monetary sovereignty can enhance policy debate by revealing the breadth of the nation’s economic policy choices.