Keynesian economics has long been a pillar of modern macroeconomic thought. Born from the ashes of the Great Depression, this theory emphasises the pivotal role of government in smoothing out the booms and busts of the business cycle. But how relevant is Keynesian thinking for Australia in 2025? As the global economy faces new shocks and the Albanese government balances inflation and growth, Keynesian principles are front and centre in policy debates. Let’s unpack what Keynesian economics is, how it plays out in Australia today, and what critics and supporters say about its future.
Understanding Keynesian Economics: The Basics and Beyond
Keynesian economics emerged from John Maynard Keynes’s landmark 1936 book, The General Theory of Employment, Interest and Money. The core idea is simple but powerful: in times of economic downturn, private sector demand can fall short, leading to unemployment and wasted resources. Keynes argued that government spending can fill the gap, stimulating demand and restoring growth. In essence, he flipped the classical view that markets always self-correct.
- Fiscal policy over monetary policy: Keynesians advocate for active government spending and taxation policies, rather than relying solely on central banks and interest rates.
- Multiplier effect: Increased government spending can have a bigger impact than the initial outlay, as money circulates through the economy.
- Counter-cyclical measures: During recessions, governments should increase spending and cut taxes. In booms, they should rein it in.
Fast-forward to 2025, and these ideas are more than theoretical. Australia’s economic resilience during recent global shocks – from COVID-19 to inflation surges – has seen policymakers dust off Keynesian playbooks.
Keynesian Economics in Action: Australia’s Fiscal Response in 2025
In the wake of the pandemic, Australia’s government deployed massive stimulus packages, echoing Keynesian prescriptions. In 2025, the approach continues to shape fiscal policy:
- Targeted government spending: The 2025 Federal Budget earmarked billions for infrastructure, healthcare, and renewable energy projects, aiming to boost jobs and long-term productivity.
- Cost-of-living relief: Direct cash payments and energy rebates to households aim to maintain consumer demand as inflation bites.
- Automatic stabilisers: Programs like JobSeeker and the progressive tax system automatically pump money into the economy when unemployment rises, softening downturns without new legislation.
Take the National Housing Accord, which received a $10 billion top-up in 2025 to accelerate social and affordable housing. This not only addresses a chronic shortage but injects demand into construction and allied sectors – classic Keynesian stimulus in action.
And while the Reserve Bank has been busy managing interest rates to tackle inflation, the government’s role in shaping overall demand remains crucial, especially as global uncertainties persist.
The Debate in 2025: Does Keynesianism Still Work?
Despite its enduring influence, Keynesian economics is not without critics. Detractors argue that government spending can crowd out private investment, fuel inflation, and lead to unsustainable debt. Others contend that in a world of globalised capital flows, the old playbook needs updating.
Yet, in Australia, Keynesian thinking remains influential. Why?
- Economic shocks are still with us: From supply chain disruptions to climate disasters, unpredictable events require rapid, large-scale responses.
- Low global growth: With private investment cautious, government action helps sustain demand.
- Public appetite for intervention: Polling in 2025 shows Australians broadly support government action to manage crises and support vulnerable groups.
However, the government faces trade-offs. The 2025 Budget’s increased spending comes with warnings from the Treasury about rising public debt. The challenge is to target spending where it delivers the most bang for buck and to scale back as the economy recovers – the so-called “Keynesian exit strategy.”
For younger Australians, Keynesianism is not just history: it’s the rationale behind free TAFE, new hospital wings, and green energy subsidies. Whether it remains the dominant doctrine will depend on how well these interventions balance growth, inflation, and fiscal sustainability in an ever-changing world.
Conclusion: Keynesianism’s Enduring Relevance
Nearly a century after Keynes published his General Theory, his ideas continue to shape Australia’s economic landscape. In 2025, as governments grapple with inflation, sluggish growth, and global shocks, the case for smart, targeted intervention remains strong. The debate is less about whether to intervene, and more about how – and when – to step back. For Australians looking to understand the forces shaping budgets, jobs, and economic opportunity, Keynesian economics is as relevant as ever.
