The economy slowed sharply during the first half of 2003, when brisk domestic demand growth was almost offset by a steep fall in exports. With farm output likely to recover from the drought and adverse external influences receding, economic activity is projected to gather momentum, despite a cyclical downturn in housing investment. The labour market should improve further, with inflation remaining under control, given sizeable productivity gains, wage moderation and the strong Australian dollar. To preserve price stability over the longer run, monetary policy needs to move to a more neutral policy stance. The government should maintain its fiscal objective of keeping the budget balanced over the economic cycle, allowing fiscal policy to play a stabilisation role through the operation of the automatic stabilisers. Reform of the income support system should aim at strengthening the incentives of welfare recipients to participate in gainful employment...