The employment situation, while much improved on what it was a decade ago, is still far from satisfactory. Australia's labour force participation rates are below the best in international terms and, after allowing for under-employed and discouraged workers, the actual under-utilisation rate is closer to 7per cent of the workforce than the official rate of 4 per cent. So there is no justification for accepting a marked increase in job-seekers as inevitable.

If the economy weakens markedly, monetary policy will probably do its part to revive the economy but the impact lags are unpredictable. It is quite likely that the multiplier effects of a monetary stimulus are greater than for a fiscal stimulus but the two can usefully complement each other if there is a risk that an economy will run into a recession. Fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone.

A recent United States academic review of the empirical literature on how best to craft fiscal stimulus concluded that, provided a discretionary fiscal stimulus is seen as temporary, it would "boost economic activity more quickly than monetary policy" and would "usefully supplement and reinforce any monetary stimulus".

It added that, "when the impact of policy instruments is not known, policy makers should use all the instruments available". Australia's own recent experience with fiscal stabilisation policy has generally been OK.

Well used, fiscal policy can clearly be effective as a contra-cyclical tool but its biggest stumbling block is implementation lags, especially in periods when governments do not control the Senate. How do we get around that?

One possibility would be for Parliament to give the Government authority to temporarily decrease the GST (or some other consumption taxes) within a narrow margin without requiring legislation subject to the original GST rate being restored over a five-year period. The authority could extend to flat tax rebates now being used in the US and likely to have desirable effects on job formation there tax credits for business investment (presumably of temporary duration) or a temporary increase in unemployment benefits or household tax offsets.

If there is a threat of recession, the Government could also spend some money usefully on correcting the constraints on labour mobility (occupational and regional) and the inequalities of employment opportunity. These adversely affect the unemployment/inflation relationship. Active measures are needed to enhance the competence, employability and location opportunities of low-skill workers and to prevent the perpetuation of chronic inter-generational joblessness. Such measures have been successfully applied in Nordic and European countries.

But the most rewarding idea would be to have a number of sensible "ready to go" infrastructure projects for quick implementation. The advantages of such a proposal are potentially very large and numerous.

First, spending on projects with reasonably short gestations can produce a more effective contra-cyclical demand effect per dollar than tax changes because it initially raises aggregate demand in the economy dollar for dollar, whereas a share of the tax cut is saved.

Secondly, the benefit-cost ratio on any new infrastructure project is much more favourable if it is started at a time when there is a lot of spare capacity in the engineering and construction industry than at a time of full employment.

Thirdly, investment spending has much bigger spin-offs for the economy in the long term than increased transfers and consumer spending. For example, it offers an opportunity to rectify the past neglect of economic infrasructure, such as ports, as well as social and environmental investment in education, health, public infrastructure, low-cost housing, urban roads, rivers and water.

If the slowing of activity in the private sector goes too far and starts to seriously threaten jobs, it will surely be a never-to-be-missed opportunity for governments to start fixing our long-neglected public infrastructure.

But governments need to be institutionally prepared. For investments to be well timed and productive there needs to be prior federal-state coordination, a national audit to determine priorities and quick implementation (which is why prior parliamentary authority for limited action is needed). This can be done through COAG or the new Infrastructure Australia body.

There should be no objections in terms of political credibility. The Rudd Government commitment is to achieve a budget surplus "on average over the business cycle". This gives Wayne Swan the moral justification to run a significant budget cash deficit for a period in the right economic circumstances.

By all means let's cut out fiscal waste in the 2008-09 Budget, but the Government should be prepared for a quick turnaround if economic circumstances change dramatically.

Fred Argy is a former senior Treasury official, a visiting Fellow at the ANU, and author of various books examining the interaction between efficiency and equity.