AbstractA question featuring prominently in policy debates over the last few years is whether Australia can gain from having smaller government. Proponents have stressed beneficial impacts on the supply side of the economy; opponents have stressed the deflationary impact from possible reductions in demand. This article provides a quantitative assessment of this essentially empirical question, namely, whether supply or demand responses would dominate. It suggests that over the short term, demand contraction may be important. In the longer term, increased incentives can expand Australia's productive capacity, although incentives to work longer appear less important than incentives created for capital accumulation. But the longer term expansion may be crucially dependent on foreign investor acquiescence to increased involvement in the Australian economy.