At the end of the first quarter of 1977 the available economic indicators, while as usual far from univocal, still give cause for serious concern about the health and direction of the Australian economy. With no significant expansionary factors operating in the economy in 1977 other than the revival in the mining industry and in some aspects of business investment, and the various arms of economic policy being set almost entirely in a restrictive stance, aggregate output would appear to be either flat or declining modestly at the present time. On the basis of a continuation of present policies we would anticipate growth in real non‐farm GDP of only 2 to 3 per cent in both 1976–77 and 1977–78, with unemployment continuing to increase until well into 1978. Given the stimulus to inflation arising from the 1976 devaluation and from the wage effects of the Medibank changes, the rate of increase in the consumer price index would seem likely to be 14 to 15 per cent in 1977, even if a partial wage indexation policy could be sustained and whether or not a one quarter wage/price deferment comes into effect. But government pressure on the Arbitration Commission for a reduction in real wages has placed the wage indexation system in jeopardy, and there is now considerable uncertainty about the methods of wage fixation which will obtain in 1977–78. This article surveys some aspects of recent developments and considers some policy options available to the gov