“W E WILL JUST end up being a third-rate economy…a banana republic,” warned Paul Keating in 1986. He used such threats to persuade the country to accept a series of radical economic reforms over the next decade, when he was treasurer (finance minister) and then prime minister. Along with his predecessor as PM, Bob Hawke, Mr Keating floated the Australian dollar, abolished import quotas, slashed tariffs, deregulated the financial sector, privatised state-owned enterprises, overhauled the tax code and did away with country-wide wage accords in favour of company-by-company “enterprise bargaining”.

Many of these reforms were instituted during Australia’s last recession in the early 1990s (“the recession we had to have”, in Mr Keating’s words). Most economists believe they have saved it from subsequent recessions by providing the flexibility needed to adjust promptly to changing economic conditions.

To this far-sighted macro-economic management, the next government, of John Howard (1996-2007), added fiscal prudence, running surpluses in eight out of its 11 years in office and turning the government from a debtor to a net creditor. It also created a regulator to oversee banks and other financial institutions.

It was these solid policy foundations, as much as the economy’s diversity, that prevented the global financial crisis from causing more problems. Kevin Rudd, the prime minister of the day, was able to spend freely to ward off recession. His stimulus, of roughly 5% of GDP, included A$900 cheques for many Australians. Yet the country remains in good fiscal shape, with gross government debt of only 41% of GDP, below even Germany’s 64%, let alone Canada’s 90% or Japan’s 238%.

Better yet, thanks to conservative regulation (and less-than-cut-throat competition), Australia’s financial system was in good shape when the crisis struck. It had only one large investment bank, Macquarie. Its other big financial institutions were all commercial banks, whose main business was mortgage lending. The RBA guaranteed their deposits and lent to them profusely when they struggled to raise funds elsewhere, but there were no failures or full-scale bail-outs.

Although the RBA reduced interest rates no more than other central banks, households soon felt the benefit, as most Australian mortgages are floating-rate. It also helped that the crisis was not precipitated by a property crash—on the contrary, Australian house prices barely faltered, propelled in part by lower interest rates.

But the reforms of the 1980s and 1990s did not just help Australia through the financial crisis; their benefits will be felt for years to come. Whereas other rich governments are struggling to pay for pensions and health care, Australia’s fiscal outlook is rosier—thanks again to the shrewdness of Mr Keating in particular.

In 1992 his government made it compulsory for workers and employers to pay part of their salary into private pension funds. This system, known as “superannuation” or “super”, has not replaced public pensions altogether, but has allowed the government to make them more miserly. They are strictly means-tested, based on both assets and income, including accumulated super funds. Public spending on pensions is just 4% of GDP, compared with 7% in America and 14% in France (see left-hand chart). And that is expected to fall in future, even as costs soar elsewhere.