OBJECTIVES: In the past few years a range of policy initiatives has been introduced into the Australian national reimbursement system. Prior to these initiatives the Australian Government published its “Intergenerational report” which was used to support the argument that the growth in health, and in particular pharmaceutical, spending would create a fiscal crisis over the next 40-years. In late 2006, after extensive negotiation with industry, a raft of policies where announced which detailed substantial cuts in drug prices. The introduction of the policies will be phased in up until 2011. METHODS: This study examines the initiatives and estimates the savings that each will provide. It also examines the basis for the claimed long-term fiscal crisis. The analysis builds on earlier work presented at the 11th annual ISPOR conference in Philadelphia. Planned policy initiatives include mandatory price cuts for off-patent medicines and the adjustment of reimbursed prices to reflect manufacturer discounting. RESULTS: The estimated impact of the range of cost cutting measures should see pharmaceutical expenditures grow at less than 5% per annum over the next 5 years. The new policies will cut over A$2billion from Government expenditure. The underlying growth rate for pharmaceuticals expenditure, without any cost cutting initiatives, is estimated at 5% from the increase in volumes and 4% from growth in the average cost per unit sold. The “intergenerational report” is based on a number of flawed assumptions and has been used as justification for cutting health expenditures. In the same period defence expenditures have grown rapidly. CONCLUSION: The policy initiatives will cut deeply into pharmaceutical spending. These cuts have been justified by a spurious case built by Government to cut health expenditure and to shift funding into newer priority areas. The public has not been engaged in an open debate around which priorities they would select.