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To ensure Australia’s economy would avoid a recession, the International Monetary Fund (IMF) has called on the Albanese government to engage in broader tax reforms, including the overhaul of current property taxation systems.
The global financial agency revised its growth projections for the country, with growth projected to slow from 3.6 per cent in 2022 to 1.6 per cent in 2023, a slight decrease from the 1.7 per cent forecast in November.
According to the IMF, the downward amendment in growth expectations was due to rising interest rates and a slowdown in global growth, which has impacted domestic demand.
But despite the “land down under” being in a better position than other advanced economies — thanks to its robust post-pandemic recovery and strong commodity prices that left Australia’s economy largely unscathed — the agency warned that it is not completely out of the woods.
“Australia’s economy is on a narrow path to a soft landing, with downside risks,” the IMF stated.
Some of the outlined downside risks that pose a threat to the country’s economic prospects include the uncertainty prevailing in the global environment, the housing market correction weighing on consumption and a potential decline in commodity prices.
It also predicts unemployment to edge up to 4 per cent because of rising interest rates and weaker consumer spending.
With the IMF anticipating a gradual deceleration in inflation towards the Reserve Bank’s 2 to 3 per cent inflation target by the end of 2024, it said that there is room in the central bank’s fiscal policy for more interest rate hikes.
“With a positive output gap, a tight labour market and high inflation, further monetary policy tightening, complemented by fiscal consolidation, is warranted,” it said.
The IMF expects the cash rate to peak around 3.85 per cent. “Given considerable uncertainty, the pace of further rate increases should be data-dependent, ensuring that inflation expectations remain well anchored.”
To stabilise the country’s finances for the long term and repair the budget deficit, the IMF also advised the government to keep spending contained.
It welcomed the review of the $35 billion-a-year National Disability Insurance Scheme (NDIS) and recommended reviewing other existing large-spending programs for efficiency gains, adding that any cost-of-living support should be “targeted and temporary”.
To further improve the budget’s bottom line, the IMF also urged the government to wind back capital gains tax breaks for the sale of main residences or family homes and to broaden the Goods and Services Tax (GST).
At the state and territory level, the IMF also called for broader tax reform, such as ending state stamp duties on property transactions in favour of land taxes.
In what could be a precedent for this recommendation, the NSW government has recently greenlit a land tax reform under which first home buyers who purchased their home after 11 November 2022 can opt into the annual fee and receive a stamp duty refund within 10 business days.
Other suggestions include reviewing the controversial “stage 3” personal tax cuts that favour high-income earners, which the IMF stated would make the system more “efficient and equitable”.
In response to the IMF’s report, treasurer Jim Chalmers has welcomed the agency’s economic assessment, highlighting that the Albanese government received “a glowing report card” for its budget and economic plan.
“The IMF has overnight strongly endorsed Australia’s responsible economic management at a time of growing uncertainty for the global economy,” he stated.
Despite the IMF confirming that 2023 is shaping up to be a “difficult year”, Mr Chalmers said that “Australians have every right to be optimistic about the future of our economy and our country”.
“The Albanese government is committed to its plan to make our nation’s finances more responsible, our economy more resilient, and to support Australians with responsible cost‑of‑living relief that doesn’t add to inflationary pressures,” he stated.
Notably, Mr Chalmers did not endorse or provide a direct response to any of the IMF’s specific policy recommendations.
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