Public Information Notices
Australia and the IMF
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On October 28, 1998, the Executive Board concluded the Article IV consultation with Australia.1
Australia has enjoyed a strong economic performance over the past seven years, with growth averaging 3½ percent and inflation 2 percent. Growth has been underpinned by an improved economic policy framework and regulatory reforms that have promoted investment and boosted productivity. The progress in bringing down inflation has been facilitated by a forward-looking monetary policy that has targeted low inflation.
Growth picked up to an estimated 4 percent in 1997/98 (July-June). The expansion was driven exclusively by domestic demand, which accelerated to 6 percent, in contrast to previous years when more balanced contributions from both domestic and foreign demand underpinned activity. Export volume growth slowed markedly in 1997/98, reflecting not only the impact of the Asian crisis and Japanese recession, but also the boost to export volumes in 1996–97 from Reserve Bank of Australia non-monetary gold sales and the sale of a frigate to New Zealand. This slowdown, together with strong domestic demand, contributed to a sharp widening of the current account deficit. The impact of the Asian crisis on exports was nevertheless cushioned by a switching of exports to other markets.
Despite continued strong growth over the past few years, progress in reducing the unemployment rate stalled. The rate has hovered around 8 percent over the past year, and reflects mainly structural factors.
Underlying inflation declined to 1½ percent in 1997/98, below the Reserve Bank’s target of 2–3 percent, on average, over the economic cycle. This decline reflected mainly the lagged effect of the earlier appreciation of the Australian dollar and the absence of significant inflationary pressures from domestic sources. Monetary conditions have eased with the recent depreciation of the Australian dollar.
Australia has made significant progress in fiscal consolidation over the past five years, mainly through cuts in structural expenditure. As a result, the Commonwealth’s underlying budget balance (that is, exclusive of net advances) improved to reach a small surplus in 1997/98, in contrast to deficits of about 3 percent of GDP at mid-decade. At the same time, the government has undertaken substantial asset sales, leading to a sharp decline in public debt. The improved fiscal position has supported a fall in long-term interest rates toward international levels.
This fiscal strategy is in line with the broad principles laid out in the recently legislated Charter of Budget Honesty. These principles include achieving adequate national saving and maintaining Commonwealth debt at prudent levels. In addition, the Charter aims to improve the transparency and accountability of fiscal policy.
In addition to fiscal reform, Australia has been pursuing a range of other microeconomic reforms, with important recent achievements in several key areas. These reforms cover: the labor market; the financial sector; competition policy; trade policy; and the corporate law code. An important measure is the passage, in late 1996, of the Workplace Relations Act (WRA) that has encouraged wage bargaining at the enterprise level. With respect to the financial sector, a package of pathbreaking reforms, which puts Australia at the forefront of international practice, is in the process of being adopted. A major reform proposal for the tax system, which would address many of the shortcomings in the current system, was announced in mid-August, 1998.
Executive Board Assessment
Executive Directors commended the authorities for implementing sound macroeconomic policies and structural reforms, which have built the foundation for Australia's impressive record of strong growth and low inflation in recent years. Directors noted that fiscal consolidation and the inflation targeting framework had contributed to a fall in long-term interest rates, which together with labor and product market reforms, had supported increased investment and productivity. Moreover, the adoption of the Charter of Budget Honesty, which sets a high standard for fiscal transparency and accountability, waswelcomed by Directors. At the same time, they expressed concern that unemployment remained high and national saving was low. Furthermore, the near-term outlook was seen as somewhat less favorable, reflecting the deterioration in the external environment, with Australia's growth expected to slow and the current account deficit to widen.
Directors agreed that the current mix of relatively easy monetary conditions (as a result of the depreciation of the Australian dollar) and maintenance of a budget surplus was appropriate, and would help minimize the adverse effects of the Asian crisis on Australia. This mix would support growth while bringing down the current account deficit. In the event of a sharper than expected economic slowdown, Directors agreed that a somewhat lower budget surplus would be appropriate in the near term, by permitting the operation of automatic stabilizers. On monetary policy, Directors noted that it may be possible to accommodate a modest easing if the pass through from the recent depreciation continues to be lower than expected, and if inflationary pressures from other quarters remain subdued. Some other Directors, however, cautioned that a tightening of monetary policy could be called for, if additional price shocks or exchange rate pass through occurs, and causes a rise in inflationary expectations.
Directors strongly endorsed the proposed tax reform package. The introduction of a broad-based tax on goods and services would enhance efficiency, while protecting the revenue base from continued erosion. The accompanying reduction in effective marginal income tax rates would improve the incentives for saving and employment. Some Directors considered that the budgetary costs of the proposed tax reform package should be offset by expenditure measures, over the medium term, to avoid compromising fiscal consolidation. Others considered that the cost of introducing the tax reform of the order envisaged by the authorities would be acceptable, given the importance and long-run benefits of the tax reform. Directors cautioned against granting concessions that would introduce distortions and erode the benefits of the tax reform.
Directors considered that raising national saving must remain a top priority for the medium term. They agreed with the Australian authorities that the main elements of this strategy should be a significant fiscal consolidation effort and measures to promote private saving, so as to reduce Australia's call for foreign saving. Directors referred to Australia's high level of external liabilities, and agreed that policies must continue to be conducted in a prudent way, so as to avoid any potential weakening in market confidence. With respect to public saving, Directors agreed with the authorities' focus on structural expenditure cuts, particularly in view of the long-term pressures on the budget from the aging of the population. In this regard, there could be scope to hold down social spending, given the sharp increase of the past five years. Directors also called for further efforts to boost private saving.
Directors welcomed the government's efforts at labor market and social welfare reform. Further reforms will be necessary, however, to reduce the high level of structural unemployment. In the labor market, reforms should focus on strengthening enterprise bargaining further, and reducing the role of awards and third parties in wage determination. On social welfare reform, Directors stressed that, while it was necessary to maintain an adequate social safety net, it was also important to limit the duration of unemployment benefits to encourage employment search, and to scale back other social welfare benefits that discourage labor force participation.
The authorities' long-standing commitment to product market and financial sector reforms was strongly supported by Directors, as they would help to improve efficiency and the environment for investment and growth. These reforms included the broadening of the applicability of competition policy rules, comprehensive corporate law reform, and financial sector reforms, which will put Australia's prudential regime at the forefront of international practice. On trade policy, Directors welcomed Australia's commitment to liberalization, and agreed that the tariff reductions proposed for 2005 and beyond should proceed as planned, but regretted the decision to allow a pause in liberalization for two sectors. As regards industrial policy, Directors agreed that the use of selective incentives should be avoided to maintain as level a playing field as possible for private investment decisions.
Noting that Australia now provides a relatively low level of official development assistance (ODA), some Directors urged the authorities to seize the opportunity of the expected budget surpluses to gradually raise the level of ODA.
|Australia: Selected Economic and Financial Indicators1|
|(Change in percent)|
|Real domestic demand||3.8||6.3||3.6||2.9||5.9|
|Headline CPI inflation||1.8||3.2||4.2||1.3||0.0|
|Underlying CPI inflation||2.1||2.1||3.2||2.1||1.5|
|Unemployment rate (in percent)||10.5||9.0||8.5||8.7||8.3|
|Gross national saving (percent of GDP)2||17.0||17.1||17.6||18.3||18.4|
|Gross capital formation (percent of GDP)||20.9||22.0||21.1||20.6||21.8|
|(Percent of GDP)|
|Public sector underlying balance3||-3.1||-1.9||-1.3||0.1||0.2|
|(End of period)|
|Money and credit|
|M1 (change in percent)||14.9||2.4||12.7||14.3||10.8|
|M3 (change in percent)||7.2||7.1||10.2||10.5||6.2|
|Private domestic credit (change in percent)||7.6||9.9||12.5||10.1||11.2|
|Interest rate (90-day, in percent)||5.1||7.6||7.6||5.4||5.3|
|Government bond yield (10-year, in percent)||9.6||9.2||8.9||7.1||5.6|
|Balance of payments|
|Current account balance||-16.4||-28.8||-21.8||-17.1||-23.9|
|(In percent of GDP)||-(3.8)||-(6.3)||-(4.4)||-(3.3)||-(4.4)|
|Capital and financial account||14.6||28.6||21.9||18.6||22.3|
|Reserves (US$ billions)||15.1||14.3||15.0||17.0||15.6|
|Gross external debt||243.2||264.6||276.5||305.1||322.2|
|Net external liabilities||242.4||263.2||287.9||311.6||324.3|
|(In percent of GDP)||(56.0)||(57.2)||(58.5)||(60.4)||(59.5)|
|(End of period)|
|Nominal effective exchange rate4||106.4||96.1||113.4||112.7||98.1|
|Real effective exchange rate4||87.6||79.9||95.0||92.4||80.1|
Sources: Data provided by the Australian authorities; and IMF staff estimates.
1Fiscal year ends June 30.
2National accounts basis, as measured by the authorities.
3Underlying expenditure and balance exclude asset sales and other one-off factors.
Notice System index (1990 = 100).
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT