## 1ausea2021001

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### Outlook and inflation
- Growth projections:
  - "3.5 and 4.1 percent in 2021 and 2022, respectively."
- Inflation:
  - "Underlying inflation should rise gradually toward the mid-point of the 2-3 percent inflation target range."
  - Headline inflation pushed to the top of the target range by base effects from temporary free childcare in 2020, a rebound in fuel prices, and supply disruptions; spike expected to be temporary.
- Risks:
  - "Given the unpredictable trajectory of the pandemic, risks are tilted to the downside in the near term, but broadly balanced beyond that."
  - Near-term downside risks listed: pandemic (Delta variant), prolonged global supply chain disruptions, tightening global financial conditions, geopolitical tensions, a housing market correction, climate-related risks, risks from trade restrictions by China.
  - Upside risks listed: faster recovery in household consumption and business investment, a rise in commodity prices.

### Recent developments and pandemic impact
- Health and containment:
  - "A swift public health response" in 2020; renewed outbreaks since June 2021 driven by the Delta variant more difficult to contain.
  - Vaccination: "73.4 percent of eligible adults (16+) fully vaccinated, and 86.8 percent having received at least one dose of vaccine as of October 26."
- Recovery trajectory:
  - "By 2021Q2, output had recovered to well above pre-COVID levels."
  - Renewed lockdowns affected "more than half of the population" and disproportionately impacted "services and construction."
- Labor market:
  - Headline unemployment "remained low" but metrics accounting for participation and zero-hours workers have "deteriorated, with long-term unemployment remaining high."
  - Disproportionately affected groups: "Casual jobs, female, youth, and lower-educated workers."

### Fiscal support and public finances
- Scale and timing:
  - Stimulus "about 20 percent of GDP through FY2024/25."
  - Nearly "60 percent of the stimulus expired by end-FY2020/21."
  - Fiscal deficit peak: "around 9 percent of GDP."
- Key 2020 measures:
  - JobKeeper wage subsidy: "4½ percent of GDP."
  - Employers' mandatory pension contribution rate rose from "9.5 to 10 percent in July 2021."
  - Superannuation guarantee scheduled to increase to "12 percent by FY2025/26."
- 2021H2 support (three pillars):
  - Pillar 1 — COVID-19 Disaster Payment Program:
    - (A) "8-20 hours — A$450 per week"
    - (B) "More than 20 hours — A$750 per week"
    - (C) "Welfare recipients who lost more than 8 hours — A$200 per week (top up)."
    - Cost sharing: Commonwealth covers full payments in declared hotspots; outside hotspots the state/territory covers payments.
  - Pillar 2 — State-Administered Business Support Programs:
    - Eligibility "varies" and is generally anchored on declines in turnover; example JobSaver (NSW) requires maintaining staffing levels as of July 13, 2021.
    - Payments and cost sharing "vary by the jurisdiction"; Commonwealth provides joint funding where agreed.
  - Pillar 3 — Pandemic Leave Disaster Payment Program:
    - Eligibility: "Individuals who cannot earn income because they must self-isolate, quarantine, or care of someone with COVID-19."
    - Payments: "A$1,500 for each 14-day period."
  - Phase-out:
    - Commonwealth announced phase-out as full vaccination rate reaches "70-80 percent targets"; Pandemic Leave Disaster Payment to continue until "end-June 2022."
- Remaining and expired items:
  - New measures in 2021H2 equal "1¾ percent of GDP" and anticipated to phase out by end-2021.
  - Remaining support includes revenue measures "3.7 percent of 2020 GDP" and expenditure measures "4¾ percent of 2020 GDP."
  - Commonwealth loan guarantee and recovery loan schemes and other below-the-line assistance for SMEs amounting to "nearly 2 percent of GDP."
  - Major expired measures: Coronavirus Supplement, HomeBuilder grants (applications closed April 2021, payments continue until end-April 2023), JobKeeper, JobMaker Hiring Credit (access closed October 2021, payments continue for 12 months).
  - Remaining major items: low and middle income tax offset (LMITO) until "June 2022"; temporary full expensing and loss carry-back for businesses; COVID-19 Disaster Payment and Pandemic Leave Disaster Payment programs; wage subsidy for apprenticeships and trainees; vaccination and pharmaceutical benefit programs.

### Monetary policy and liquidity measures
- Key actions:
  - Cash rate target cuts: "cut the cash rate target from 0.75 to 0.1 percent in March-November 2020."
  - 3-year yield target: set at "0.25 percent" in March 2020 and lowered to "0.1 percent" in November 2020; changed in July 2021 to be fixed at the April 2024 bond; "the yield target was abandoned in November 2021."
  - Term Funding Facility (TFF): offered up to "A$213 billion (9.7 percent of GDP) in three-year funding"; drawdown expired in "June 2021."
  - Asset purchases: "assets worth A$230 billion, or 11.7 percent of GDP, have been purchased to date"; weekly purchases "tapered from A$5 billion to A$4 billion"; bond purchase program: "Outright purchase of A$200 bn" extended to mid-February 2022.
  - FX swaps: temporary swap line allowing RBA access up to "$60 bn."
- Effects and guidance:
  - Measures "compressed bond yields and led to significant reductions in firms’ and households’ borrowing costs."
  - Forward guidance: cash rate will not be hiked until actual inflation is sustainably within the "2-3 percent" target; central forecast for underlying inflation "no higher than 2½ percent by end-2023."

### Prudential, banking sector, and housing developments
- Prudential measures and banking metrics:
  - APRA actions: regulatory support for temporary loan deferrals, "maintained the counter-cyclical capital buffer (CCyB) at zero", imposed temporary bank dividend payment restrictions.
  - Basel III reforms postponed to "January 2023."
  - Loan deferrals mostly resumed by "March 2021"; deferrals reinstated "during July-September 2021" for up to three months with "limited" take-up.
  - Tier-1 capital ratio: increased from "13.2 percent pre-COVID to 14.6 percent in June 2021."
  - Non-performing loan ratio: "remains low at 1.1 percent."
  - Mortgage concentration: "mortgages accounting for 63 percent of bank loan portfolios."
- Housing market:
  - Price rebound: "21.6 percent y/y in October 2021."
  - Credit growth: housing credit growth accelerated, reaching "6.5 percent (y/y) in September", driven by owner-occupiers "8.7 percent", investor loans "2. 4 percent".
  - Riskiness: share of borrowers with high debt-to-income ratios rose from "16 percent pre-COVID to 22 percent."
  - About "70 percent of mortgages are at variable rates."
  - Macroprudential response: APRA raised minimum serviceability buffer from "2.5 to 3 percent" in October 2021.
  - Staff view: recent tightening "appropriate"; additional measures should be considered if risks continue to build, including portfolio restrictions on DTI and LVR.

### External position and balance sheet dynamics
- Current account and NIIP:
  - CA balance surged to "2.7 percent of GDP in 2020"; increased to "3.7 percent of GDP in 2021H1."
  - NIIP: "−54.3 percent of GDP in 2020" (from "−46.8 percent of GDP in 2019").
  - Key 2020 external stats (percent of GDP): NIIP: "−54.3"; Gross Assets: "169.8"; Debt Assets: "46.3"; Gross Liab.: "224.1"; Debt Liab.: "103.9".
- REER and exchange rate:
  - REER depreciated by "0.8 percent in 2020" vs 2019 average; about "5 percent lower than its 2015 level."
  - As of July 2021 REER up by "about 5 percent relative to the 2020 average."
  - IMF staff assesses REER gap in range "−8 to 2 percent", midpoint "−3 percent."
- Annex I assessments:
  - EBA model estimates: Cycl. Adj. CA: "2.6 percent of GDP"; EBA Norm: "−0.1 percent of GDP"; EBA Gap: "2.7 percent of GDP."
  - IMF staff COVID-19 adjustment: "−0.5 percent of GDP"; adjustment for temporarily lower dividend payments: "−1.3 percent of GDP"; staff-adjusted CA gap range "−0.1 to 1.9 percent of GDP", midpoint "0.9 percent of GDP."

### Fiscal sustainability and alternative scenarios
- Baseline and scenario figures (selected):
  - Baseline Real GDP growth: "3.5, 4.1, 2.6, 2.6, 2.6, 2.6"
  - Historical Real GDP growth: "3.5, 2.1, 2.1, 2.1, 2.1, 2.1"
  - Baseline Primary Balance: "-7.4, -4.7, -2.2, -1.3, -0.8, -0.4"
  - Historical Primary Balance: "-7.4, -2.7, -2.7, -2.7, -2.7, -2.7"
  - Constant Primary Balance Primary Balance: "-7.4, -7.4, -7.4, -7.4, -7.4, -7.4"
  - Baseline Effective interest rate: "2.6, 2.6, 2.8, 3.0, 3.0, 3.1"
  - Historical Effective interest rate: "2.6, 2.6, 3.2, 3.6, 4.0, 4.2"
- Stress-test findings:
  - Interest rate shock: real interest rate increases nearly "570 basis points" in 2022 and onwards; single shock adds "6 percentage points of GDP relative to the baseline by 2026."
  - Combined macro-fiscal shock: raises gross public debt by "12 percentage points of GDP by 2026."
- Baseline debt dynamics (selected):
  - Change in gross public sector debt (cumulative 2019-2026): "2.8, 5.0, 11.1, 4.7, 4.1, 0.8, -0.4, -1.1, -1.4, 6.6"
  - Primary deficit (percent of GDP, selected years): "2.3, 3.5, 7.6, 7.4, 4.7, 2.2, 1.3, 0.8, 0.4, cumulative 16.8"

### Structural reform priorities and productivity
- Productivity concerns:
  - Labor productivity growth "has slowed and has fallen below the OECD median."
  - R&D expenditure declined from "about 3 percent of GDP in 2010 to less than 2.5 percent of GDP in 2019."
  - Closing the gap in R&D and ICT investment could raise productivity growth by "about 0.05 to 0.1 percentage point in the medium-term."
- Recommended reforms:
  - "Promoting innovation and competition" — make R&D tax incentive more generous and better targeted; scale up government R&D spending; implement Digital Economy Strategy.
  - "Reducing administrative burden for start-ups", simplify regulations, reform insolvency framework for SMEs, digitize government-business interactions, widen automatic mutual recognition of occupational licenses.
  - Infrastructure: increase spending to close capacity gaps and ensure timely implementation.
  - Tax reforms: shift from direct to indirect taxes (lessen corporate income tax burden, rely more on goods and services tax), consider transition from stamp duty to land tax, replace state-level foreign purchaser duty surcharges with non-discriminatory measures.

### Climate, energy policy, and transition risks
- Targets and investment:
  - Australia committed to "net zero emissions by 2050."
  - Government investment of "$20 billion" to support commercialization of low emissions technologies.
  - Authorities project "a 30 percent decline in emissions by 2030 compared to 2005 levels" (35 percent in a technology-sensitive scenario).
- Policy options and recommendations:
  - Broad-based carbon pricing is presented as the most cost-effective option to achieve emissions reductions and to reduce export risks from carbon border adjustments.
  - If carbon pricing infeasible, alternative regulatory reforms include enhancing the Emissions Reduction Fund’s Safeguards Mechanism and sectoral policies.
  - ASIC can further improve standardized disclosures of exposure to climate-related risks for large, listed companies.
- Financial sector readiness:
  - Guidance on managing financial risks of climate change expected before end-2021; APRA conducting Climate Vulnerability Assessment of large ADIs in 2021-22.

### Financial sector reforms and oversight (FSAP and CFR actions)
- Regulatory reforms:
  - Enhance licensing, supervisory, and enforcement powers of ASIC and the RBA; RBA to be granted crisis management and resolution powers over clearing and settlement facilities.
  - Proposed bank capital framework: increase risk weights for high-risk mortgages, lower risk weights for SMEs, set CCyB default level above zero, raise capital conservation buffer for IRB banks, introduce a capital floor for IRB banks, simplify framework for smaller banks.
  - New regulations on superannuation funds; APRA guidance on climate risk management; Council of Financial Regulators established cyber resilience framework; open banking initiative advanced; AML/CFT reforms in process.
- FSAP/Annex V recommendations (selected in-process actions and time frames):
  - Strengthen independence and funding autonomy of APRA and ASIC — "In process."
  - Enhance APRA supervisory approach and stress testing — "In process."
  - Improve data collection and APRA Connect launched September 2021 — "In process."
  - Complete resolution policy framework and expand loss-absorption capacity — "In process."
  - Expand AML/CFT coverage to DNFBPs and strengthen enforcement — "In process."

### Social policy, labor market, and inequality
- Labor market and ALMPs:
  - Active labor market policies remain important to support vulnerable groups, notably "15–34-year-olds and casual workers."
  - Recommend review and possible reinstatement of JobMaker Hiring Credit if recovery is slow; scale up career support and training programs.
- Social policy measures:
  - Increased funding for aged care and the National Disability Insurance Scheme; reforms to childcare subsidy to promote female labor force participation; gender budget released.
  - JobTrainer Fund targets youth and unemployed offering free or low-fee courses in shortage areas.
- Inequality metrics and pandemic impact:
  - Income inequality "stabilized after 2005-06 at levels slightly above the OECD average."
  - Aggregate participation rate rose "2.3 percentage points (1990–2019)."
  - Gender participation gap "about 10 percentage points in 2019."
  - Female participation (age 55–64): "25 percent in 1990; 61 percent in 2019."
  - Pandemic policy response likely limited impact on income inequality; vulnerable groups initially hit hard but recovered before recent lockdowns.

### Recommendations and priorities (staff appraisal)
- Macro stance:
  - "Fiscal and monetary policies should remain accommodative and agile."
  - Additional targeted fiscal support should be deployed if downside risks materialize; fiscal space available.
  - Contingent support: "Additional fiscal and monetary support should be deployed if easing of the new lockdowns is delayed."
- Monetary policy sequencing:
  - "Monetary policy should be data-dependent"; normalization likely to entail further tapering and ending asset purchases before raising policy rate, and eventually unwinding asset holdings.
  - RBA has scope to expand asset purchases, reinstate term funding facilities, and/or introduce negative rates if downside risks materialize; negative rates are least preferred by authorities.
  - Recommend review of the monetary policy framework.
- Housing and macroprudential:
  - Monitor lending standards; further macroprudential tightening may be warranted (DTI and LVR restrictions) if housing debt outpaces income growth and price rises increase mortgage riskiness.
  - Supply-side reforms critical: planning, zoning, infrastructure incentives to local governments, promote flexible work arrangements, targeted fiscal support for low-income households, expand social housing, tax reforms to discourage leveraged housing investment.
- Structural and climate priorities:
  - Implement integrated climate policy framework to meet net zero by 2050; consider broad-based carbon pricing or alternative sectoral/regulatory measures.
  - Advance deregulation, digital economy, competition, SME financing, and innovation to reignite productivity growth.
  - Consider rebalancing tax system away from direct taxes toward indirect taxes while offsetting distributional effects.

*IMF staff report excerpt — 1ausea2021001.*

### 3.5 and 4.1 percent in 2021 and 2022, respectively. With the anticipated recovery from

### 1ausea2021001 - 3.5 and 4.1 percent in 2021 and 2022, respectively. With the anticipated recovery from

### Outlook and inflation
- Growth: "3.5 and 4.1 percent in 2021 and 2022, respectively."
- Inflation: "With the anticipated recovery from the lockdowns, underlying inflation should rise gradually toward the mid-point of the 2-3 percent inflation target range."
- Risks: "Given the unpredictable trajectory of the pandemic, risks are tilted to the downside in the near term, but broadly balanced beyond that."

### Policy recommendations
- Macroeconomic policy
  - "Macroeconomic policies should remain appropriately accommodative and agile in the context of a quickly evolving economic environment."
  - Fiscal policy: "Fiscal policy should continue to support vulnerable households and affected businesses as needed and, in case downside risks materialize, consider additional stimulus to soften the pace of planned consolidation."
  - Monetary policy: "Monetary policy should be data-dependent, calibrating the pace of normalization to the strength of the expected recovery and inflation."
- Macroprudential policy
  - "Macroprudential policy should continue to focus on financial risks from surging house prices and elevated household debt."
  - "Additional tightening should be considered if risks continue to build."
- Structural policy priorities
  - "Promoting innovation and competition"
  - "Supporting housing affordability"
  - "Reducing uncertainty in climate change mitigation policies"
  - "Pursuing tax reforms to shift from direct to indirect taxes"

### Recent developments and pandemic impact
- Health and containment
  - "A swift public health response, focused on suppressing infections through testing, contact tracing, social distancing, and tight border restrictions, allowed for fast containment of the two initial COVID-19 waves in 2020 (Box 1)."
- Recovery trajectory
  - "By 2021Q2, output had recovered to well above pre-COVID levels, faster than in most other advanced economies."
- 2021 Delta outbreaks
  - "Renewed outbreaks since June 2021, driven by the highly contagious Delta variant, have proven much harder to contain."
  - Lockdowns affected "more than half of the population" and disproportionately impacted "services and construction."
- Labor market
  - Headline unemployment: "remained low"
  - Alternative measures: "account for a decline in the labor force participation rate and an increase in zero-hours workers, have deteriorated, with long-term unemployment remaining high."
  - Disproportionately affected groups: "Casual jobs, female, youth, and lower-educated workers have been disproportionately affected."

### Fiscal support and public finances
- Scale of stimulus: "about 20 percent of GDP through FY2024/25"
- Initial measures (2020)
  - JobKeeper wage subsidy: "4½ percent of GDP"
  - Nearly "60 percent of the stimulus expired by end-FY2020/21."
  - Fiscal deficit peak: "around 9 percent of GDP."
  - Employers' mandatory pension contribution rate rose from "9.5 to 10 percent in July 2021."
  - Note on superannuation: "The minimum contribution rate (“superannuation guarantee”) is scheduled to further increase in annual increments to 12 percent by FY2025/26."
- 2021H2 support pillars (three pillars)
  - Pillar 1 — COVID-19 Disaster Payment Program
    - Payments by hours lost: (A) "8-20 hours — A$450 per week"; (B) "More than 20 hours — A$750 per week"; (C) "Welfare recipients who lost more than 8 hours — A$200 per week (top up)."
    - Cost sharing: "Commonwealth declared hotspots — The Commonwealth Government covers the full payments. Outside hotspots: The state or territory government of the jurisdiction covers the payments."
  - Pillar 2 — State-Administered Business Support Programs
    - Eligibility: "Varies across the programs and is generally anchored on declines in turnover."
    - Example: JobSaver (NSW) "requires maintaining staffing levels as of July 13, 2021"
    - Payments and cost sharing: "Vary by the jurisdiction"; "The Commonwealth Government provides joint funding for the cost of the programs agreed with the respective state or territory governments."
  - Pillar 3 — Pandemic Leave Disaster Payment Program
    - Eligibility: "Individuals who cannot earn income because they must self-isolate, quarantine, or care of someone with COVID-19."
    - Payments: "A$1,500 for each 14-day period."
  - Phase-out: "At end-September 2021, the Commonwealth Government announced to phase out the support programs as the full vaccination rate reaches 70-80 percent targets in affected regions. The Pandemic Leave Disaster Payment program will continue until end-June 2022."

### Monetary policy and liquidity measures
- Cash rate and unconventional tools
  - Cash rate target: "cut the cash rate target from 0.75 to 0.1 percent in March-November 2020"
  - Yield target: introduced a "3-year yield target"
  - Term Funding Facility (TFF): offered banks up to "A$213 billion (9.7 percent of GDP) in three-year funding"
  - Asset purchases: "assets worth A$230 billion, or 11.7 percent of GDP, have been purchased to date"; weekly purchases "tapered from A$5 billion to A$4 billion"
  - TFF drawdown period: "expired in June 2021"
  - Yield target removal: "the yield target was abandoned in November 2021"
- Effects: "These measures compressed bond yields and led to significant reductions in firms’ and households’ borrowing costs."

### Prudential, banking sector, and housing developments
- Prudential measures
  - APRA actions: "introduced regulatory support for temporary loan deferrals, maintained the counter-cyclical capital buffer (CCyB) at zero, and imposed temporary bank dividend payment restrictions."
  - Basel III reforms: "postponed to January 2023."
  - Loan deferrals: "Most loans resumed payments by the deferral program’s end in March 2021." Deferrals reinstated "during July-September 2021 with loan deferrals for up to three months" with "limited" take-up.
- Banking sector metrics
  - Tier-1 capital ratio: increased from "13.2 percent pre-COVID to 14.6 percent in June 2021."
  - Non-performing loan ratio: "remains low at 1.1 percent."
  - Mortgage concentration: "mortgages accounting for 63 percent of bank loan portfolios."
- Housing market
  - Price rebound: "21.6 percent y/y in October 2021"
  - Drivers: "low mortgage rates, the fast economic recovery, HomeBuilder grants to eligible owner-occupiers (with caps on income and house prices), government income transfers, and temporary stamp duty exemptions in a few states."
  - Demand shift: "The pandemic has strengthened housing demand outside of major cities and for single-family houses."

*IMF staff report, November 5, 2021.*

### 9.      The external position in 2020 was broadly in line with fundamentals and desirable

### 9.      The external position in 2020 was broadly in line with fundamentals and desirable policies

### External position and recent developments
- The current account (CA) balance surged to 2.7 percent of GDP in 2020 on pandemic-related temporary factors (lower income payments on external liabilities and an improved travel balance).
- The exchange rate:
  - First depreciated and then recovered in 2020H1, reflecting global risk aversion.
  - Continued to appreciate in the second half of 2020, supported by the strong domestic recovery.
- Commodity price effects and 2021H1 outcomes:
  - A sharp rise in commodity prices led to a further increase in the CA surplus to 3.7 percent of GDP in 2021H1 and supported the exchange rate.
- Recent pressures:
  - Renewed lockdowns, a decline in Australian yields relative to other advanced economies, and lower iron ore prices have put downward pressure on the Australian dollar in recent months.
- SDR allocation:
  - The new SDR allocation is SDR 6.3 billion, about 0.5 percent of GDP, and will likely be held as international reserves or channeled to vulnerable countries.

### Outlook and near-term macro projections
- Growth:
  - GDP is projected to grow by 3.5 percent in 2021 and 4.1 percent in 2022.
- Recovery drivers:
  - Accelerated national vaccination campaign in 2021Q3 and a shift toward opening up and living with COVID-19 once vaccination milestones are met.
  - As restrictions are eased, household consumption is expected to strengthen, with savings declining.
  - Large-scale tax incentives (temporary full expensing with loss carry-back) are envisaged to stimulate business investment.
  - Border reopening will support tourism and education exports, though some Australian private demand will be diverted to tourism imports.
- Inflation:
  - Underlying inflation is expected to increase gradually, remaining within the 2-3 percent inflation target range.
  - Headline inflation pushed to the top of the target range by base effects from temporary free childcare in 2020, a rebound in fuel prices, and supply disruptions.
  - The spike in headline inflation is expected to be temporary; measures of underlying inflation have remained significantly lower.
  - With some increase in inflation expectations and the anticipated recovery from lockdowns, underlying inflation is projected to rise gradually toward the mid-point of the RBA target range.
- Labor market:
  - Relatively quick recovery anticipated in the labor market, reflecting continued high underlying labor demand as evidenced in the high volume of job advertisements.

### Balance sheets, insolvency risk, and population effects
- Balance sheets:
  - Household net wealth and corporate profits have increased, supported by fiscal stimulus and the strong recovery through 2021Q2.
  - Firms’ leverage ratios have declined as new equity issuance was facilitated by temporary capital-raising measures.
  - Business insolvency rate dropped sharply during the pandemic due to temporary support measures but is likely to increase, particularly for SMEs in hard-hit sectors, as these measures expire.
- Migration and potential output:
  - Collapsed immigration flows (which typically account for about 60 percent of population growth) mean the working age population is expected to remain well below pre-pandemic projections, reducing production capacities.
  - The loss in per capita output is expected to be limited, given the projected strength of the economic recovery and the pandemic’s limited impact on corporate balance sheets.

### Risks to the outlook
- Near-term downside risks:
  - Pandemic risks, with the Delta variant posing challenges in Australia and elsewhere.
  - Prolonged global supply chain disruptions.
  - Tightening of global financial conditions.
  - Geopolitical tensions.
  - A housing market correction.
  - Climate-related risks.
  - Risks from trade restrictions by China.
- Upside risks:
  - Faster recovery in household consumption and business investment, supported by strong household and business balance sheets.
  - A rise in commodity prices.
- Overall tilt:
  - Risks to the outlook are tilted to the downside in the near term, but broadly balanced beyond that.

### Authorities’ views (summarized)
- The authorities broadly agreed with staff’s assessment that the economy would recover relatively quickly as restrictions are lifted and noted high uncertainty around the near-term outlook.
- They emphasized that the slowdown in population growth due to border restrictions will likely have a sizeable impact on potential output in the near and medium term.
- The RBA expected a gradual pick-up in underlying inflation in its central scenario, given that wage growth remained weak despite labor market tightening before the recent lockdowns.
- Authorities concurred that movements in the Australian dollar were in line with interest rate differentials between Australia and other major economies and commodity price developments.
- They stressed that aggregate household and firm balance sheets strengthened as a result of policy responses and that the financial system remained resilient.

### Staff views and policy recommendations
- Fiscal and monetary stance:
  - Fiscal and monetary policies should remain accommodative and agile.
  - Last year’s large-scale fiscal support strengthened household and business balance sheets and will support private demand as current lockdowns and related uncertainty ease.
  - The newly added fiscal measures further soften the pace of policy support withdrawal in the current fiscal year and will bolster the expected recovery; this fiscal path seems appropriate.
- Contingent support:
  - Additional fiscal and monetary support should be deployed if easing of the new lockdowns is delayed to an extent that endangers the expected recovery.
- Fiscal policy recommendations:
  - Fiscal policy should continue to support vulnerable households and businesses.
  - The COVID-19 Disaster Payment program and business support grants provide appropriately targeted support and function like automatic stabilizers.
  - With accelerated vaccinations, the Commonwealth Government announced a sunset clause to phase out the support programs, contingent on full vaccination rates reaching 70-80 percent targets.
  - If economic or health downside risks materialize, the authorities should provide additional targeted fiscal support, including reorienting the automatic stabilizers, with discretionary support for businesses contingent on maintaining employment relationships.
  - Fiscal policy should ensure a durable transition from public to private demand in FY2022/23; timing and pace of future consolidation should be calibrated to the strength of the underlying economic recovery and communicated to reduce policy uncertainty.
- Labor market policies:
  - Active labor market policies (ALMPs) remain important to support vulnerable groups disproportionately affected by the pandemic (notably 15–34-year-olds and casual workers).
  - Review and reinstate the JobMaker Hiring Credit program, particularly if the labor market recovery is slow, to incentivize take-up and increase employment and skill development for retention.
  - Scale up programs for career support to find jobs and acquire training where needed.
- Monetary policy recommendations:
  - Monetary policy should remain data-dependent in a highly uncertain environment.
  - Accommodative policy settings are important during lockdowns and the ensuing recovery.
  - Sequence of normalization should likely entail further tapering and ending asset purchases before raising the policy rate, and eventually unwinding asset holdings.
  - Clear communication stressing state-contingency of forward guidance will be important for a smooth transition.
  - If stronger-than-expected underlying inflation and/or economic activity occurs, monetary stimulus should be withdrawn more quickly than implied under the baseline.
  - If downside risks materialize, the RBA has space to provide additional support by expanding asset purchases, reinstating term funding facilities, and/or introducing negative rates.
  - A review of the monetary policy framework would be good practice to ensure the RBA’s framework remains up to date.

*Source: IMF staff report excerpt — "9. The external position in 2020 was broadly in line with fundamentals and desirable policies."*

### 24.      The authorities underscored that fiscal policy needs to remain accommodative and

### 1ausea2021001 - 24.      The authorities underscored that fiscal policy needs to remain accommodative and

### Fiscal policy stance and evaluation
- Fiscal policy needs to remain accommodative and state dependent.
- Sizable fiscal stimulus helped maintain jobs, safeguard wellbeing during the height of the pandemic, and steer the economy back quickly and strongly.
- Fiscal policy was seen as appropriately targeted to support vulnerable households and businesses.
- New fiscal measures in response to the Delta variant in 2021H2 functioned like automatic stabilizers and were assessed as providing appropriate support.
- The announced plan to phase out the new fiscal measures contingent on vaccination progress was seen as appropriate to help anchor public expectations.
- Remaining fiscal measures through FY2024/25 were viewed by the authorities as broadly appropriate to underpin the recovery.

### Labor market policies and outcomes
- Labor market disruptions were seen as less severe than initially feared, with ALMPs playing important complementary roles to limit scarring risks.
- The JobKeeper program was emphasized as important in limiting output and job losses during the 2020 outbreaks.
- After a swift labor market recovery through 2021Q2, the impact of new lockdowns was less severe but uneven across states and businesses.
- Authorities stressed continued implementation of existing, targeted ALMPs, including apprenticeship and training subsidies and tailored support for job seekers.
- Authorities underscored the importance of closely monitoring ALMP effectiveness and readiness to strengthen them if needed to support an inclusive recovery.

### Fiscal strategy and buffers
- The Commonwealth Government aims to rebuild fiscal buffers only once the economic recovery is well secured.
- Fiscal strategy: achieve a secure economic recovery and an unemployment rate back to pre-crisis levels or lower before rebuilding policy buffers.
- Authorities will not mechanically assess the unemployment rate alone in implementing the strategy.
- Authorities concurred with staff that the Commonwealth Government maintains substantial fiscal space and additional stimulus can be deployed if downside risks materialize in the living-with-COVID-19 environment.
- Most state/territory and local governments aim to return to operating surplus by FY2023/24; the Commonwealth Government expects a longer path to a balanced budget with more gradual withdrawal of underlying fiscal stimulus.

### Monetary policy (RBA)
- The RBA emphasized that monetary policy would remain accommodative.
- The RBA stressed that wage growth had remained sluggish and inflation was not expected to be sustainably in the target range before 2024 in its central scenario.
- The RBA concurred there is unusually high uncertainty around the virus trajectory and persistence of international supply bottlenecks.
- The RBA will continue to emphasize state dependency of its forward guidance but noted public focus on calendar-based implications.
- If downside risks materialize, the RBA maintained scope for further policy accommodation, potentially including additional asset purchases and further provision of term funding.
- Negative interest rates were seen as the least preferred option.
- Conversely, if underlying inflation rises faster than expected, the RBA was prepared to reduce monetary stimulus faster than assumed under the central scenario.
- Authorities were open to reviewing the monetary policy framework in light of fast-changing global and domestic macroeconomic settings; a decision on a review would be made by the Commonwealth Government.

### Enhancing financial sector resilience — reforms approved and in progress
- Government approved major financial market infrastructure reforms to enhance licensing, supervisory, and enforcement powers of ASIC and the RBA.
- The RBA will be granted crisis management and resolution powers over Australian clearing and settlement facilities.
- Authorities are revising the bank capital framework to make it more flexible, risk-sensitive, and competition-enhancing:
  - Proposed framework will increase risk weights for high-risk mortgages and lower risk weights for SMEs to address concentration risks in mortgages.
  - Under the proposed framework, the CCyB’s default level will be set above zero.
  - The capital conservation buffer for internal ratings-based (IRB) banks will be raised.
  - A capital floor for IRB banks will be introduced and a simplified regulatory framework applied to smaller banks.
- New regulations introduced on superannuation funds to improve efficiency, transparency, and accountability.
- APRA released guidance on managing financial risks of climate change (governance, risk management, scenario analysis, disclosure) and is conducting vulnerability assessments of climate risks for large banks.
- The Council of Financial Regulators established a new framework for financial institutions’ cyber resilience.
- Open banking initiative initiated, allowing customers to transfer bank data to third parties.
- Efforts were taken to strengthen the AML/CFT regime, including reforming the AML/CFT Act.

### Staff assessment of financial reforms
- Proposed bank capital framework could lean against banks’ concentration in housing loans, facilitate SME lending, and enhance competition.
- Financial market infrastructure reform strengthens regulation, supervision, and crisis management.
- Initiatives on climate and cyber issues are welcome given rising related risks.
- Superannuation reform will strengthen industry efficiency and consumer focus.
- AML/CFT measures are welcome, though staff noted a need to further expand coverage to include non-financial and business professionals, such as accountants, lawyers, and real estate agents.

### Housing risks, credit trends, and affordability metrics
- Housing affordability has deteriorated; housing price-to-income and price-to-rent ratios have risen and exceed pre-COVID peaks.
- Affordability gap has widened.
- Housing credit growth accelerated, reaching 6.5 percent (y/y) in September, driven by owner-occupiers (8.7 percent), with investor loans picking up from a low base (2. 4 percent).
- Risk profile of new loans is deteriorating: share of borrowers with high debt-to-income ratios surged from 16 percent pre-COVID to 22 percent.
- About 70 percent of mortgages are at variable rates, exposing borrowers to rate increases with expected monetary policy normalization.

### Macroprudential response and recommendations
- In October 2021, APRA raised the minimum serviceability buffer from 2.5 to 3 percent, requiring lenders to use the higher interest rate spread in assessing borrowers’ ability to service mortgage loans.
- Staff view: recent tightening of macroprudential policy is appropriate; additional measures should be considered if financial-stability risks continue rising.
- Further macroprudential tightening may be warranted if housing debt outpaces income growth and housing price rises increase mortgage lending riskiness.
- Possible additional measures:
  - Instituting portfolio restrictions on debt-to-income (DTI) and loan-to-value ratios (LVR).
  - DTI restrictions likely more effective in curbing investor demand.
  - LVR restrictions would affect more liquidity-constrained owner-occupiers, particularly first home buyers.
- Lending standards should be monitored closely given rising high debt-to-income mortgages and investor demand pickup.

### Housing supply and structural reforms to improve affordability
- Supply-side reforms are critical: more efficient planning, zoning, and better infrastructure could improve housing supply.
- Commonwealth and state/territory governments should consider providing more financial incentives for local governments to streamline zoning regulations and improve infrastructure.
- Promoting flexible work arrangements could allow workers to move away from capital cities, improving affordability.
- Governments should focus on providing targeted fiscal support for low-income households and expand social housing.
- Tax reforms could discourage leveraged housing investment.

### Authorities’ views on housing and policy tools
- Authorities stressed rising risks in home lending motivated recent macroprudential tightening.
- They noted lending standards have generally remained prudent but rapid credit growth outpacing household income could build vulnerabilities.
- Authorities will closely monitor residential mortgage lending trends and are prepared to take further measures if needed.
- Confirmed other policy instruments, including DTI and LVR restrictions, could be deployed if necessary.
- Authorities viewed tax policy as not the right tool to address potential speculative behavior (negative gearing and capital gains tax discount apply across investments).
- Authorities agreed housing supply reform is important and noted Commonwealth funding to support state and local governments in infrastructure provision; more could be done to promote zoning and planning reforms.
- Additional targeted support for low-income households and adequate provision of social housing were considered important.

### Promoting high, sustainable, and inclusive growth — productivity and reforms
- Continued structural reforms are essential to tackle the longstanding productivity slowdown and ensure an inclusive recovery.
- Australia compares favorably to peers on product market efficiency and has an open trade environment, but productivity growth slowed significantly pre-pandemic, falling below the OECD average.
- Productivity-enhancing investments have declined and measures of competition have deteriorated.
- Income inequality is slightly above average among advanced economies; pandemic policy response likely limited its impact.
- Wealth inequality has been lower than peers but likely to rise with the housing boom.

### Energy, climate policy, and emissions
- Australia announced a net zero emissions target for 2050 in October 2021.
- Emissions intensity remains one of the highest among advanced economies; coal accounts for about half of electricity production.
- Authorities’ projections indicate Australia will meet its Paris Agreement mitigation target for 2030 under current policies (authorities project a 30 percent decline in emissions by 2030 compared to 2005 levels; a 35 percent decline in a technology-sensitive scenario), though independent assessments show some uncertainty.
- Authorities favor a technology-based approach to reducing emissions rather than a broad-based carbon price.

### Staff views on innovation, competition, infrastructure, and tax reform
- Priorities to raise medium-term growth:
  - Innovation and digitalization: recent reform to make the R&D tax incentive more generous is welcome; better targeting to young firms and reducing administrative burden could further boost innovation; scope to scale up government R&D spending and incentivize university-business collaboration; swift implementation of the Digital Economy Strategy to build skills and infrastructure for SMEs and regions.
  - Competition: streamline administrative burdens on start-ups; simplify regulations; reform insolvency framework for SMEs; digitize government-business interactions; implement and widen automatic mutual recognition of occupational licenses across jurisdictions; reduce financing constraints for SMEs and promote venture capital.
  - Infrastructure: increased infrastructure spending will help close the gap; priority is to overcome capacity constraints for timely implementation.
- Tax reforms can promote efficiency:
  - Longstanding recommendation: reduce relatively high share of direct taxes by lessening the corporate income tax burden and relying more on indirect taxes, especially the goods and services tax, to improve tax system efficiency without reducing aggregate revenues.
  - Make reform less regressive through targeted cash transfers.
  - Transition from housing transfer stamp duty to a land tax to promote labor mobility and provide a more stable revenue stream for states and territories.
  - Replace state-level foreign purchaser duty surcharges with alternative, non-discriminatory measures, such as a general surcharge on vacant property or surcharges on all investor-owned housing transactions.

*Source: IMF staff report material contained in the provided PDF content unit.*

### 43.      Australia’s efforts to support the rules-based international trading system are

### 43.      Australia’s efforts to support the rules-based international trading system are welcome.

### Trade policy and foreign direct investment (FDI)
- Australia has strengthened its network of multilateral and bilateral free-trade agreements and provides strong support for the WTO to buttress the rules-based international trading system.
- The Foreign Investment Reform (Protecting Australia's National Security) Act 2020 introduced a new national security test requiring approval for foreign investments in ‘sensitive national security business’ regardless of the value of the investment.
- The issuance of guidance for implementing the new FDI framework and the authorities’ intention of judicious use of this policy are expected to help ensure that the FDI approval process remains simple and transparent.

### Labor market, social policy, and education
- Government initiatives to tackle inequities include increased funding for aged care and the National Disability Insurance Scheme, reforms to the childcare subsidy to promote female labor force participation, and a released gender budget aimed at reducing gender gaps.
- Recommendations to ensure an inclusive recovery:
  - Strengthen active labor market policies to support disproportionately affected groups, including the underemployed, the long-term unemployed, and casual workers.
  - Enhance programs for retraining, career support, and job search.
  - Continue education sector reforms to improve education outcomes which have deteriorated in recent years and ensure equal opportunities.
- Authorities’ notes:
  - Income levels of the lower quartiles increased in 2020 due to government support.
  - Policies assisting disadvantaged groups include more generous wage subsidies through the JobActive Program, greater funding for training and apprenticeships, and planned reform of employment services.
  - Ongoing review into teacher education and increased funding for education.

### Climate change policy and low-emissions investment
- Australia committed to net zero emissions by 2050.
- Achieving net zero will require:
  - Strong policy ambition and credible medium-term targets consistent with the net zero goal.
  - A comprehensive policy package and increased investment in the development of low-emissions technologies.
- Policy recommendations and considerations:
  - Implementing broad-based carbon pricing, along with measures to mitigate transition risks for impacted industries and regions, would be the most effective way to achieve emissions reductions and complement the investment strategy; it would also minimize risks to Australian exports from carbon border adjustments.
  - If political constraints preclude a broad carbon price, consider alternative regulatory reforms such as enhancing the Emissions Reduction Fund’s Safeguards Mechanism and employing sectoral policies aimed at reducing emissions in energy generation, transportation, and agriculture.
  - ASIC can further improve standardized disclosures of exposure to climate-related risks for large, listed companies to facilitate assessment of climate and transition risks and foster better allocation of capital.
- Authorities’ approach:
  - Emphasis on a technology-based approach and the Technology Investment Roadmap as the cornerstone of the strategy to 2030.
  - Confident of achieving the 2030 target and highlighted fast rollout of renewable energy, especially small and mid-scale solar installation.

### Authorities’ views on productivity, competition, and tax reform
- Authorities agree on the need to reignite productivity growth by enhancing competition and innovation.
  - Noted that unlike R&D spending, broader measures of innovation activity have not declined in Australia.
  - Newly introduced Patent Box will promote innovation.
  - Ongoing review of administration of the R&D tax incentive will identify ways to reduce compliance costs.
  - Progress through the Digital Economy Strategy and whole-of-government deregulation agenda.
  - Initiatives to facilitate SME lending include SME Recovery Loan Scheme, Business Growth Fund, lowering risk weights on SME loans, and Venture Capital Limited Partnership to encourage venture capital funding.
- Tax reform constraints:
  - Any change to the GST requires the support of all states and territories.
  - Legislation to lower the corporate tax rate for large firms had failed to pass in parliament.
  - State governments generally supportive of shifting from stamp duties to land taxes but concerned about significant near-to-medium term revenue losses.

### Macroeconomic outlook and policy advice (Staff appraisal)
- Near-term outlook and uncertainty:
  - Amid high uncertainty, Australia’s economy is expected to begin recovering from recent lockdowns.
  - The economy is projected to recover from a marked decline in activity in 2021Q3 as restrictions ease.
  - Underlying inflation is expected to rise gradually toward the mid-point of the 2-3 percent target range.
  - The outlook remains highly uncertain and contingent on the trajectory of the pandemic, with near-term risks tilted to the downside.
- Fiscal policy:
  - Appropriately accommodative and agile macroeconomic policies should soften the near-term economic impact and lay the foundation for post-lockdown recovery.
  - Fiscal and monetary support should stay nimble; additional coordinated stimulus should be provided if downside risks materialize.
  - Substantial fiscal space is available to implement further stimulus if downside risks materialize.
  - Authorities are phasing out pandemic-triggered automatic stabilizers as vaccinations accelerate, but should stand ready to implement additional fiscal support as needed.
- Monetary policy:
  - Monetary policy should remain data-dependent.
  - Recent steps toward policy normalization (tapering bond purchases, expiry of the TFF drawdown period, abandoning the yield target) have been appropriate.
  - Timing and pace of further policy normalization should be gradual and well-sequenced in line with recovery and expected inflation; forward guidance should stress state-contingency.
  - If inflationary pressures become more persistent, earlier tightening would be warranted; if downside risks materialize, the RBA has sufficient policy space to deploy additional support.
- Financial sector and macroprudential policy:
  - APRA’s proposed revisions to the bank capital framework will make it more flexible and risk-sensitive while supporting competition and addressing banks’ high concentration in mortgage lending.
  - Recent reforms in financial market infrastructure enhance resilience.
  - Continued efforts needed on climate and cyber risks.
  - AML/CFT framework should be further strengthened by expanding coverage to relevant non-financial and business professionals.
- Housing sector concerns:
  - Surging house prices raise concerns around financial vulnerabilities and housing affordability.
  - The recent increase in the interest serviceability buffer is welcome.
  - Lending standards should be monitored closely; further tightening of macroprudential policy may be needed if risks continue to build.
  - Complementary supply-side reforms recommended: provide more financial incentives to local governments to improve zoning, planning, and infrastructure provision.
  - Recommend more targeted support to low-income households, expansion of social housing, and tax reforms to discourage leveraged housing investment by households.

### Recommendations and priorities
- Implement an integrated, comprehensive climate policy framework; prioritize fast progress within a comprehensive policy framework to meet net zero by 2050.
- Continue advancing the deregulation agenda, support the digital economy, and enhance competition to reignite productivity growth.
- Reduce financing constraints for SMEs and promote innovation, including by overcoming supply constraints to ensure timely implementation of infrastructure projects.
- Consider rebalancing the tax system away from direct taxes towards indirect taxes while offsetting negative distributional effects.
- Continue targeted social measures (childcare subsidies, increased funding for aged care and the National Disability Insurance Scheme) to support an inclusive recovery.
- The next Article IV consultation is recommended to be held on the standard 12-month cycle.

### Boxed findings — Health response and fiscal stimulus
- Health response to COVID-19:
  - Australia implemented strict border closures and mandatory self-isolation/quarantine beginning March 2020; state governments closed non-essential services and used timely lockdowns, large-scale testing, and contact tracing to contain outbreaks.
  - Renewed outbreaks linked to the Delta variant led to prolonged lockdowns in New South Wales and Victoria in mid-2021, disproportionately affecting services (including hospitality) and construction.
  - Vaccination campaign: Vaccination started in late February 2021; accelerated in the third quarter 2021 with 73.4 percent of eligible adults (16+) fully vaccinated, and 86.8 percent having received at least one dose of vaccine as of October 26.
  - Government plans to phase out lockdown measures once 70-80 percent of eligible population are fully vaccinated, in line with the National Plan.
  - New South Wales and Victoria began easing restrictions on October 11 and 21, 2021, respectively, after regional vaccination rates hit 70 percent.
  - On November 1, 2021, international travel restrictions for fully vaccinated Australian citizens and permanent residents were relaxed.
- Fiscal stimulus:
  - Commonwealth, state and territory governments assembled stimulus packages amounting to around 20 percent of 2020 GDP (above the line) in total.
  - Nearly 60 percent of the stimulus (mostly expenditure measures) had been implemented by end-FY2021.
  - New measures implemented in 2021H2 lockdowns equal 1¾ percent of GDP and are anticipated to phase out by end-2021.
  - Remaining support includes revenue measures (3.7 percent of 2020 GDP) and expenditure measures (4¾ percent of 2020 GDP).
  - The Commonwealth provided loan guarantee and recovery loan schemes and other below-the-line financial assistance for SMEs amounting to nearly 2 percent of GDP.
  - Major expired measures included the Coronavirus Supplement, HomeBuilder grants (applications closed April 2021, payments continue until end-April 2023), JobKeeper wage subsidies, and JobMaker Hiring Credit (access closed October 2021, payments continue for 12 months).
  - Remaining major items: retain the low and middle income tax offset (LMITO) until June 2022; temporary full expensing and loss carry-back for businesses; COVID-19 Disaster Payment and Pandemic Leave Disaster Payment programs; wage subsidy for apprenticeships and trainees; vaccination and pharmaceutical benefit programs.

*Source: 1ausea2021001 - 43.      Australia’s efforts to support the rules-based international trading system are*

### Box 3. Key Monetary and Liquidity Facilities Under COVID-19

### Box 3. Key Monetary and Liquidity Facilities Under COVID-19

### Objective and overall approach
- Provide liquidity and support market functioning; provide dollar liquidity to financial institutions; provide stable and low-cost funding to banks to reduce the cost of borrowing for businesses and households, and encourage business lending, in particular to SMEs; anchor the 3-year government bond yield to lower the borrowing cost for businesses and households; lower longer-term interest rates and the exchange rate; anchor interest rate expectation in the medium-term to lower the borrowing cost for businesses and households.

### Open Market Operations (OMO)
- Objective: Provide liquidity and support market functioning.
- Terms and Duration:
  - Open market operations expanded in size and to longer-term tenors, with the range of eligible collaterals broadened.

### FX Swaps
- Objective: Provide dollar liquidity to financial institutions.
- Terms and Duration:
  - Temporary FX swap line between RBA and US Federal Reserve, allowing RBA to access up to $60 bn and lend to financial institutions via repo.

### Term Funding Facility (TFF)
- Objective: Provide stable and low-cost funding to banks to reduce the cost of borrowing for businesses and households, and encourage business lending, in particular to SMEs.
- Terms and Duration:
  - A$213 billion of three-year funding with the drawdown expired in June 2021, priced at 0.1 percent (0.25 percent before November 2020).

### 3-Year Yield Target
- Objective: Anchor the 3-year government bond yield to lower the borrowing cost for businesses and households.
- Terms and Duration:
  - The 3-year government yield target was set at 0.25 percent in March 2020 and lowered to 0.1 percent in November 2020.
  - In July 2021, the target was changed from applying to the bond closest to 3-years maturity to being fixed at the April 2024 bond, with the implied maturity of the yield target declining over time.
  - Government bonds purchased in the secondary market as required to support the target and, in the early stages of the pandemic, to address dislocations in government bond markets.
  - The yield target was abandoned in November 2021.

### Bond purchase program
- Objective: Lower longer-term interest rates and the exchange rate.
- Terms and Duration:
  - Outright purchase of A$200 bn of government bonds (including state and territory governments) of around 5-10 year maturity in the secondary market from November 2020 until September 2021, extended to mid-February 2022 with weekly purchase tapered from A$5bn to A$4bn.

### Forward Guidance
- Objective: Anchor interest rate expectation in the medium-term to lower the borrowing cost for businesses and households.
- Guidance details:
  - Cash rate will not be hiked until actual inflation is sustainably within the 2-3 percent target, with the central forecast for underlying inflation being no higher than 2½ percent by end-2023.

*Source: RBA.*

### Box 8. Australia’s Productivity Slowdown

### Box 8. Australia’s Productivity Slowdown

### Overview
- Labor productivity growth in Australia has slowed and has fallen below the OECD median.
- The slowdown has been broad-based, with productivity growth in many sectors decreasing.
- Both lower total factor productivity (TFP) growth and a smaller contribution from capital deepening (as investment rates have fallen) have contributed to the decline in productivity growth.

### Drivers: Investment and Innovation
- Productivity-enhancing investments, especially in R&D and information and communication technologies (ICT), have declined.
- R&D investments:
  - R&D expenditure declined from about 3 percent of GDP in 2010 to less than 2.5 percent of GDP in 2019, falling below the OECD median.
  - While R&D expenditure by universities has been maintained and remains comparable to peers, lower spending by businesses and the government drove the decline.
- ICT investment has also fallen below the OECD median.
- Some broader measures of innovation, such as the share of firms undertaking innovative activities, have performed better.

### Empirical Quantification of Impact
- Empirical analysis using cross-country industry level data suggests that R&D and ICT investment are especially beneficial for productivity growth.
- Closing the gap between Australia and the OECD median in these investment categories can be associated with an increase in productivity growth of about 0.05 to 0.1 percentage point in the medium-term.

### Competition and Market Structure
- Measures of competition have weakened in Australia, broadly in line with global trends.
- Estimates of markups and market concentrations have trended upwards in recent years.
- Rates of firm entry and exit remain below pre-GFC levels.
- De-jure measures of product market regulation suggest scope for reducing the administrative burden for start-ups and simplifying regulatory procedures to support better resource allocation and productivity growth.

### Other Contributing Factors
- Spillovers from weak global productivity growth may be affecting Australia.
- Financial constraints for SMEs have been a long-standing concern, potentially preventing productive firms from growing.
- Infrastructure gaps have been large, though the recent step up in public spending should help close the gap.
- Given the growing share of non-market services (for example, health care, education), enhancing their productivities will be essential.

*Based on an accompanying Selected Issues Paper by Y. Kido and S. Kothari, "Reigniting Productivity Growth in Australia."*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall assessment
- The external position in 2020 was broadly in line with the level implied by medium-term fundamentals and desirable policies.
- The increase in the CA surplus recorded in 2020 reflects in large part temporary factors associated with the COVID-19 shock.
- While considerable uncertainty remains, the CA is expected to return to a deficit in the medium term as domestic demand picks up and temporary factors unwind.

### Potential policy responses
- Policies that promote domestic demand can contribute to maintaining the current account balance close to its norm.
- The substantial monetary policy easing and fiscal stimulus implemented in response to the COVID-19 shock were appropriate to support the economy and protect vulnerable households and firms.
- Policy priority ahead: maintain adequate policy support until the recovery is firmly entrenched.
- Continued accommodative fiscal and monetary policy stance will support domestic demand and contribute to the narrowing of the CA surplus while keeping the external position in line with fundamentals.

### Foreign asset and liability position and trajectory
Background and structure:
- Australia’s NIIP declined to −54.3 percent of GDP in 2020 from −46.8 percent of GDP in 2019 as valuation changes from the Australian dollar’s appreciation offset the effect of the CA surplus.
- Nearly one-half of Australia’s gross liabilities are debt obligations; more than one-half of the liabilities are denominated in domestic currency, while assets are in foreign currency.
- Foreign liabilities composition: about one-quarter FDI, one-half portfolio investment (principally banks’ borrowing abroad and foreign holdings of government bonds), and one-quarter other investments and derivatives.

Assessment:
- The NIIP level and trajectory are sustainable.
- The structure of Australia’s external balance sheet reduces vulnerability associated with its high negative NIIP.
- With a positive net foreign currency asset position, a nominal depreciation tends to strengthen the external balance sheet, all else equal.
- The banking sector’s net foreign currency liability position is mostly hedged; the maturity of banks’ external funding has lengthened since the global financial crisis.
- The Term Funding Facility implemented after the COVID-19 shock reduced banks’ dependence on foreign funding.
- Despite the recent increase in debt, the government’s balance sheet remains strong and can provide credible support in a tail risk event in which domestic banks suffer a major loss.

Key statistics (2020, percent of GDP):
- NIIP: −54.3
- Gross Assets: 169.8
- Debt Assets: 46.3
- Gross Liab.: 224.1
- Debt Liab.: 103.9

### Current account
Background:
- Historically run CA deficits, averaging about 3 percent of GDP between 2014 and 2018.
- CA switched to a surplus of 0.7 percent of GDP in 2019 and rose to 2.7 percent of GDP in 2020.
- The 2020 surplus increase largely reflects temporary COVID-19 factors: sharp increase in the primary income balance (an improvement of 1.8 percent of GDP relative to 2019 and the highest-recorded balance as a percent of GDP since the mid-1970s), a collapse in travel services imports (including tourism) while travel services exports declined by less, relatively strong demand for Australian commodities, and an increase in commodity prices of Australia’s main exports late in the year.
- The current account surplus increased further in the first half of 2021, largely reflecting the significant rise in iron ore prices.
- Expectation: CA expected to gradually return to a deficit over the medium term, albeit at a level lower than the historical average.

Assessment and model adjustments:
- EBA model estimates:
  - Cycl. Adj. CA: 2.6 percent of GDP
  - EBA Norm: −0.1 percent of GDP
  - EBA Gap: 2.7 percent of GDP
- IMF staff view warrants two adjustments to the cyclically adjusted CA balance:
  1. COVID-19 adjustment: −0.5 percent of GDP to reflect temporary factors related to the COVID-19 shock, mostly due to an increase in the travel services balance.
  2. Adjustment for temporarily lower dividend payments on FDI and portfolio liabilities: −1.3 percent of GDP.
- Taking these adjustments into consideration, the IMF staff‑adjusted CA gap is in the range of −0.1 to 1.9 percent of GDP, with a midpoint of 0.9 percent of GDP.

Key statistic (2020, percent of GDP):
- CA: 2.7
- Cycl. Adj. CA: 2.6
- EBA Norm: −0.1
- EBA Gap: 2.7
- COVID-19 Adj.: −1.8
- Other Adj.: 0.0
- Staff Gap: 0.9

### Real exchange rate (REER)
Background:
- Australia’s REER depreciated by 0.8 percent in 2020 compared with the 2019 average and is about 5 percent lower than its 2015 level.
- Substantial volatility in 2020: REER depreciated in the first half amid global risk aversion; significant appreciation in the second half, with the fourth quarter of 2020 average REER close to 4 percent higher than fourth quarter 2019 due to rising commodity prices and relatively quicker domestic recovery.
- REER appreciated further in the first half of 2021, but depreciated in recent months amid renewed lockdowns, a decline in Australian yields relative to other advanced economies, and lower iron ore prices.
- As of July 2021 the REER was up by about 5 percent relative to the 2020 average.

Assessment:
- IMF staff CA gap implies a REER gap of −4.5 percent (applying an estimated elasticity of 0.2).
- EBA REER level model points to an overvaluation of 9.8 percent.
- REER index model points to a slight undervaluation of 2.1 percent.
- Overall IMF staff assesses the REER gap to be in the range of −8 to 2 percent, with a midpoint of −3 percent.

### Capital and financial accounts: flows and policy measures
Background:
- Financial account recorded net outflows in 2020, reflecting the sizable CA surplus.
- Net FDI inflows continued (though at lower levels amid the COVID-19 shock) and were offset by net portfolio outflows (mainly reflecting outflows from the financial sector as banks replaced foreign borrowing with funding from the central bank using the Term Funding Facility), other net outflows, and derivative outflows (net outflows of about 1.2 percent of GDP).
- Net outflows continued in the first half of 2021, with large net equity outflows offsetting continued FDI inflows.

Assessment:
- Vulnerabilities related to the financial account remain contained, supported by a credible commitment to a floating exchange rate.

### FX intervention and reserves level
Background:
- The currency has been free floating since 1983.
- The central bank has not intervened in the FX market since the global financial crisis.

Assessment:
- Authorities are strongly committed to a floating regime, which reduces the need for reserve holdings.
- Although domestic banks' external liabilities remain sizable, they are either in local currency or hedged, so reserve needs for prudential reasons are limited.

*International Monetary Fund — Annex I. External Sector Assessment*

### 7.      Alternative scenarios. Under the  historical scenario, gross public debt continues to increase

### 1ausea2021001 - 7. Alternative scenarios. Under the historical scenario, gross public debt continues to increase

### Alternative scenarios — key findings
- Historical scenario characteristics:
  - Captures underlying macroeconomic developments during 2011-2020 and is characterized by low productivity growth.
  - Assumes a high real interest rate, up by 220 basis points from the baseline over the medium term.
  - Although the average primary deficit is somewhat lower than in the baseline, debt servicing costs and gross financing needs continue to increase over the projection horizon due to the interest rate-growth differential.
- Constant primary balance scenario:
  - If governments maintained stimulus measures without winding them down (as assumed under the constant primary balance scenario), gross public debt and financing needs would continue to grow more acutely than in the historical scenario.
- Underlying Assumptions (Baseline, Historical, Constant Primary Balance — selected rows):
  - Baseline Real GDP growth: 3.5, 4.1, 2.6, 2.6, 2.6, 2.6
  - Historical Real GDP growth: 3.5, 2.1, 2.1, 2.1, 2.1, 2.1
  - Baseline Primary Balance: -7.4, -4.7, -2.2, -1.3, -0.8, -0.4
  - Historical Primary Balance: -7.4, -2.7, -2.7, -2.7, -2.7, -2.7
  - Constant Primary Balance Primary Balance: -7.4, -7.4, -7.4, -7.4, -7.4, -7.4
  - Baseline Effective interest rate: 2.6, 2.6, 2.8, 3.0, 3.0, 3.1
  - Historical Effective interest rate: 2.6, 2.6, 3.2, 3.6, 4.0, 4.2
  - Constant Primary Balance Effective interest rate: 2.6, 2.6, 2.7, 2.8, 2.9, 2.9

### Stress tests — key findings and impacts
- Interest rate shock (single shock):
  - When the real interest rate on new issuance of debt increases by nearly 570 basis points in 2022 and onwards, the gross public debt-to-GDP ratio continues to increase over the medium term.
  - The single interest rate shock adds 6 percentage points of GDP relative to the baseline by 2026.
  - The shock raises debt servicing costs, requiring additional gross financing needs, but remains below the 20-percent-of-GDP threshold used to signal a risk.
- Combined macro-fiscal shocks:
  - When the nearly 570 basis point real interest rate shock is combined with other macro-fiscal shocks (which individually yield benign impacts), propagation is amplified.
  - The combined shock raises gross public debt by 12 percentage points of GDP by 2026 and steepens the trajectory of gross financing needs over the medium term.
- Additional stress-test scenario parameters (Selected outcomes shown in Annex IV. Figure 5):
  - Real Interest Rate Shock — Effective interest rate path (selected years): 2.6, 2.6, 3.8, 4.7, 5.4, 5.9
  - Combined Shock — Effective interest rate path (selected years): 2.6, 2.6, 3.8, 4.8, 5.5, 6.0
  - Public gross financing needs and gross nominal public debt are shown rising under these stress scenarios relative to the baseline (figures presented in the source).

### Baseline projection dynamics — selected statistics and drivers
- Debt dynamics drivers (selected excerpts from projections table):
  - Change in gross public sector debt (cumulative 2019-2026): 2.8, 5.0, 11.1, 4.7, 4.1, 0.8, -0.4, -1.1, -1.4, 6.6
  - Identified debt-creating flows (cumulative 2019-2026): 3.5, 5.4, 11.5, 5.0, 4.4, 1.1, -0.1, -0.8, -1.1, 8.5
  - Primary deficit (percent of GDP, selected years): 2.3, 3.5, 7.6, 7.4, 4.7, 2.2, 1.3, 0.8, 0.4, cumulative 16.8
  - Primary (noninterest) revenue and grants (percent of GDP, selected years): 33.2, 34.0, 35.6, 34.0, 33.1, 33.3, 33.6, 33.8, 33.9, cumulative 201.6
  - Primary (noninterest) expenditure (percent of GDP, selected years): 35.5, 37.6, 43.2, 41.3, 37.8, 35.5, 34.9, 34.6, 34.3, cumulative 218.5
- Automatic debt dynamics contribution (interest rate/growth differential):
  - Interest rate/growth differential contribution (selected years): 0.0, -0.9, 2.2, -3.3, -1.6, -1.2, -1.2, -1.2, -1.1, cumulative -9.5
  - Of which: real interest rate contribution (selected years): 0.8, -0.1, 1.0, -1.4, 0.9, 0.5, 0.5, 0.5, 0.5, cumulative 1.4
  - Of which: real GDP growth contribution (selected years): -0.8, -0.8, 1.1, -1.9, -2.4, -1.6, -1.7, -1.7, -1.6, cumulative -10.9
- Residual including asset changes (selected years): -0.7, -0.5, -0.4, -0.3, -0.3, -0.3, -0.3, -0.3, -0.3, cumulative -1.9

### Risk assessment highlights
- Market-perception and debt-profile indicators (Annex IV. Figure 3) identify vulnerabilities and benchmark thresholds used for risk coloring:
  - Gross financing needs benchmark: 20 percent of GDP (stress outcomes remained below this threshold for the single interest-rate shock).
  - Stress-test color coding: green if benchmark not exceeded under shock or baseline; yellow if exceeded under shock but not baseline; red if exceeded under baseline.
- Evolution of predictive densities shows rising percentiles for gross nominal public debt under baseline and stress distributions (figures presented in the source).

*Source: IMF staff (Annex IV excerpts).*

### Annex V. Financial Sector Assessment  Program Update

### Annex V. Financial Sector Assessment Program Update

### Banking and Insurance Supervision
- Recommendation: Strengthen the independence of APRA and ASIC, by removing constraints on policy making powers and providing greater budgetary and funding autonomy; strengthen ASIC’s enforcement powers and expand their use to mitigate misconduct (Treasury, APRA, ASIC). Time Frame: ST
  - In process.
  - ASIC’s industry funding model has been in place since the 2017-18 financial year.
  - Legislative and enforcement developments:
    - On April 6, 2019, ASIC was granted a product intervention power; used for short-term credit, binary options, and CFDs.
    - On February 18, 2019, Parliament passed legislation to significantly increase penalties for corporate and financial sector misconduct.
    - On February 6, 2020, Parliament passed legislation to strengthen ASIC’s licensing and banning powers and enhance ASIC’s investigatory capability.
    - On December 10, 2020, Parliament passed legislation enabling ASIC to designate enforceable code provisions in approved codes of conduct, and establish a mandatory code of conduct framework for the financial services and consumer credit industry.
    - December 2020 legislation enhanced ASIC’s breach reporting requirements for financial service and credit licensees.
  - APRA funding: APRA was provided A$150 million in additional funding in the 2019-20 Federal Budget, which was further expanded in the 2020-21 and 2021-20 22 Budgets.

- Recommendation: Enhance APRA’s supervisory approach by carrying out periodic in-depth reviews of governance and risk management (APRA). Time Frame: ST
  - In process.
  - APRA has built capability to undertake in-depth reviews of governance and risk management.
  - On November 19, 2019, APRA released "Transforming Governance, Culture, Remuneration and Accountability: APRA’s Approach".
  - APRA focused follow-up on risk governance self-assessments from 2018, prioritizing a small number of large institutions with substantial deficiencies.
  - Conducting in-depth, institution-specific and industry-wide reviews is a key part of APRA’s supervisory approach to transforming Governance, Culture, Remuneration and Accountability (GCRA).
  - APRA rolled out the Supervision and Risk Intensity (SRI) model to increase focus on governance, risk management, board and senior management. SRI captures assessments under GCRA, Business and Central Functions, and Risk and Compliance Functions.
  - APRA intends to consult on revision of Prudential Standard CPS 510 Governance and Prudential Standard CPS 220 Risk Management in 2022.

- Recommendation: Strengthen the integration of systemic risk analysis and stress testing into supervisory processes (APRA, RBA). Time Frame: I
  - In process.
  - APRA’s SRI model incorporates an External Factors category covering macro and systemic risk; the capital section requires supervisors to consider recent stress test results. Transition to SRI started in October 2020 and was completed in June 2021.
  - APRA increased stress testing activities across all regulated industries in response to COVID-19, analyzing a range of scenarios to identify vulnerabilities and institutions at heightened risk of failure.
  - Collaboration with the RBA in modeling scenarios and comparing results increased.
  - APRA developed a nimble and more frequent program of stress testing and is developing stress testing guidance to integrate stress testing into the supervisory process.

### Financial Stability Analysis
- Recommendation: Commission and implement results of a comprehensive forward-looking review of potential data needs. Improve the quantity, quality, granularity and consistency of data available to the CFR agencies to support financial supervision, systemic risk oversight and policy formulation (CFR agencies). Time Frame: MT
  - In process.
  - A Multi-Agency Data Collection Committee includes APRA, ASIC, RBA, Treasury, and the Australian Bureau of Statistics.
  - The Committee is reviewing forward-looking data needs, identifying data gaps, and exploring streamlining of data collection and use to support CFR functions.
  - The Committee endorsed a work program to regularly review programs to close identified data gaps.
  - APRA Connect launched in September 2021 as a new data collection solution for APRA and all reporting entities. APRA’s new data collections are structured to contain granular data with less transformation required.
  - APRA’s pipeline of new/amended data collections includes:
    - new tactical and strategic collections capturing relevant data for credit activities of ADIs;
    - new strategic collections to support implementation of the Basel 3B reforms applicable to ADIs from January 2023;
    - new collections to support insights relating to prudential standards about remuneration and operational risk and additional non-financial risk data collections;
    - enhancements to existing collections to reflect forthcoming changes in the capital framework for insurers.

- Recommendation: Enhance the authorities’ monitoring, modeling, and stress testing framework for assessing solvency, liquidity and contagion risk. Draw on the results to inform policy formulation and evaluation (CFR agencies). Time Frame: ST
  - In process.
  - Since COVID-19 onset, APRA has undertaken numerous stress tests across banking and insurance using severe downside scenarios and has increased frequency and depth of stress testing.
  - APRA enhanced internal stress testing functionality to challenge industry submissions and to internally generate stress scenarios. APRA and RBA stress testing teams engage directly.
  - APRA is moving towards annual stress testing of large ADIs (transitioned in 2020).
  - APRA plans to test resilience to operational and climate change financial risks.
  - APRA is undertaking a Climate Vulnerability Assessment (CVA) of large ADIs in 2021-22 with objectives to:
    - assess potential financial exposure to climate risk;
    - understand how banks may adjust business models and implement management actions in response to different scenarios;
    - foster improvement in climate risk management and stress testing capabilities.

- Recommendation: Encourage further maturity extension and lower use of overseas wholesale funding (APRA). Time Frame: I
  - In process.
  - Banks’ offshore funding is kept under close scrutiny by the CFR agencies.
  - CFR discussed offshore funding at its September 2019 meeting; noted banks manage offshore borrowing risks through currency hedging and foreign currency liquid assets and welcomed progress in lengthening offshore term debt maturity.
  - Australian banks’ overseas wholesale funding is currently lower than in recent history given use of the RBA’s TFF. The TFF closed to new drawdowns in June 2021, and banks’ overseas issuance is expected to pick up as they refinance maturing TFF debt through to June 2024. The refinancing task is assessed to be sizeable but manageable.

### Systemic Risk Oversight and Macroprudential Policy
- Recommendation: Raise formalization and transparency of the CFR and accountability of its member agencies through publishing meeting records as well as publication and presentation of an Annual Report to Parliament by CFR agency Heads (CFR agencies). Time Frame: I
  - In process.
  - CFR actions to increase transparency:
    - publishing a statement following regular CFR meetings since December 2018;
    - increasing coverage of CFR’s work in the RBA’s Financial Stability Review (released bi-annually);
    - updating the CFR website to be more informative.
  - The Government established the Financial Regulator Assessment Authority to report on the effectiveness and capability of ASIC and APRA; the Authority cannot direct regulators, assess single cases, or deal with complaints about the regulators.

- Recommendation: Undertake a CFR review of the readiness to apply an expanded set of policies to address systemic risks, including data and legal/regulatory requirements; and address impediments to their deployment (CFR agencies). Time Frame: I
  - In process.
  - The Housing Market Risks Working Group under the CFR considers financial system risks and appropriate policies, including tools that might be available in future, circumstances for use, and restrictions (e.g., data availability).

- Recommendation: Commission analysis by the CFR member agencies on relevant financial stability policy issues, including: policies affecting household leverage; as well as factors affecting international investment flows and their implications for real estate markets (CFR agencies). Time Frame: MT
  - In process.
  - The CFR actively considers policy impacts on financial stability. The Housing Market Risks Working Group frequently reports risks in the housing market.
  - The RBA participated in a Committee on the Global Financial System working group studying property price dynamics and influence of international investors; its report was released in February 2020.

### Financial Crisis Management and Safety Nets
- Recommendation: Complete the resolution policy framework and expedite development of resolution plans for large and mid-sized banks and financial conglomerates, and subject them to annual supervisory review (APRA, Treasury). Time Frame: ST
  - In process.
  - APRA is developing recovery and resolution planning prudential standards and practice guides; draft standard planned for consultation later in 2021.
  - APRA accelerated resolution preparedness with simple, credible resolution playbooks for all high-risk regulated entities.
  - APRA’s internal readiness to execute a resolution continues to progress with live case examples enhancing the resolution operating model.
  - Work on major bank resolution planning is ongoing, including via CFR and Trans-Tasman Council on Banking Supervision (TTBC); inaugural entity-specific Crisis Management Group (CMG) preparations for 2021 (delayed in 2020 by COVID-19).
  - APRA accelerated recovery planning to drive improvements in entity-led planning across regulated sectors; conducted ‘fire drills’ with largest ADIs and provided thematic feedback to smaller ADIs.

- Recommendation: Extend resolution funding options by expanding loss-absorption capacity for large and mid-sized banks and introduce statutory powers (APRA, Treasury). Time Frame: ST
  - In process.
  - On November 8, 2018, APRA released a discussion paper on changes to capital adequacy framework for ADIs to support orderly resolution.
  - In early July 2019, APRA released its final position requiring the D-SIBs to lift Total Capital by three percentage points of RWA by January 1, 2024, and an overall long-term target of four to five percentage points of loss absorbing capital. Requirements for mid-sized banks to be settled as part of resolution planning.

- Recommendation: Advance mutual understanding between the Australia and New Zealand resolution authorities on cross-border bank resolution modalities, through the Trans-Tasman Banking Council (TTBC) (CFR agencies). Time Frame: ST
  - In process.
  - The TTBC continues to discuss cross-border financial stability and bank resolution; statements released after Heads meetings in November 2019 and December 2020.
  - APRA works closely with CFR and TTBC on crisis preparedness; inter-agency engagements increased after COVID-19, focusing on emerging risks, stress testing and response strategies.
  - Commencing in 2021, APRA and the RBNZ will establish entity-specific Crisis Management Groups to develop and evaluate entity-specific cross-border resolution strategies.

### Financial Market Infrastructure
- Recommendation: Strengthen independence of RBA and ASIC for supervisory oversight, enhance enforcement powers and promote compliance with regulatory requirements. Time Frame: I
  - In process.
  - CFR released a consultation paper in November 2019 proposing enhancements to Australia’s FMI regulatory regime, including enhanced powers for ASIC and the RBA and transferring licensing and supervisory powers from the Minister to ASIC and the RBA.
  - Following stakeholder feedback, CFR provided recommended changes to the Government.
  - The Government announced it would proceed with the reforms in June 2021, enhancing supervisory and licensing powers of ASIC and the RBA and streamlining regulatory powers.

- Recommendation: Finalize the resolution regime for FMIs in line with the FSB Key Attributes (RBA, ASIC, Treasury). Time Frame: ST
  - In process.
  - CFR consultation paper in November 2019 proposed establishing a resolution regime for domestic clearing and settlement facility licensees; CFR recommended implementation to Government.
  - The Government announced in June 2021 it would proceed with FMI regulatory reforms, including a resolution regime for clearing and settlement facilities allowing the RBA to intervene to ensure critical services continue.
  - The regime will be supported by a $5 billion standing appropriation, with Ministerial agreement, to provide temporary funding to a clearing and settlement facility if necessary to ensure continuity of services.

### Anti-Money Laundering / Countering the Financing of Terrorism (AML/CFT)
- Recommendation: Expand the AML/CFT regime to cover all designated non-financial businesses and professions (DNFBPs) and strengthen AML/CFT supervision by: improving data collection and risk analysis; increasing oversight of controls and compliance; and undertaking more formal enforcement action in the event of breaches (Department of Home Affairs, Treasury, AUSTRAC). Time Frame: I
  - In process.
  - Since October 2019, AUSTRAC published ML/TF risk assessments of Australia’s mutual banking sector, the junket tour operations sector and Australia’s non-bank lending and financing sector.
  - On September 6, 2021, AUSTRAC finalised four ML/TF risk assessments relating to Australia’s banking sector: Australia’s major banks, other domestic banks, foreign subsidiary banks in Australia and foreign bank branches in Australia.
  - In April 2019, AUSTRAC implemented regulatory monitoring and alerting analyzing extensive data holdings to generate alerts indicating potential non-compliance; capability enabled swift engagement with reporting entities.
  - During the 2020-21 financial year, AUSTRAC finalised 32 compliance assessments across sectors; 11 were in the banking sector.
  - AUSTRAC formal enforcement actions include:
    - remedial direction to Australian Military Bank Ltd on May 3, 2021;
    - infringement notice to State Street Bank and Trust Company in September 2020;
    - application to the Federal Court of Australia in November 2019 for a civil penalty order against Westpac.
  - From June 17, 2021, reforms to the AML/CTF Act came into effect, clarifying customer due diligence obligations, strengthening protections for correspondent banking relationships, expanding circumstances for reliance on third parties for customer identification and verification, and expanding exceptions to the prohibition of tipping off.

*Sources: IMF (2019), Australia, Financial Sector Assessment Program—Financial System Stability Assessment; and the Australian authorities.*

### Annex VI. Inequality in Australia: Pre-COVID Trends and  Impact

### Annex VI. Inequality in Australia: Pre-COVID Trends and Impact of the Pandemic

### Overview: relative position on inequality
- Income inequality in Australia is high compared to other advanced economies.
- Wealth inequality and inequality of opportunity are below those of peers.
- After trending upwards since the early 1990s, income inequality stabilized after 2005-06 at levels slightly above the OECD average, in part reflecting lower levels of redistribution through taxes and transfers.
- Wealth inequality has increased in recent years, potentially reflecting higher house prices, though the level of wealth inequality remains below that of peers.
- Australia compares favorably to OECD advanced economies on other metrics of inequality of opportunity, such as the intergenerational persistence of education and income outcomes.

### Labor force participation and gender gap
- Aggregate participation rate increased by 2.3 percentage points between 1990 and 2019, reflecting increases in participation among women and people aged 55 and over.
- The gender gap in participation declined to about 10 percentage points in 2019, less than half the level recorded in 1990.
- Participation among women aged 55 to 64 rose from 25 percent in 1990 to 61 percent in 2019, moving from well below the OECD median to well above the OECD median.

### Impact of the COVID-19 pandemic on inequality (preliminary evidence)
- The comprehensive policy response and the subsequent recovery have likely limited the impact of the pandemic on inequality.
- Direct data on income inequality for the pandemic period is not available in the source; analysis relies on labor market indicators.
- Traditionally vulnerable groups (women, lower educated people, and youth) were initially hit hard in the first half of 2020 but saw a full recovery before the recent lockdowns.
- Employment as a share of population plummeted in the first half of 2020, but recovered to above pre-pandemic levels for most vulnerable groups prior to recent lockdowns.
- Underemployment among youth and women declined below pre-COVID levels, though it remains high by international standards.
- Recent lockdowns have again hit vulnerable groups harder, mirroring the experience from early 2020.

### Key statistics and measures (as reported)
- Income inequality: stabilized after 2005-06 at levels slightly above the OECD average.
- Aggregate participation rate change: 2.3 percentage points (1990–2019).
- Gender participation gap: about 10 percentage points in 2019.
- Female participation (age 55–64): 25 percent in 1990; 61 percent in 2019.

*Source: Annex VI. Inequality in Australia: Pre-COVID Trends and Impact of the Pandemic (from the supplied IMF content).*

### 7.      Achieving the net zero target will require credible medium-term  targets within a

### 7. Achieving the net zero target will require credible medium-term targets within a comprehensive policy framework

### Climate targets, investment, and emissions strategy
- Australia is committed to achieve net zero emissions by 2050.
- Australia is on track to exceed its 2030 emissions reduction target.
- The Government’s Long-Term Emissions Reduction Plan is backed by Government investment of $20 billion to support the commercialization of low emissions technologies including clean hydrogen, energy storage, carbon capture and storage, ultra-low-cost solar, low carbon materials, and soil carbon.
- The National Climate Resilience and Adaptation Strategy provides a national framework for collaboration with the private sector, improved climate information services, national assessments of climate impacts and adaptation progress, and independent monitoring and assessment of progress over time.
- Adaptation is emphasized as critical alongside mitigation.

### Role of carbon pricing and alternative policies
- A broad-based carbon price, while politically challenging, can complement investment strategies and deliver significant emissions reductions in the short and medium term.
- Advantages of a clear price signal:
  - Cost-effective emissions reduction by promoting across-the-board behavioral responses and redirecting investment towards clean technologies.
  - If implemented through a carbon tax or an auction-based emissions trading system, a carbon price can raise significant revenues to mitigate impacts on those adversely affected by the transition.
  - It can minimize risks to Australian exports from carbon border adjustments.
- If carbon pricing is not feasible, alternative regulatory reforms include:
  - Enhancing the Emissions Reduction Fund’s Safeguards Mechanism.
  - Employing sectoral policies such as feebates for power generation or electric cars.
- Additional supportive measures:
  - Investment in charging infrastructure.
  - Continued push on renewables to accelerate emissions reduction.

### Financial sector, disclosure, and transition risk management
- New regulations on disclosure of climate risks for banks and listed companies are welcomed.
- To facilitate assessment of climate and transition risks and foster better allocation of capital, ASIC can further improve standardized disclosures of exposure to climate-related risks for large, listed companies.
- Guidance on managing the financial risks of climate change is expected to be released before the end of 2021.

### COVID-19 response, economic recovery, and risks
- Australia experienced a large economic shock from COVID-19 but achieved impressive health outcomes and provided significant economic lifelines to households and businesses.
- A fast economic recovery followed initial outbreaks, with employment and real GDP surpassing pre-pandemic levels ahead of any other major advanced economy by 2021Q1.
- Delta variant created setbacks, but emergency economic support underpinned a strong bounce back in spending and employment as restrictions eased.
- Vaccination progress: Australia has fully vaccinated around 80 percent of the population aged 16 years and older, with almost 90 percent having received one dose.
- Partial reopening of the international border began from 1 November, including phased removal of quarantine requirements for vaccinated travelers; reopening is crucial for tourism and tertiary education recovery and for returning skilled migrants.
- Outlook: underlying inflation expected to remain around 2¼ percent for much of the forecast period, rising slightly towards the end of 2023 (RBA expectation).
- Risks: potential disruption from further COVID-19 outbreaks remains, though mitigated by high vaccination rates.

### Fiscal, monetary, and financial policies
- Fiscal response:
  - Government revised fiscal strategy to reflect COVID-19 recession and provided targeted assistance; emphasis will shift to strengthening fiscal position and rebuilding fiscal buffers once recovery is secured.
  - Australia remains one of nine nations with a AAA credit rating from the three leading ratings agencies.
  - JobKeeper Payment supported around four million Australians and has been phased out as the economy strengthened.
  - Other fiscal measures included cash flow boost payments, insolvency relief, loss carry-backs, increased instant asset write-off threshold, one-off stimulus payments, temporary Coronavirus Supplement, and personal income tax relief.
- Monetary policy:
  - RBA committed to not raising interest rates until actual inflation is sustainably within the 2 to 3 percent target range; authorities currently do not see this objective being met until 2024 under the central forecast.
  - RBA actions included cutting interest rates, purchasing government bonds, targeting the yield on the 3-year government bond, and a term-funding facility for the banking system.
  - Reflecting improved conditions, RBA scaled back the pace of bond purchases and discontinued the yield target for the April 2024 bond.
  - Authorities are open to considering a review of the monetary policy framework.
- Financial stability and regulation:
  - Financial system resilient; banks had ample access to funding and loan repayment deferrals; non-performing loans did not surge.
  - Prudential regulator increased the interest rate serviceability buffer on home loans by 50 basis points from 2.5 percent to 3.0 percent.
  - Prudential regulator revising bank capital framework to be more flexible, risk-sensitive, and competition-enhancing; new guidance on cyber risks introduced.
  - Efforts to strengthen the AML/CFT regime and consideration of regulation of designated non-financial businesses and professions as part of a longer-term strategy.

### Labor market, skills, and structural reform policies
- Authorities prioritize growing a bigger, highly skilled workforce via measures to train and reskill workers.
- JobTrainer Fund targets youth, school leavers and the unemployed, offering free or low-fee courses in areas of shortages including aged care, IT and childcare.
- Other programs:
  - jobactive Program provides employment services and includes wage subsidies for disadvantaged groups like the long-term unemployed.
  - Boosting Apprenticeship Commencements wage subsidy supports businesses to take on new apprentices or trainees.
- Tax and productivity reforms:
  - Reforms to enhance the R&D tax incentive and introduction of a patent box to encourage domestic commercialization of innovation.
  - Personal Income Tax Plan aims to ensure that 95 percent of Australians face a marginal tax rate of no more than 30 percent.
  - Small business tax rate reduced to 25 percent (down from 30 percent in 2015-16).
  - Unprecedented business investment incentives remain in place to the end of 2022-23.
- Infrastructure and digital strategy:
  - Government announced additional infrastructure investments across a 10-year pipeline.
  - Investment in a Digital Economy Strategy to harness pandemic-related opportunities and support jobs and productivity.
- Authorities continue to advance deregulation, remain committed to an open, rules-based international trade system and a transparent FDI regime.

*Source: IMF staff report excerpt (Australia Article IV consultation informational annex).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1ausea2021001.pdf_