## 1. Monetary Policy During the Pandemic

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### Context and recent developments
- Australia recovered from the pandemic faster than most advanced economies; output gap turned positive and growth in 2022Q3 was 5.9 percent y/y.
- Headline inflation reached 7.3 percent in 2022Q3 and became broad-based.
- Unemployment rate: 3.4 percent (November 2022); NAIRU: ~4.7 percent.
- Wage growth: 3.1 percent y/y in 2022Q3.
- Housing prices declined by 8 percent from their peak following a pandemic-era surge.
- Fiscal: overall deficit declined to 3½ percent of GDP (from 9¼ percent in FY2020/21); gross public debt is 57 percent of GDP.
- External position: current account balance expected to moderate to 0.9 percent of GDP in 2022 (2021: 3.1 percent). REER appreciated by 6 percent in 2021 and remained broadly stable through 2022Q3.

### Monetary policy tightening and RBA balance sheet effects
- RBA tightened policy by cumulatively 300 bps since May 2022 to a roughly neutral stance.
- RBA decision: hold to maturity the bonds from its asset purchase portfolio.
- Medium-term inflation expectations remained anchored while short-term expectations rose.
- Projected equity position: moderately negative, projected at 0.9 percent of GDP at the trough.
- RBA balance sheet expansion and losses:
  - RBA balance sheet expanded to 3.5 times its pre-COVID level.
  - Purchases: A$360 billion (including purchases for yield target and market operations).
  - TFF provided low-interest bank funding of A$188 billion.
  - Model projection: total capital estimated to decline to A$ -19.5 billion by December 2024, then recover and gradually converge to zero.
  - Revaluation account: estimated to reach A$ -8.4 billion by June 2023 and improve to A$16.9 billion by December 2027 as around 50 percent of existing bonds mature.

### Inflation dynamics and labor market pressures
- Inflation broad-based: rising costs in food, transport, electricity, and new dwellings construction (surging due to labor and materials shortages).
- Peak estimates: headline inflation estimated to have peaked at around 8 percent y/y in 2022Q4; trimmed mean was 6.5 percent y/y in 2022Q4.
- Projection: inflation projected to remain above target through 2024; inflation target band expected to be reached in 2024 or later, subject to uncertainty.
- Labor market: underemployment and underutilization compressed; employment and labor force participation reached record highs in 2022Q3; average hours worked per employee remained below pre-pandemic levels.
- Survey readings of labor costs have spiked, creating potential for broader wage acceleration.

### Outlook and downside risks
- Growth outlook: projected to slow from 3.6 percent in 2022 to 1.6 percent in 2023 before gradually recovering to potential growth of around 2¼ percent.
- Domestic demand headwinds:
  - Rising mortgage payments.
  - Declines in real disposable income from high inflation and higher energy prices.
  - Falling housing prices.
  - Households expected to draw down pandemic savings buffers to soften consumption declines.
- External demand: expected to slow with subdued growth in trading partners, including China.
- Near-term inflationary pressures from high energy, food, and transport costs, lingering supply disruptions, and gradually rising nominal wages.
- Downside risks (Annex IV): stronger global downturn (including China); higher commodity prices; natural disasters from climate change; geo-economic fragmentation; cybersecurity risks; stronger-than-expected housing price decline which could weaken banks’ balance sheets.
- Growth-at-risk: Growth-at-risk (5th percentile) shows a notable decline from last year; referenced value: -1.8 (5th percentile).

### Authorities’ views
- Authorities expect a soft landing amid near-term headwinds as higher interest rates feed through.
- Authorities view inflation as driven by both supply- and demand-side factors and expect it to remain above target through 2024.
- Authorities agree with staff’s preliminary external sector assessment.
- Authorities emphasized uncertainty about consumers’ reactions to high inflation and rising mortgage rates amid significant accumulated savings buffers; they saw financial stability risks as well-contained but acknowledged the housing correction would affect consumption.
- Authorities committed to near-term fiscal discipline to support monetary policy efforts to dampen inflation.

---

### Monetary policy assessment and outlook (section 13 and related staff appraisal)

### Monetary policy assessment and projected path
- Staff view: monetary policy tightening warranted in response to high inflation and strong domestic demand; pace of further tightening to be data-dependent.
- Cash rate: 3.1 percent.
- Staff expected cash rate peak: around 3.85 percent in 2023Q2.
- Tightening cycle: 2022-2023 tightening (325 bps) noted as significant; high uncertainty about transmission lags.
- Financial conditions may tighten by more than what the cash rate implies.
- Household interest payments as share of disposable income: set to double from 5.2 percent in 2021 to around 10 percent (projected).
- Household mortgage exposure: large share at variable rate or fixed for only a few years; many mortgages resetting to higher rates in 2023.
- TFF expiry: 2023-24 (raising banks’ funding costs).

### Fiscal policy stance and developments
- FY2022/23 consolidation: overall consolidation of the general government cyclically adjusted primary balance expected at about 0.3 percent of potential GDP.
- Consolidation achieved in FY2021/22: 4¾ percent of potential GDP.
- October 2022 budget: new spending measures provide targeted cost-of-living relief; partially offset by reductions in other spending and new revenue measures.
- Temporary cap on domestic gas and coal price introduced; further measures expected in 2023Q1 include direct subsidies for household and small business energy bills and a permanent mandatory code of conduct for the domestic gas market.
- Stage three personal income tax (PIT) reforms (legislated 2018) projected to lower tax receipts by around 1 percent of GDP annually starting in FY2024/25.
- Budget repair work identified savings of 1¼ percent of 2022 GDP over the next four years.
- Commonwealth cash balance projected to remain in deficit through the medium term.
- Structural spending pressures: higher interest payments; significantly revised-up cost projections for the National Disability Insurance Scheme (NDIS); higher expenses for health and aged care; lower assumption for labor productivity growth.
- Capital gains tax exemption for main residences estimated to cost around 2½ percent of GDP annually in foregone revenues.

### Staff views and policy recommendations (monetary and fiscal)
- Monetary policy recommendations:
  - Pace of further rate increases should be data-dependent to ensure inflation expectations remain well anchored.
  - More tightening in the short term is indicated, but uncertainty about transmission remains.
  - Careful communication of risk assessment and policy intentions to guide market expectations.
- Fiscal near-term recommendations:
  - Focus on fiscal consolidation to contain demand pressures and inflation.
  - Save expected revenue overperformance and implement spending programs judiciously, notably infrastructure investment.
  - Phase implementation of below-the-line activity through newly created investment vehicles and avoid proliferation.
  - Cost-of-living support should be temporary and targeted to protect vulnerable households and small viable firms; avoid untargeted policies that weaken price signals.
  - Broader regulatory changes should minimize risks to domestic energy supply.
- Fiscal options in downside scenario:
  - Additional fiscal support should be temporary and well-targeted (e.g., extension of low-income tax offsets; top-up payments to welfare and JobSeeker recipients).
- Medium-term recommendations:
  - Continue consolidation path to rebuild buffers for future shocks.
  - Multi-pronged approach to contain NDIS spending growth; planned review to make NDIS efficient, equitable, and sustainable.
  - Consider transforming JobSeeker into a contribution-based unemployment insurance to strengthen automatic stabilizers.
  - Protect spending for human and physical capital to support productivity growth.
- Tax reform recommendations:
  - Comprehensive medium-term tax reforms to meet higher structural spending needs and support economic efficiency and growth.
  - Rebalance from currently high direct to underutilized indirect taxes, mitigating regressive impacts with targeted cash transfers.
  - Reassess stage 3 PIT cuts (effective FY2024/25) if needed; address bracket creep by raising tax brackets periodically.
  - Broaden the GST base by limiting exemptions (e.g., healthcare spending).
  - Review tax exemptions such as the main residence capital gains tax exemption (costing around 2½ percent of GDP annually).
  - At state and territory level, implement recurring property taxes in lieu of stamp duties to promote housing affordability and more stable tax bases; bridge transitional revenue losses with higher GST if substantial.

### Key figures and timeline items (selected)
- Cash rate: 3.1 percent.
- Expected cash rate peak: around 3.85 percent in 2023Q2.
- Consolidation of cyclically adjusted primary balance in FY2022/23: about 0.3 percent of potential GDP.
- Consolidation achieved in FY2021/22: 4¾ percent of potential GDP.
- Stage three PIT cuts reduce receipts by around 1 percent of GDP annually starting in FY2024/25.
- Identified budget repair savings: 1¼ percent of 2022 GDP over the next four years.
- Household interest payments as share of disposable income: 5.2 percent in 2021 → around 10 percent (projected).
- TFF expiry: 2023-24.
- NDIS main residence capital gains tax exemption foregone revenue: around 2½ percent of GDP annually.
- NDIS review completion target: October 2023.

---

### RBA review, financial stability, housing, and macroprudential considerations

### RBA review and mandate
- Independent review by outside experts "to conclude by March 2023" covering objectives, mandate, governance, culture, operations, and interaction between monetary, fiscal and macroprudential policies.
- Opportunities from review:
  - Reaffirm inflation targeting regime within a clearly focused mandate.
  - Revisit RBA’s objectives, governance arrangements, and decision-making processes.
  - Institute periodic reviews in line with practices in some other central banks.

### Housing market outlook and affordability
- Staff baseline: housing prices projected to decline by about 16 percent in nominal terms from peak in April 2022 through 2023, before normalizing.
- Despite declines, housing prices would remain above pre-pandemic levels.
- Housing price-at-risk (HaR) analysis: significant downside risks widening since late 2021.
- Household savings in mortgage redraw/offset accounts: "3 percent of disposable income over the two years to June 2022" (pre-pandemic average: "1 percent").
- Potentially vulnerable borrowers: less than "5 per cent" of owner-occupier variable rate borrowers in early 2022.
- Banks' commercial property exposure: around "6 percent" of assets.
- Loans with outstanding LVR greater than 75 percent: "5 percent" (may rise as prices fall).
- Serviceability buffer for new mortgages: "300 bps" (raised from "250 bps" in 2021).
- Banks’ CET1 ratios: decreased slightly due to capital returned to shareholders but remain high and exceed new capital framework requirements effective January 2023.
- TFF refinancing need: banks require refinancing of TFF funding of "A$190 billion; 3 percent of total liabilities" in 2023-24.

### Staff’s views on financial stability
- Financial system appears resilient with adequate buffers and liquidity; risks increasing but contained.
- Key vulnerabilities:
  - Lower-income, highly indebted households with recent mortgages may be disproportionately at risk.
  - Some increase in non-performing loans likely but unlikely to pose material stability risks if labor market remains resilient.
  - Increase in bank wholesale funding at higher rates and slowing growth may pose vulnerabilities; liquidity coverage ratios remain comfortably above minimums.
  - Non-bank financial institutions merit close scrutiny given rapid growth from a low base.
- Non-financial risks and recommendations:
  - Climate risk: measurable impact on loan losses from Climate Vulnerability Assessment, likely absorbable without banking-system stress.
  - Data: climate-related data quality and accessibility need improvement.
  - Recommendation: CFR, including ASIC, can further improve standardized climate-risk disclosures for large, listed companies.
  - Cyberthreats: require investment, monitoring, and contingency planning.
  - AML/CFT: expand regime to cover DNFBPs and enhance beneficial ownership transparency.

### Macroprudential stance
- With limited financial stability risks in the housing downcycle, no strong case currently for either loosening or tightening macroprudential policies.
- APRA’s new macroprudential framework utilizes forward-looking indicators and is coordinated through the Council of Financial Regulators (CFR).
- Planned implementation of bank capital framework will further increase capital buffers (CET1 requirements and buffers discussed in source).

---

### Crypto, payments, and CBDC developments and recommendations

### Crypto and payments regulation (findings and recommendations)
- Current state: crypto assets largely unregulated for conduct and prudential purposes in Australia; supervision fragmented across agencies under frameworks not designed for crypto.
- Recommendations:
  - Achieve greater clarity in regulatory architecture with clear roles and coordination among regulatory agencies.
  - Strengthen consumer protection.
  - Reform payments regulatory framework to address new products and technologies.
  - Develop a comprehensive regulatory framework for the broad crypto ecosystem covering issuers, providers, legal classification, prudential regulation commensurate with risk, wind-down arrangements and resolution, and legislation to boost consumer protection.
  - Ensure coordination among Treasury, APRA, ASIC, AUSTRAC and RBA; augment resources and international cooperation.
  - Stablecoin-specific considerations: requirements related to issuance, redemption rights, stabilization mechanisms, disclosure and auditing of reserve assets; collaboration with foreign regulators.

### CBDC research
- RBA has been researching CBDCs actively but has no immediate plans to issue one.
- Project Atom: proof of concept for a CBDC using DLT completed in 2021.
- New RBA research project and limited-scale pilot began in August 2022.
- RBA collaborating with BIS (Project Dunbar) and other central banks.

---

### Securing sustainable and inclusive growth; climate mitigation, infrastructure, and competition

### Climate mitigation and energy transition
- Australia’s upgraded 2030 NDC: "43 percent" reduction in emissions from 2005 levels.
- Climate Change Act, 2022:
  - Codifies the 2030 NDC and the net-zero target.
  - Requires an annual statement to Parliament on progress (first statement presented in December 2022).
  - Empowers the Climate Change Authority to advise on the climate statement and future targets.
- Authorities reforming the Safeguard Mechanism, developing a National Electric Vehicle Strategy, and ramping up electricity grid investments.
- Staff recommendations:
  - An economy-wide carbon price would be the most effective way to achieve emission reductions; absent that, strong sectoral policies with price signals where possible.
  - Transforming the Safeguard Mechanism into a binding baseline-and-credit scheme is welcome.
  - Step up energy sector investment under Rewiring the Nation program.
  - Additional price signals, such as feebates in energy and transport, could elicit behavioral responses.
  - Vehicle emission standards and other sectoral policies can complement price signals.

### Infrastructure, innovation, competition, and labour
- Priorities: ensure smooth delivery of high-priority infrastructure projects, boost productivity via innovation and competition, sustain infrastructure spending to meet policy goals including climate transition.
- Implementation guidance:
  - Reprioritize infrastructure pipeline given strong cyclical position and construction-sector constraints.
  - Coordinate with states and undertake only projects evaluated by Infrastructure Australia.
  - Reduce administrative burden of the R&D tax incentive and promote university-business R&D collaboration.
  - Expand digital infrastructure and skills; reduce regulatory burden on businesses; expand automatic mutual recognition of occupational licenses.
- Labour market and inclusion:
  - Initiatives: free vocational training, expansion of university capacity, temporary increase in migration, increase in child-care subsidies, expanded parental leave.
  - Scope to improve migration system to attract skilled workers; education sector reforms to reverse deteriorating school outcomes.
  - Industrial relations changes: greater access to multi-employer bargaining; authorities should monitor effects and review law in two years.

---

### Box 3. Downside Scenario (modelled shocks and impacts)

### Scenario assumptions (preserved exactly)
- Model: IMF’s G20 Model (Andrle and others (2015)).
- Domestic demand shocks to trading partners: a one percent decline in GDP from the baseline, decaying over four years, in China and the US.
- Inflation expectations shock: a 50 bp increase in one-year-ahead inflation expectations for Australia and all other countries in the model.
- Financial conditions shock: a 50 bp sovereign term premium shock in the US that transmits to other countries’ term premia; and a 100 bp increase in corporate risk and term premia (in addition to the sovereign premia).

### Effects on Australia (preserved exactly)
- Impact on real output: -0.9 percentage point in 2023; 0.1 percentage point in 2024.
- Impact on core inflation: 0.4 percentage point increase in 2023; effect dissipates fully in 2024.

---

### Box 5. Strengthening Unemployment Benefits and Automatic Stabilizers

### Current assessment and key facts (preserved)
- "About one half" of lost household disposable income is offset by automatic stabilizers in Australia (below the OECD average).
- JobSeeker provides means‑tested cash support for an unlimited period subject to meeting conditions; benefit levels are fixed and not earnings‑linked.
- JobSeeker corresponds to 41 percent of pre‑tax earnings for a single person working full time on the minimum wage (IMF staff calculation, assuming 38 hours per week; underlying benefit figure as at September 2022 excludes certain eligible allowances).
- Australia is the only OECD country without contribution‑funded unemployment insurance.

### Rationale for a contributions‑based unemployment insurance program (UIP)
- Introducing a contributions‑based UIP linked to workers’ wages can:
  - Help close a gap in social protection.
  - Enhance automatic stabilizers by providing time‑bound, transparent, and pre‑specified income support during downturns.
  - Reduce need for ad‑hoc discretionary support during downturns.

### Design considerations and trade‑offs
- UIP introduction would raise the tax wedge as employers and employees typically need to make contributions.
- Costs depend on targeted replacement rate, maximum level of earnings insured, and duration of payouts.
- Parameters should balance adequate income support and incentives to job search.
- Interactions with state-administered workers compensation programs need consideration.

### Semi‑automatic stabilizers
- Semi‑automatic, state‑dependent settings could allow more generous benefits during high cyclical unemployment while preserving incentives in normal times.

---

### Annex summaries: debt, external position, and risk assessment (selected figures)

### Public debt and fiscal projections (percent of GDP unless indicated)
- Public debt (actual and projection): 57.6 (2021), 55.6 (2022), 59.2 (2023), 61.9 (2024), 62.4 (2025), 62.6 (2026), 62.5 (2027), 62.1 (2028), 61.5 (2029), 60.8 (2030), 60.0 (2031).
- Change in public debt: 0.5 (2021), -1.9 (2022), 3.6 (2023), 2.7 (2024), 0.5 (2025), 0.2 (2026), -0.1 (2027), -0.4 (2028), -0.6 (2029), -0.7 (2030), -0.8 (2031).
- Primary deficit (percent of GDP): 5.3 (2021), 2.1 (2022), 1.6 (2023), 1.5 (2024), 1.4 (2025), 1.0 (2026), 0.7 (2027), 0.4 (2028), 0.1 (2029), -0.1 (2030), -0.3 (2031).
- Real GDP growth (percent): 5.2 (2021), 3.6 (2022), 1.6 (2023), 1.7 (2024), 2.1 (2025), 2.2 (2026), 2.3 (2027–2031).
- Inflation (GDP deflator; percent): 5.6 (2021), 7.7 (2022), -1.2 (2023), 0.4 (2024), 2.9 (2025), 2.4 (2026), 2.5 (2027–2031).
- Gross financing needs: 13.4 (2021), 9.5 (2022), 9.1 (2023), 10.6 (2024–2025), 10.4 (2026–2027), 10.7 (2028), 11.3 (2029), 11.5 (2030), 11.6 (2031).

### External sector (selected figures)
- CA: 0.9 (2022).
- Cycl. Adj. CA: -1.9.
- EBA Norm: -0.7.
- EBA Gap: -1.2.
- COVID-19 Adj.: 0.6.
- Staff Gap: -0.6 (staff-adjusted CA gap range: -1.2 to 0 percent of GDP; midpoint: -0.6 percent of GDP).
- NIIP snapshot 2022 (% GDP): NIIP: -33.2; Gross Assets: 155.1; Debt Assets: 35.0; Gross Liab.: 188.2; Debt Liab.: 74.5.

### Risk Assessment Matrix (selected principal risks)
- Abrupt global slowdown or recession: Likelihood: H; Time horizon: Short term; Impact: H.
- Intensifying spillovers from Russia’s war in Ukraine and impact on commodity prices: Likelihood: H; Time horizon: Short term; Impact: H.
- De-anchoring of inflation expectations leading to tightening domestic financial conditions: Likelihood: M; Time horizon: Short term; Impact: H.
- Unexpectedly large or disorderly housing market disruptions: Likelihood: M; Time horizon: Short to medium term; Impact: M.
- Higher frequency and severity of natural disasters related to climate change: Likelihood: H; Time horizon: Short to medium term; Impact: H.

---

### Financial Sector Assessment Program Update (Annex V) — selected supervisory and regulatory actions
- Strengthen independence and funding autonomy for APRA and ASIC; enhance ASIC enforcement powers — status: In process.
- APRA funding and capacity enhancements (selected amounts):
  - A$67.3 million additional funding in the 2021-22 MYEFO.
  - $145 million in the 2019-20 Budget.
  - $28.8 million in the 2020-21 Budget.
- APRA reforms and supervisory enhancements:
  - SRI model and supervisory methodology updates; increased stress testing and annual stress testing for ADIs.
  - CPS 900 resolution planning expected to be effective from 1 January 2024.
- Data and analytics improvements:
  - APRA Connect launched in September 2021.
  - Superannuation Data Transformation (SDT) project and other enhanced collections.
- AML/CFT developments:
  - AUSTRAC oversees >17,000 reporting entities.
  - AUSTRAC initiated 19 assessments covering 174 reporting entities in 2021-22.
  - Reforms to the AML/CTF Act effective June 17, 2021.
- Crypto market observations:
  - >400 crypto asset exchanges registered in Australia; largest 10-12 account for most retail activity.
  - Australian Tax Office: over 1 million Australians had crypto capital transactions in 2021-22.
  - Survey: around 5 percent of the population owned crypto assets (2022 survey).

---

*Source: 1ausea2023001 - 1. Monetary Policy During the Pandemic (IMF staff report chapter).*

### 1. Monetary Policy During the Pandemic ________________________________________________________ 27

### 1. Monetary Policy During the Pandemic

### Context and recent developments
- Australia recovered from the pandemic faster than most advanced economies; output gap turned positive and growth in 2022Q3 was 5.9 percent y/y.
- Headline inflation reached 7.3 percent in 2022Q3 and became broad-based, driven by higher commodity prices, supply-chain disruptions, domestic floods, and strong domestic demand.
- The unemployment rate declined to 3.4 percent (November 2022), well below the NAIRU (~4.7 percent); job vacancy rates are high in construction and manufacturing.
- Wage growth was 3.1 percent y/y in 2022Q3, described as somewhat subdued.
- Housing prices declined by 8 percent from their peak following a pandemic-era surge; housing credit growth is beginning to moderate while business credit remains strong.
- Fiscal consolidation: overall deficit declined to 3½ percent of GDP (from 9¼ percent in FY2020/21); gross public debt is 57 percent of GDP.
- External position: preliminary assessment finds the 2022 external position in line with fundamentals; current account balance expected to moderate to 0.9 percent of GDP in 2022 (2021: 3.1 percent). REER appreciated by 6 percent in 2021 and remained broadly stable through 2022Q3.

### Monetary policy tightening and RBA balance sheet effects
- The RBA has tightened policy rapidly, hiking the policy rate by cumulatively 300 bps since May 2022 to a roughly neutral stance.
- The RBA decided to hold to maturity the bonds from its asset purchase portfolio, unlike some other AE central banks.
- Medium-term inflation expectations have remained anchored even as short-term expectations have risen.
- Policy tightening is leading to financial losses and a moderately negative equity position for the RBA, projected at 0.9 percent of GDP at the trough.

### Inflation dynamics and labor market pressures
- Inflation is broad-based with rising costs in food, transport, electricity, and new dwellings construction (surging due to labor and materials shortages).
- Headline inflation is estimated to have peaked at around 8 percent y/y in 2022Q4; trimmed mean was 6.5 percent y/y in 2022Q4.
- Inflation is projected to remain above target through 2024; the inflation target band is expected to be reached in 2024 or later, subject to uncertainty.
- Labor market: underemployment and underutilization rates compressed; employment and labor force participation reached record highs in 2022Q3, while average hours worked per employee remained below pre-pandemic levels.
- Survey readings of labor costs have spiked, creating the potential for broader wage acceleration.

### Outlook and downside risks
- Growth outlook: projected to slow from 3.6 percent in 2022 to 1.6 percent in 2023 before gradually recovering to potential growth of around 2¼ percent.
- Key channels weighing on domestic demand: rising mortgage payments, declines in real disposable income from high inflation and higher energy prices, and falling housing prices; households are expected to draw down pandemic savings buffers to soften consumption declines.
- External demand is expected to slow with subdued growth in trading partners, including China.
- Near-term inflationary pressures expected to persist due to high energy, food, and transport costs, lingering supply disruptions, and gradually rising nominal wages.
- Noted downside risks (Annex IV): stronger global downturn (including China), higher commodity prices leading to higher inflation, natural disasters from climate change, geo-economic fragmentation, cybersecurity risks, and a stronger-than-expected housing price decline which could weaken banks’ balance sheets.
- Growth-at-risk analysis indicates downside risks: Growth-at-risk (5th percentile) shows a notable decline from last year; one referenced value is -1.8 (5th percentile).

### Authorities’ views
- Authorities expect a soft landing amid near-term headwinds, anticipating a slowdown in domestic demand as higher interest rates feed through.
- Authorities view inflation as driven by both supply- and demand-side factors and expected to remain above target through 2024; they agree with the staff’s preliminary external sector assessment.
- Authorities emphasized uncertainty about consumers’ reactions to high inflation and rising mortgage rates amid significant accumulated savings buffers; they saw financial stability risks as well-contained but acknowledged the housing correction would affect consumption.

*Source: 1ausea2023001 - 1. Monetary Policy During the Pandemic*

### 13.      With a positive output gap, a tight labor market, and high inflation, further monetary

### 1ausea2023001 - 13.      With a positive output gap, a tight labor market, and high inflation, further monetary

### Monetary policy assessment and outlook
- Monetary policy tightening is warranted in response to high inflation and strong domestic demand, with the pace of further tightening determined by incoming data.
- The cash rate is 3.1 percent and has reached broadly neutral territory.
- Staff expect the cash rate to peak at around 3.85 percent in 2023Q2, given inflationary pressures and the tight labor market.
- The 2022–2023 tightening cycle has been significant (tightening 2022-2023 (325 bps)), and there is high uncertainty about the strength and lags of transmission channels.
- Financial conditions may tighten by more than what the cash rate implies, weighing on corporate and household balance sheets.
- On average, household interest payments as a share of disposable income are set to double, from 5.2 percent in 2021 to around 10 percent.
- Household mortgage exposure: a large share of mortgages are at variable rate or fixed for only a few years, with a large share resetting to sharply higher rates in 2023.
- Pandemic-era Term Funding Facility (TFF) funding will expire in 2023-24, raising banks’ funding costs.

### Fiscal policy stance and developments
- Fiscal consolidation is expected to continue in FY2022/23, albeit at a significantly slower pace.
- Overall consolidation of the general government cyclically adjusted primary balance is expected at about 0.3 percent of potential GDP, following stronger-than-expected consolidation of 4¾ percent of potential GDP in FY2021/22.
- New spending measures in the October 2022 Commonwealth Government budget provide targeted cost-of-living relief and address structural economic issues; fiscal impact is partially offset by reductions in other spending and new revenue measures.
- A temporary cap on domestic gas and coal price was recently introduced. Further measures expected in 2023Q1 include direct, targeted subsidies for household and small business energy bills and a permanent mandatory code of conduct and reasonable pricing provision for the domestic gas market.
- Stage three of the personal income tax (PIT) reforms legislated in 2018 is projected to lower tax receipts by around 1 percent of GDP annually starting in FY2024/25, partially offset by gains from bracket creep during ensuing years.
- Work on budget repair has identified 1¼ percent of 2022 GDP savings over the next four years.
- The Commonwealth cash balance is projected to remain in deficit through the medium term, with overall fiscal consolidation at the general government level driven by state-level budget tightening.
- Structural spending pressures: higher interest payments, significantly revised-up cost projections for the National Disability Insurance Scheme (NDIS), higher expenses for health and aged care, and a lower assumption for labor productivity growth.
- The capital gains tax exemption for the sale of main residences is estimated to cost around 2½ percent of GDP annually in foregone revenues.

### Staff views and policy recommendations
- Monetary policy:
  - Pace of further rate increases should be data-dependent, ensuring that inflation expectations remain well anchored.
  - More tightening in the short term is indicated, but significant uncertainty remains about transmission speed and intensity.
  - Careful communication of risk assessment and policy intentions is key to guide market expectations.
- Fiscal policy near term:
  - Focus on fiscal consolidation to contain demand pressures and inflation.
  - Save expected revenue overperformance and implement spending programs judiciously, notably infrastructure investment.
  - Phase implementation of below-the-line activity through newly created investment vehicles (National Reconstruction Fund, Rewiring the Nation, and Housing Australia Future Fund) and avoid proliferation of such vehicles.
  - Cost-of-living support should be temporary and targeted to protect vulnerable households and small viable firms; untargeted policies that weaken price signals should not be extended.
  - Broader regulatory changes should be designed to minimize risks to domestic energy supply.
- Fiscal options in downside scenario:
  - Any additional fiscal support should be temporary and well-targeted; options include extension of low-income tax offsets and top-up payments to welfare and JobSeeker recipients.
- Medium term:
  - Target continued consolidation path to rebuild and supplement buffers for future shocks.
  - Multi-pronged approach needed to contain NDIS spending growth; planned review of the program should make it efficient, equitable, and sustainable.
  - Consider transforming the limited, tax-funded JobSeeker unemployment benefit into a contribution-based unemployment insurance to strengthen automatic stabilizers.
  - Protect spending for human and physical capital to support productivity growth.
- Tax reform recommendations:
  - Comprehensive medium-term tax reforms to meet higher structural spending needs and support economic efficiency and growth.
  - Rebalance from currently high direct to underutilized indirect taxes, mitigating regressive impacts with targeted cash transfers to vulnerable households.
  - Reassess stage 3 personal income tax cuts (effective FY2024/25) if needed to balance budget costs and economic benefits; address bracket creep by raising tax brackets periodically.
  - Broaden the GST base by limiting exemptions (e.g., healthcare spending) to improve efficiency and strengthen revenue.
  - Review tax exemptions such as the main residence capital gains tax exemption (costing around 2½ percent of GDP annually) for possible restriction.
  - At state and territory level, implement recurring property taxes in lieu of stamp duties to promote housing affordability and more stable tax bases; transitional revenue losses could be bridged with higher GST if substantial.

### Authorities’ positions and actions
- Authorities committed to near-term fiscal discipline to support monetary policy efforts to dampen inflation; strategy calls for spending restraint and saving any revenue overperformance in support of budget repair.
- Authorities stated the current budget streamlines pre-existing plans for rising infrastructure investment given changing priorities and construction industry bottlenecks.
- Emergency temporary measures were required to mitigate domestic energy price rises following the war in Ukraine; longer-term gas market policies will be designed to avoid discouraging private investment and supply in the domestic gas sector.
- The government has brought forward the planned independent review of the NDIS; the review will be completed by October 2023.
- Authorities plan to revisit long-term cost estimates of government programs in the 2023 Intergenerational Report, brought forward by two years.
- Authorities intend to review current tax bases and forgone revenues to inform next steps in tax reforms; noted reliance on personal income taxation and bracket creep raising average personal income tax rates to record levels over the medium term due to inflation and wage growth.

### Key figures and timeline items (as presented)
- Cash rate: 3.1 percent.
- Expected cash rate peak: around 3.85 percent in 2023Q2.
- Consolidation of cyclically adjusted primary balance in FY2022/23: about 0.3 percent of potential GDP.
- Consolidation achieved in FY2021/22: 4¾ percent of potential GDP.
- Stage three PIT cuts reduce receipts by around 1 percent of GDP annually starting in FY2024/25.
- Identified budget repair savings: 1¼ percent of 2022 GDP over the next four years.
- Household interest payments as share of disposable income: 5.2 percent in 2021 → around 10 percent (projected).
- TFF expiry: 2023-24.
- NDIS main residence capital gains tax exemption foregone revenue: around 2½ percent of GDP annually.
- NDIS review completion target: October 2023.

*AUSTRALIA — INTERNATIONAL MONETARY FUND.*

### 26.      The ongoing independent review of the RBA presents an opportunity to revisit the

### 1ausea2023001 - 26.      The ongoing independent review of the RBA presents an opportunity to revisit the

### RBA review and mandate
- Independent outside experts are conducting a review "to conclude by March 2023" covering the RBA’s objectives, mandate, governance, culture, operations, and the interaction between monetary, fiscal and macroprudential policies.
- The review presents an opportunity to:
  - Reaffirm the inflation targeting regime within a clearly focused mandate.
  - Revisit the RBA’s objectives, governance arrangements, and decision-making processes.
  - Institute periodic reviews in line with practices in some other central banks.

### Authorities’ views on monetary policy and outlook
- Authorities emphasized their resolve to return inflation to target by establishing a more sustainable balance of demand and supply.
- Key observations:
  - Interest rates have increased considerably over a short period of time.
  - Monetary policy transmission exhibits lags; the RBA noted policy is data-dependent and not on a pre-set path.
  - Household consumption remained broadly resilient in high-frequency data but was expected to slow as pent-up demand from the holidays abates and past rate hikes feed through to mortgage payments.
  - Aggregate wage growth remains moderate and consistent with the inflation target.
  - Prospects for a significant global slowdown have increased, partly due to fast and synchronized monetary policy tightening globally.

### Maintaining financial sector resilience amid falling housing prices
- Housing prices and risks:
  - Housing prices are declining; rising rates, mortgage repricing, and increased supply will dampen housing price growth.
  - IMF staff’s baseline projects prices to decline by about 16 percent in nominal terms from their peak in April 2022 through 2023, before normalizing.
  - Despite declines, housing prices would remain above pre-pandemic levels.
  - Housing price-at-risk (HaR) analysis indicates significant downside risks that began widening in late 2021.
- Household and sector vulnerabilities:
  - Default risk appears limited due to absence of limited-recourse mortgages and significant household savings in mortgage offset and redraw accounts.
  - Households saved "3 percent of disposable income over the two years to June 2022" in mortgage redraw and offset accounts, compared with an average of "1 percent" pre-pandemic.
  - Borrowers accounting for less than "5 per cent" of owner-occupier variable rate borrowers in early 2022 were identified as potentially vulnerable.
  - Financial stability risks from commercial property remain low; banks' exposures limited to around "6 percent" of assets.
- Banking system strength and macroprudential stance:
  - Only "5 percent" of loans have an outstanding LVR greater than 75 percent, though this share may rise as housing prices fall.
  - Banks assess new mortgages with a serviceability buffer of "300 bps" above the contracted mortgage rate (raised from "250 bps" in 2021).
  - Major banks’ CET1 ratios have decreased slightly in recent quarters because banks have returned capital to shareholders, but capital remains high and exceeds levels required under the new capital framework effective January 2023.
  - With limited financial stability risks in the housing downcycle, there is currently no strong case for either loosening or tightening macroprudential policies.
  - APRA’s new macroprudential framework utilizes forward-looking indicators and is coordinated through the Council of Financial Regulators (CFR).
- Liquidity and funding risks:
  - Holdings of high-quality liquid assets remain high and liquidity coverage ratios are comfortably above regulatory requirements.
  - Banks require refinancing of TFF funding of "A$190 billion; 3 percent of total liabilities" in 2023-24, which could raise exposure to wholesale funding at a period of higher global rates.
- Capital framework:
  - Planned implementation of the bank capital framework will further increase capital buffers.
  - Higher bank capital buffers required (CET1 requirements and buffers discussed in the source).

### Staff’s views on financial stability
- Overall view:
  - Financial system appears resilient with adequate buffers and good liquidity positions; financial stability risks, while increasing, remain contained.
  - Close monitoring is important amid falling housing prices and tightening financial conditions.
- Key risks and concerns:
  - Lower-income, highly indebted households with recent mortgages may be disproportionately at risk from rising rates and declining real incomes.
  - Some increase in non-performing loans is likely but unlikely to pose material stability risks if the labor market remains resilient.
  - An expected increase in bank wholesale funding at higher rates and slowing growth may pose vulnerabilities, although liquidity coverage ratios remain well above minimums and deposit share has improved.
  - Non-bank financial institutions merit close scrutiny given rapid growth from a low base.
- Non-financial risks:
  - Climate risk: Climate Vulnerability Assessment for the five largest banks found a measurable impact of climate risks on loan losses, though likely absorbable without banking-system stress.
  - Data: Climate-related data quality and accessibility remain a challenge.
  - Recommendation: CFR, including ASIC, can further improve standardized climate-risk disclosures for large, listed companies.
  - Cyberthreats require adequate investment, monitoring, and contingency planning.
  - AML/CFT: The regime should be expanded to cover designated non-financial businesses and professionals and enhance beneficial ownership transparency.

### Crypto and payments regulation
- Current state:
  - Crypto assets largely unregulated for conduct and prudential purposes in Australia; supervision currently provided by various agencies under frameworks not designed for crypto.
- Recommendations:
  - Achieve greater clarity in regulatory architecture to ensure timely risk monitoring and clear roles/coordination among regulatory agencies.
  - Strengthen consumer protection.
  - Reform payments regulatory framework to address new products and technologies.

### Authorities’ views on financial sector risks and reforms
- Authorities consider risks well-contained given strong bank capital and liquidity buffers.
- Observations:
  - Interest serviceability buffer of "300 bps" provides expectations that households can manage interest rate increases.
  - Almost three quarters of mortgage debt is owed by households in the top 40 percent of the income distribution.
  - Authorities acknowledge pockets of vulnerability among lower-income households with recent mortgages or high loan-to-income ratios and low prepayment buffers.
- Commitments:
  - Continue financial sector reforms and implement FSAP recommendations.
  - Strengthen integration of systemic risk analysis and stress testing in APRA’s supervision.
  - Extend resolution funding options by expanding loss-absorption capacity for banks.
  - Consult on enhancing APRA’s supervisory approach and close data-collection gaps.
  - Introduce standardized, internationally aligned climate-related financial disclosure for large, listed companies and financial institutions in consultation with industry.
  - Ensure AML/CFT regime remains fit for purpose, including introducing a public beneficial ownership registry for companies and legal vehicles and considering regulation of DNFBPs as part of longer-term strategy.

### Restoring housing affordability
- Affordability deterioration:
  - Baseline interest-rate trajectory suggests borrowing capacity may have fallen as much as "30 percent" by the end of 2022.
  - In 2022, the median housing price was estimated to be almost "50 percent" above the price the median household could afford with a debt service-to-income ratio of "30 percent".
  - As interest rates increase further, affordability is expected to continue declining despite falling housing prices.
  - Rental markets have tightened with rents rising fast and likely to remain tight amid resumption of inward migration.
- Authorities’ planned supply measures:
  - Commonwealth and state/territory governments are working to facilitate faster supply of land through more efficient planning and zoning.
  - The "A$10 billion Housing Australia Future Fund" plans to provide an additional "30,000" social and affordable housing units over the next "5 years".
- Staff’s view on policy priorities:
  - Boosting housing supply is essential and should be supported by well-targeted support for lower-income households.
  - Measures discriminating by residency (e.g., state-level land tax surcharges for non-residents) have a limited role and should be replaced by measures not discriminating by residency, such as a general surcharge on vacant property.

### Securing sustainable and inclusive growth; climate mitigation
- Climate commitments:
  - Australia’s upgraded 2030 NDC commits to a "43 percent" reduction in emissions from 2005 levels.
  - The Climate Change Act, 2022:
    - Codifies the 2030 NDC and the net-zero target.
    - Requires an annual statement to Parliament on progress (first statement presented in December 2022).
    - Empowers the Climate Change Authority to advise on the climate statement and future targets.
  - Authorities are reforming the Safeguard Mechanism, developing a National Electric Vehicle Strategy, and ramping up electricity grid investments.
- Staff’s recommendations:
  - Australia’s upgraded targets are broadly in line with net-zero by 2050 and comparable to other advanced G20 economies.
  - An economy-wide carbon price would be the most effective way to achieve emission reductions; absent that, strong sectoral policies with price signals where possible are recommended.
  - Transforming the Safeguard Mechanism into a binding baseline-and-credit scheme is welcome and can drive down industrial emissions efficiently.
  - Stepping up energy sector investment under the Rewiring the Nation program can speed renewable deployment.
  - Additional price signals, such as feebates in energy and transport, could elicit behavioral responses without impacting average prices.
  - Vehicle emission standards and other sectoral policies can complement price signals.

*Source: IMF staff compilation of the chapter content.*

### 45.      Ensuring smooth delivery of high-priority infrastructure projects, and promoting

### Ensuring smooth delivery of high-priority infrastructure projects, and promoting

### Infrastructure, innovation, and competition
- Priorities: ensure smooth delivery of high-priority infrastructure projects, boost productivity via innovation and competition, and sustain infrastructure spending to meet policy goals including the climate transition.
- Implementation guidance:
  - Reprioritize the ambitious infrastructure pipeline given a strong cyclical position and binding construction-sector constraints.
  - Coordinate with states and undertake only significant projects evaluated by Infrastructure Australia.
  - Reduce administrative burden of the R&D tax incentive and promote university-business R&D collaboration.
  - Expand digital infrastructure and skills, reduce regulatory burden on businesses, and expand automatic mutual recognition of occupational licenses across jurisdictions.

### Trade, FDI, and international engagement
- Positive actions:
  - Continued strong support for the WTO and the rules-based international trading system.
  - Contributions totalling the equivalent of 39 percent of Australia’s 2021 SDR allocation to the Fund’s Poverty Reduction and Growth Trust and the Resilience and Sustainability Trust.
- FDI framework changes:
  - Recent changes eased regulatory burden but increased approval fees and expanded notification requirements under the national security test.
  - Recommendation: continued judicious use of the national security test to keep the FDI approval process transparent.
- Regional engagement: authorities engage public and private stakeholders to address correspondent banking relationship pressures in the Pacific and to facilitate discussion on regional solutions.

### Labor market, skills, and inclusion
- Recent initiatives to tackle skill shortages:
  - Free vocational training, expansion of university capacity, and a temporary increase in migration.
  - Announced increase in child-care subsidies and expanded parental leave to boost female labor force participation.
- Migration and education:
  - Scope to improve the migration system to attract skilled workers.
  - Continued education sector reforms needed to reverse deteriorating school outcomes.
- Industrial relations:
  - Recent changes include greater access to multi-employer bargaining; effects depend on interpretation and implementation.
  - Authorities should closely monitor implementation, assess effects on wages and labor market flexibility, and review the law in two years as statutorily required.
  - Authorities plan to publish an Employment White Paper in 2023.

### Authorities’ views on climate and infrastructure
- Climate approach:
  - Confidence in achieving mitigation targets using sectoral policies; an economy-wide carbon tax is not being considered.
  - Emphasis on rapid implementation of sectoral policies, using market mechanisms where possible.
  - Commitment to increase renewables in electricity generation from 29 percent in 2021 to 82 percent in 2030 under the Rewiring the Nation plan.
  - Commitment to reform the Safeguard Mechanism by mid-2023 into a binding baseline-and-credit scheme and introduce further regulatory measures to curb transport emissions (including the upcoming National Electric Vehicle Strategy).
- Infrastructure governance:
  - Budget cancelled or delayed several projects in the infrastructure pipeline; further reprofiling expected.
  - Review of Infrastructure Australia recommends enhancing its role as an independent adviser.
  - Authorities emphasize investment in broadband internet, digitization of government-business interactions, and implementation of recommendations to reduce R&D tax offset administrative burden.
  - Reiterated commitment to an open and transparent FDI regime and judicious use of the national security test.

### Macroeconomic outlook and policy recommendations (Staff appraisal)
- Outlook and risks:
  - From a strong cyclical position, Australia expected to come to a soft landing in 2023; risks skewed significantly to the downside.
  - Downside risks: stronger global downturn, persistently high inflation expectations, and rising geo-economic fragmentation.
  - Inflation projected to decline gradually but remains above target until 2024, with significant uncertainty.
- Monetary and fiscal policy guidance:
  - Restrictive macroeconomic policies needed in near term to mitigate strong domestic demand and address inflation.
  - Monetary policy: continue tightening in the short term as envisaged; pace of rate increases should be data-dependent; maintain transparency and risk-assessment-based communication to anchor inflation expectations.
  - Fiscal policy: near-term fiscal restraint should support monetary policy; budgetary revenue overperformance should be saved; spending program implementation should remain judicious; any additional cost-of-living support amid high inflation should be temporary and well targeted to the vulnerable.
- Medium-term fiscal strategy:
  - Implement comprehensive tax reforms and improve expenditure efficiency to create a credible consolidation path.
  - Review existing large spending programs and improve expenditure efficiency to underpin medium-term consolidation.
  - Rebalance the tax system from currently high direct to indirect taxes to raise revenues to fund government programs.
  - Direct windfall revenue gains to budget repair to build fiscal buffers.

### Financial stability, housing, and prudential recommendations
- Housing and affordability:
  - Housing prices expected to continue declining significantly from pandemic-era highs with rising interest rates; material financial stability concerns unlikely due to prudent lending standards and buffers.
  - Affordability concerns rising because of strongly rising rents and higher mortgage rates.
  - Recommendation: focus on boosting housing supply and provide well-targeted support for lower-income households.
- Financial system monitoring:
  - Financial system appears robust; increase in banks’ required capital buffers is welcome.
  - Potential vulnerabilities from increased bank wholesale funding at higher rates amid slowing growth; liquidity coverage ratios are well above regulatory minimums.
  - Monitor cyberthreats to financial infrastructure; invest in contingency planning.
  - Scrutinize non-bank financial institutions given rapid growth from a low base.
  - Expand financial integrity regulation to cover DNFBPs and enhance beneficial ownership transparency.

### Climate mitigation policy recommendations
- New targets:
  - New 2030 Nationally Determined Contribution broadly in line with net zero by 2050; new Climate Change Act creates accountability framework.
- Policy guidance:
  - A broad-based carbon price coupled with measures to mitigate transition risks remains the most cost-effective abatement approach.
  - If an economy-wide carbon price is politically infeasible, adopt alternative sectoral policies with price signals where possible.
  - Planned reforms to the Safeguard Mechanism for industrial emissions are welcome.
  - Add price signals in energy and transport sectors, potentially in the form of feebates, to incentivize emissions reduction.

### Monetary policy and RBA balance sheet (selected factual findings)
- Pandemic-era monetary measures:
  - Cash rate cut from 0.75 to 0.1 percent in March-November 2020.
  - 3-year government bond yield target introduced in March 2020.
  - Term Funding Facility (TFF): up to A$213 billion (9.7 percent of GDP) in three-year funding at discounted rates of 0.25 percent for funding drawn between March and November 2020, and then 0.1 percent until June 2021.
  - Bond Purchase Program: assets worth A$280 billion, or 14 percent of GDP, purchased between November 2020 and February 2022.
  - Cash rate increased from 0.1 percent in May 2022 to 3.1 percent at the end of 2022.
- RBA balance sheet and losses:
  - RBA balance sheet expanded to 3.5 times its pre-COVID level due to purchases of Australian and state government bonds (A$360 billion, including purchases for yield target and market operations) and provision of low-interest bank funding under the TFF (A$188 billion).
  - As a result of rising rates, the RBA incurred large mark-to-market losses; total capital has been negative since June 2022.
  - Model projections: total capital estimated to decline to A$ -19.5 billion by December 2024, then recover and gradually converge to zero.
  - Revaluation account estimated to reach A$ -8.4 billion by June 2023 and improve to A$16.9 billion by December 2027 as around 50 percent of existing bonds mature.
- Communication and governance:
  - Losses will not hinder RBA operations, but clear communication is important to explain losses arise from fulfilling price and financial stability mandates and are partly offset by cheaper funding and greater Treasury revenues.
  - Suggestion: revisit RBA capital and dividend rules in light of the COVID experience to assess whether additional buffers are needed for future unconventional policy use.

### Final recommendations and process
- Structural reforms: reignite productivity growth and boost inclusion by streamlining infrastructure pipeline, working with the construction sector to overcome capacity constraints, boosting innovation and competition, and improving education outcomes.
- Timing: recommend the next Article IV consultation on the standard 12-month cycle.

*Source: IMF staff report chapter summarized from 1ausea2023001 - 45.*

### Box 3. Downside Scenario

### Box 3. Downside Scenario

### Scenario assumptions
- Model: IMF’s G20 Model (Andrle and others (2015)).
- Domestic demand shocks to trading partners: a one percent decline in GDP from the baseline, decaying over four years, in China and the US.
- Inflation expectations shock: a 50 bp increase in one-year-ahead inflation expectations for Australia and all other countries in the model.
- Financial conditions shock: a 50 bp sovereign term premium shock in the US that transmits to other countries’ term premia; and a 100 bp increase in corporate risk and term premia (in addition to the sovereign premia).

### Effects on Australia’s real output
- Aggregate outcome: These combined shocks could reduce Australia’s real output by -0.9 percentage point in 2023, dissipating to 0.1 percentage point in 2024.
- Decomposition: A tightening of financial conditions (through a rise in inflation expectations, as well as corporate and term premia) explains most of the decline in output, while a slowdown in China’s demand explains the rest.

### Effects on Australia’s core inflation
- Inflation outcome: The rise in inflation expectations leads to higher core inflation in 2023 and 2024 but is partly offset by the deflationary impact of weaker global demand and the tightening of financial conditions through higher corporate and term premia.
- Quantified effect: Australia’s core inflation would increase by 0.4 percentage point in 2023, with the effect dissipating fully in 2024.

### Key figures and shocks (preserved exactly as in source)
- Domestic demand shock: one percent decline in GDP (China and US), decaying over four years.
- Inflation expectations shock: 50 bp increase in one-year-ahead inflation expectations.
- Sovereign term premium shock (US): 50 bp.
- Corporate risk and term premia shock: 100 bp (in addition to the sovereign premia).
- Impact on real output: -0.9 percentage point in 2023; 0.1 percentage point in 2024.
- Impact on core inflation: 0.4 percentage point increase in 2023; effect dissipates fully in 2024.

*Source: IMF staff estimates.*

### Box 5. Strengthening Unemployment Benefits and Automatic Stabilizers

### Box 5. Strengthening Unemployment Benefits and Automatic Stabilizers

### Current assessment of Australia’s automatic stabilizers
- During shocks to household disposable income, about one half of lost income is offset by automatic stabilizers, below the OECD average.
- Australia’s automatic stabilizers are relatively small but relatively effective in international comparison.
- Australia has a tax‑financed, means‑tested unemployment benefit (“JobSeeker”) program with a low benefit level:
  - Benefit levels are fixed and not linked to the earnings level of the previous job, corresponding to 41 percent of pre‑tax earnings for a single person working full time on the minimum wage.
  - The underlying unemployment benefit figure (as at September 2022) refers to the maximum JobSeeker rate for singles with no children and excludes eligible allowances, such as energy supplement or Commonwealth rental assistance.
  - IMF staff calculations assume 38 hours of work per week at the minimum wage for this comparison.

### Rationale for introducing a contributions‑based unemployment insurance program (UIP)
- Introducing a contributions‑based social unemployment insurance program linked to workers’ wages can:
  - Help close a gap in social protection.
  - Enhance automatic stabilizers by providing time‑bound, transparent, and pre‑specified income support during downturns.
  - Reduce the need for ad‑hoc discretionary support during economic downturns.
- Australia is the only OECD country without contribution‑funded unemployment insurance.

### Design considerations and trade‑offs for UIP
- UIP must be designed carefully to ensure cost effectiveness and avoid distortionary labor market impacts:
  - Introduction of a UIP would raise the tax wedge as employers and employees typically need to make contributions.
  - Costs will depend on:
    - the targeted rate of income replacement,
    - the maximum level of earnings to be insured,
    - the duration of payouts.
  - Parameters should balance maintaining adequate income for stabilization and creating incentives for unemployed persons to find suitable jobs.
- Program interactions need consideration, including overlap with workers compensation programs administered by state and territory governments that have varying rates of income replacement.

### Semi‑automatic stabilizers and state‑dependent design
- Consideration can be given to semi‑automatic stabilizers to improve the trade‑off between incentives and protection:
  - Replacement ratios and payout duration could be made state‑dependent.
  - In an economic downturn with high cyclical unemployment, benefit levels could be more generous than under baseline settings, strengthening stabilization while limiting adverse incentive effects during normal times.

### Key findings and implications (bulleted facts preserved from source)
- "About one half" of lost household disposable income is offset by automatic stabilizers in Australia (below the OECD average).
- JobSeeker provides means‑tested cash support for an unlimited period subject to meeting conditions; benefit levels are fixed and not earnings‑linked.
- JobSeeker corresponds to 41 percent of pre‑tax earnings for a single full‑time minimum‑wage worker (IMF staff calculation, assuming 38 hours per week; underlying benefit figure as at September 2022 excludes certain eligible allowances).
- Australia is the only OECD country without contribution‑funded unemployment insurance.
- Introducing a UIP would:
  - Be time‑bound and improve timeliness and targeting versus discretionary measures.
  - Require employer and employee contributions, raising the tax wedge.
  - Have costs determined by replacement rate, maximum insured earnings, and payout duration.
- Semi‑automatic, state‑dependent settings can allow more generous benefits during high cyclical unemployment while preserving incentives in normal times.

*Source: Box 5. Strengthening Unemployment Benefits and Automatic Stabilizers, IMF staff analysis (from the supplied content).*

### Annex I. Previous IMF Policy Recommendations

### Annex I. Previous IMF Policy Recommendations

### Sound macroeconomic policies and post-pandemic recovery
- Policies were broadly consistent with staff advice; Australia implemented one of the largest fiscal stimulus packages among AEs during the pandemic, combined with monetary easing, which helped weather the pandemic and limit economic scarring.
- Since the last Article IV consultation, accommodative policies have been gradually withdrawn to support a durable handover from public to private demand and address inflation.

### Fiscal consolidation and budget outcomes
- The overall deficit in FY2020/21 reached a record high of 9¼ percent of GDP.
- Cyclical recovery in tax revenues and stimulus withdrawal led to large consolidation in FY2021/22; the overall fiscal deficit reached 3½ percent of GDP in FY2021/22.
- Fiscal consolidation was described as well-calibrated to the strength of the labor market recovery and staff advice to calibrate the fiscal stance to support the transition from public to private demand.
- Projection and medium-term outlook:
  - Sizable fiscal consolidation took place in FY2021/22, but the pace of fiscal consolidation is projected to slow in FY2022/23 and beyond.
  - Gross general government debt is projected to reach a peak of around 62½ percent of GDP by FY2025/26 before stabilizing over the medium term.
  - In FY2024/25, the deficit is projected to increase, mainly resulting from the already-legislated personal income tax reform, lowering its tax revenue by around 1 percent of GDP, as per the FY2022/23 budget.

### Monetary policy and inflation
- Inflation reached 7.3 percent (y/y) in 2022Q3, well-above the RBA target band, and is projected to remain high in the near term.
- The RBA has tightened monetary policy by 300 basis points (cumulative) since May 2022; the cash rate target is at 3.1 percent.
- The 10-year Treasury bond yield peaked at around 4¼ percent in October 2022, and declined to around 3½ percent in December.
- Monetary policy is projected to tighten further through mid-2023.
- Long-term inflation expectations remain well anchored.

### Financial sector reforms and resilience
- Reforms progressed, including an increase in banks’ interest serviceability buffer and stronger bank capitalization.
- APRA raised the minimum serviceability buffer from 2.5 to 3 percent, requiring lenders to use the higher interest rate spread in assessing borrowers’ mortgage serviceability.
- Progress is being made on addressing climate and cyber risks; banks remain highly concentrated in mortgage lending.

### Structural policies
- Progress made on climate change mitigation: the new NDC brings Australia’s 2030 emissions target in line with its long-term goal of achieving net zero by 2050; codifying the target through legislation has reduced uncertainty and helped catalyze environmentally friendly investments.
- Authorities show readiness to use price signals and market mechanisms for emissions reductions, but a broad-based economy-wide carbon price is still not being considered.
- The government’s focus on education and female labor force participation aligns with staff recommendations.
- Longstanding staff advice to rebalance the tax structure away from direct taxes toward indirect taxes remains difficult to implement.

### Sovereign risk and debt sustainability (Annex II summary)
- Background and recent evolution:
  - Australia’s cyclical position is stronger than in most advanced economies, with a positive output gap and a tight labor market supported by favorable terms-of-trade developments.
  - The share of Australian Government Securities (all denominated in local currency) held by non-residents declined since end-2020, reaching around 45 percent at end 2022Q2 (or 16 percent of GDP).
- Baseline macro assumptions and projections:
  - Growth is projected to decline to around 1.6 percent in 2023 before gradually recovering over the medium-term to around 2¼ percent, consistent with staff’s potential output estimates.
  - Monetary policy tightening and rising debt-servicing costs contribute to near-term increases in gross public debt as a share of GDP, with stabilization over the medium term as the primary balance improves gradually.
- Risk assessment:
  - The overall risk of sovereign stress is assessed as low.
  - Debt is assessed as sustainable with high probability.
  - Gross financing needs (GFN) will remain at manageable levels given deep capital markets and the role of the Australian dollar, though rising GFNs should be monitored.
  - Medium-term liquidity risks as analyzed by the GFN Financeability Module are moderate; long-term risks are low.
- Key projections and public debt dynamics (percent of GDP unless indicated otherwise):
  - Public debt (actual and projection): 57.6 (2021), 55.6 (2022), 59.2 (2023), 61.9 (2024), 62.4 (2025), 62.6 (2026), 62.5 (2027), 62.1 (2028), 61.5 (2029), 60.8 (2030), 60.0 (2031).
  - Change in public debt: 0.5 (2021), -1.9 (2022), 3.6 (2023), 2.7 (2024), 0.5 (2025), 0.2 (2026), -0.1 (2027), -0.4 (2028), -0.6 (2029), -0.7 (2030), -0.8 (2031).
  - Primary deficit (percent of GDP): 5.3 (2021), 2.1 (2022), 1.6 (2023), 1.5 (2024), 1.4 (2025), 1.0 (2026), 0.7 (2027), 0.4 (2028), 0.1 (2029), -0.1 (2030), -0.3 (2031).
  - Noninterest revenues (percent of GDP): 35.6 (2021), 35.0 (2022), 35.9 (2023), 36.3 (2024), 36.2 (2025), 36.5 (2026), 36.7 (2027), 36.7 (2028), 36.8 (2029), 36.8 (2030), 36.9 (2031).
  - Noninterest expenditures (percent of GDP): 40.9 (2021), 37.1 (2022), 37.5 (2023), 37.8 (2024), 37.6 (2025), 37.5 (2026), 37.4 (2027), 37.1 (2028), 36.9 (2029), 36.7 (2030), 36.6 (2031).
  - Automatic debt dynamics contribution: -4.5 (2021), -4.8 (2022), 1.1 (2023), 0.2 (2024), -1.5 (2025), -1.3 (2026), -1.3 (2027), -1.2 (2028), -1.0 (2029), -0.9 (2030), -0.8 (2031).
  - Real GDP growth (percent): 5.2 (2021), 3.6 (2022), 1.6 (2023), 1.7 (2024), 2.1 (2025), 2.2 (2026), 2.3 (2027), 2.3 (2028), 2.3 (2029), 2.3 (2030), 2.3 (2031).
  - Inflation (GDP deflator; percent): 5.6 (2021), 7.7 (2022), -1.2 (2023), 0.4 (2024), 2.9 (2025), 2.4 (2026), 2.5 (2027), 2.5 (2028), 2.5 (2029), 2.5 (2030), 2.5 (2031).
  - Nominal GDP growth (percent): 11.1 (2021), 11.6 (2022), 0.4 (2023), 2.2 (2024), 5.1 (2025), 4.7 (2026), 4.8 (2027), 4.8 (2028), 4.8 (2029), 4.8 (2030), 4.8 (2031).
  - Effective interest rate (percent): 2.4 (2021), 2.3 (2022), 2.5 (2023), 2.6 (2024), 2.6 (2025), 2.6 (2026), 2.7 (2027), 2.9 (2028), 3.1 (2029), 3.3 (2030), 3.5 (2031).
  - Gross financing needs: 13.4 (2021), 9.5 (2022), 9.1 (2023), 10.6 (2024), 10.6 (2025), 10.4 (2026), 10.4 (2027), 10.7 (2028), 11.3 (2029), 11.5 (2030), 11.6 (2031).
  - Debt service (component of GFN): 8.4 (2021), 7.7 (2022), 7.8 (2023), 9.4 (2024), 9.6 (2025), 9.7 (2026), 10.0 (2027), 10.6 (2028), 11.5 (2029), 12.0 (2030), 12.2 (2031).
- Commentary highlights:
  - The debt path is projected to stabilize over the medium term at moderate levels with GFNs remaining manageable.
  - The overall risk of sovereign stress is low, reflecting low vulnerability in the near-term and low vulnerabilities in the medium- and long-term horizons.
  - Structural spending in disability programs has increased; growth in age-related spending is projected to pick up but at a contained pace relative to other AEs.

*Source: IMF staff.*

### Annex II. Figure 6. Australia: Medium-term Risk Analysis

### Annex II. Figure 6. Australia: Medium-term Risk Analysis

### Debt fanchart and GFN financeability — key indicators and statistics
- Fanchart width: 32.4 0.5
- Probability of debt not stabilizing (pct): 21.4 0.2
- Terminal debt level x institutions index: 9.5 0.2
- Debt fanchart index: ... 0.9
- Average GFN in baseline: 10.1 3.4
- Bank claims on government (pct bank assets): 5.2 1.7
- Chg. in claims on govt. in stress (pct bank assets): 2.3 0.8
- GFN financeability index: ... 5.9
- Debt fanchart index (normalization and weights): 0.5 0.2
- Medium-term index (MTI) components shown: Debt fanchart index 0.5 0.2; GFN finaceability index 7.6 0.2, Low...0.3; Medium-term index values: 2.1; 17.9 0.5 0.1; 0.4
- Prob. of missed crisis, 2022-2027 (if stress not predicted): 0.0 pct.
- Prob. of false alarm, 2022-2027 (if stress predicted): 70.5 pct.

### Debt and GFN assessment — findings and policy implications
- Commentary:
  - "A risk of debt not stabilizing in the medium term remains low."
  - "Likewise, a debt-rollover risk remains low, as indicated by the signal from the gross financing needs (GFN) analysis, driven by the depth of the financial sector and domestic capital markets to meet increased financing needs."
  - "The results are consistent with Australia’s credible fiscal framework, institutions, and deep capital markets."
- Triggered stress tests: (stress tests not activated in gray) — graphical indicators show low risk signals.
- Policy implication: deep domestic capital markets and credible fiscal framework underpin low rollover and medium-term debt risks.

### External Sector Assessment — overall assessment and projections
- Overall Assessment:
  - "On a preliminary basis, the external position in 2022 is expected to be broadly in line with the level implied by medium-term fundamentals and desirable policies."
  - CA surplus projected to decline from 3.1 percent of GDP in 2021 to 0.9 percent of GDP in 2022.
  - Medium-term projection: CA projected to return to a slight deficit as commodity prices decline, savings return to historical levels, and investment picks up.
  - Assessment caveat: "This assessment is highly uncertain given the lack of full-year data for 2022 and volatility in commodity prices."
- Potential Policy Responses:
  - "Withdrawing fiscal and monetary stimulus at an appropriate pace is warranted for Australia."
  - Policies to boost investment recommended: executing planned infrastructure investment, streamlining product market regulation, promoting R&D and innovation investment.
  - "Australia’s commitment to a floating exchange rate should help keep the external position in line with fundamentals going forward."

### Foreign Asset and Liability Position — background and assessment
- Background:
  - NIIP projected to improve slightly to –33.2 percent of GDP in 2022 from –33.8 percent of GDP in 2021 (and an average of –49 percent over the last five years), driven by the CA surplus.
  - About 40 percent of Australia’s gross liabilities are debt obligations.
  - More than half of the debt liabilities are denominated in domestic currency, while assets are largely denominated 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."
  - Structure of external balance sheet reduces vulnerability associated with negative NIIP.
  - Positive net foreign currency asset position implies a nominal depreciation tends to strengthen the external balance sheet, all else being equal.
  - Banking sector’s net foreign currency liability position is mostly hedged and maturity of banks’ external funding has lengthened since the global financial crisis.
  - "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."
- Snapshot 2022 (% GDP):
  - NIIP: -33.2
  - Gross Assets: 155.1
  - Debt Assets: 35.0
  - Gross Liab.: 188.2
  - Debt Liab.: 74.5

### Current Account (CA) — background, drivers, and staff assessment
- Background and projections:
  - CA peaked at 3.1 percent of GDP in 2021 and projected to decline to 0.9 percent of GDP in 2022.
  - Merchandise trade balance projected to increase from 5.3 percent of GDP in 2021 to 6.3 percent of GDP in 2022, driven by high prices for commodity exports (notably thermal coal and LNG; iron ore prices off 2021 highs).
  - Expected offsets: 2.2 percent of GDP deterioration in the primary income balance (higher dividend payments on equity liabilities, including mining sector) and 1.2 percent deterioration in the services balance (higher transport service costs and return to lower tourism surpluses).
  - Decline in 2022 surplus driven by projected decline in the savings rate from pandemic-era highs.
  - Medium-term: CA expected to gradually return to a small deficit as commodity prices decline, investment picks up, and savings decline further.
- Assessment and model results:
  - EBA model cyclically adjusted CA balance: -1.9 percent of GDP
  - EBA Norm: -0.7 percent of GDP
  - EBA Gap: -1.2 percent of GDP
  - IMF staff adjustment for COVID-19 transport service factor: +0.6 percent of GDP
  - Staff-adjusted CA gap range: -1.2 to 0 percent of GDP, midpoint: -0.6 percent of GDP
- 2022 (% GDP) summary:
  - CA: 0.9
  - Cycl. Adj. CA: -1.9
  - EBA Norm: -0.7
  - EBA Gap: -1.2
  - COVID-19 Adj.: 0.6
  - Other Adj.: 0
  - Staff Gap: -0.6

### Real Exchange Rate (REER) — background and assessment
- Background:
  - Australian dollar depreciated against the US dollar in 2022.
  - As of October, Australia’s average REER in 2022 is broadly at the same level as its 2021 average, and about 1.8 percent higher than its five-year average.
- Assessment:
  - IMF staff CA gap implies a REER gap of 3 percent (applying an estimated elasticity of 0.2).
  - EBA REER level model: overvaluation of 22 percent.
  - Index model: undervaluation of 18.6 percent.
  - IMF staff assesses REER gap in the range of 0 to +6 percent, midpoint: 3 percent.

### Capital and financial accounts, FX intervention, and reserves
- Capital and financial accounts — flows and assessment:
  - Financial account recorded net cumulative outflows through the first three quarters of 2022, reflecting the CA surplus.
  - Large net FDI outflows in the first three quarters of the year: 2.6 percent of GDP (driven by asset purchases abroad by Australian residents).
  - Other investment outflows: 2.1 percent of GDP.
  - Large net portfolio inflows: 4.1 percent of GDP (mainly inflows into Australian equities).
  - Net derivative flows: small.
  - Assessment: "Vulnerabilities related to the financial account remain contained, supported by a credible commitment to a floating exchange rate."
- FX intervention and reserves:
  - Background: currency free-floating since 1983; central bank has not intervened in the FX market since the global financial crisis; reserve assets remained stable in 2022.
  - Assessment: authorities strongly committed to a floating regime, reducing the need for reserve holdings; domestic banks’ external liabilities are either in local currency or hedged, limiting prudential reserve needs.

### Risk Assessment Matrix — principal risks, likelihood, horizon, impact, and policy responses
- Conjunctural Risks:
  - Abrupt global slowdown or recession
    - Likelihood: H
    - Time horizon: Short term
    - Impact: H
    - Key channels: US, China, Europe idiosyncratic risks could cause synchronized sharp growth slowdown; weaker external demand hurts export commodity prices and volumes.
    - Policy to reduce impact: Fiscal policy should ease pace of consolidation and provide targeted support to the vulnerable and to susceptible sectors.
  - Intensifying spillovers from Russia’s war in Ukraine and impact on commodity prices
    - Likelihood: H
    - Time horizon: Short term
    - Impact: H
    - Key channels: Further sanctions exacerbate trade and financial disruptions, commodity price volatility; import price increases could affect inflation and supply chains.
    - Policy to reduce impact: Monetary policy should tighten faster than in the baseline, especially if inflation expectations rise; in case of heightened uncertainty, fiscal stimulus can provide targeted support as needed but should avoid fueling inflation.
  - Local COVID-19 outbreaks
    - Likelihood: M
    - Time horizon: Short to medium term
    - Impact: M/L
    - Key channels: New lockdowns or more transmissible/vaccine-resistant variants inhibit commerce and extend supply chain disruptions.
    - Policy to reduce impact: Continued multilateral efforts for higher vaccination outcomes worldwide; in severe outbreaks, targeted fiscal stimulus using fiscal space while monetary tightening could pause.
- Structural Risks:
  - Deepening geo-economic fragmentation and geopolitical tensions
    - Likelihood: H
    - Time horizon: Short to medium term
    - Impact: M/H
    - Channels: Reduced international cooperation, trade reconfiguration, supply disruptions, technological fragmentation, lower confidence; potential spillovers to Australia.
    - Policy to reduce impact: Continued pursuit of open market trade policies and renewed international cooperation to foster trade.
  - Cyberthreats
    - Likelihood: M
    - Time horizon: Short to medium term
    - Impact: M/H
    - Channels: Cyberattacks on critical infrastructure (including digital currency platforms) could trigger financial instability and disrupt economic activities.
    - Policy to reduce impact: Increase spending on cybersecurity to ward off attacks and improve resiliency to incidents.
- Domestic Risks:
  - De-anchoring of inflation expectations leading to tightening domestic financial conditions
    - Likelihood: M
    - Time horizon: Short term
    - Impact: H
    - Channels: Tighter financial conditions would affect asset prices, household consumption, and investment.
    - Policy to reduce impact: Monetary policy should be tightened decisively and be dependent on evolution of wages and inflation expectations.
  - Unexpectedly large or disorderly housing market disruptions
    - Likelihood: M
    - Time horizon: Short to medium term
    - Impact: M
    - Channels: Larger-than-expected housing price declines plus tightening financial conditions would affect household wealth/consumption and could expose financial vulnerabilities.
    - Policy to reduce impact: Monetary policy to remain focused on inflation but be re-calibrated if private demand falls more than expected; targeted fiscal support for vulnerable households as appropriate; close financial sector supervision remains essential.
  - Higher frequency and severity of natural disasters related to climate change
    - Likelihood: H
    - Time horizon: Short to medium term
    - Impact: H
    - Channels: More frequent severe droughts, bushfires, and floods causing stronger economic disruptions.
    - Policy to reduce impact: Strengthen preparedness and resilience in vulnerable regions; mitigate economic impact through disaster-related government programs; strengthen international efforts to reduce global carbon emissions.

*Source: Annex II. Figure 6. Australia: Medium-term Risk Analysis (extracted content).*

### 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, remove constraints on policy making powers, provide greater budgetary and funding autonomy; strengthen ASIC’s enforcement powers and expand their use (Treasury, APRA, ASIC). Time Frame: ST.
  - Status: In process.
  - Developments:
    - The Government sets ASIC’s total budget; ASIC recovers the majority through its industry funding model (IFM) established in 2017. The Government is currently reviewing the ASIC IFM.
    - ASIC has received significant additional funding since 2019-20 to support implementation of the Financial Services Royal Commission and other measures.
    - Changes to ASIC’s enforcement powers:
      - April 6, 2019: ASIC granted a product intervention power. ASIC used this power in short-term credit, continuing credit contract, binary options, and CFDs.
      - February 18, 2019: Parliament passed legislation to significantly increase penalties for corporate and financial sector misconduct.
      - February 6, 2020: Parliament passed legislation to strengthen ASIC’s licensing and banning powers and enhance ASIC’s investigatory capability.
      - December 10, 2020: Parliament passed legislation to:
        - enable ASIC to designate enforceable code provisions in approved codes of conduct which, if breached, may attract civil penalties; establish a mandatory code of conduct framework for the financial services and consumer credit industry (regime effective from January 1, 2020);
        - enhance breach reporting requirements for financial service and credit licensees (regime commenced on October 1, 2021).
    - The Government sets APRA’s total budget; APRA recovers the majority through Financial Institutions Supervisory Levies (FISLs).
    - APRA funding provided:
      - A$67.3 million in additional funding in the 2021-22 MYEFO.
      - $145 million provided in the 2019-20 Budget to strengthen APRA’s supervisory and enforcement activities.
      - $28.8 million provided in the 2020-21 Budget to boost APRA’s capacity to respond to risks in the financial system.
      - This funding is cost-recovered from industry.
- Recommendation: Enhance APRA’s supervisory approach by carrying out periodic in-depth reviews of governance and risk management (APRA). Time Frame: ST.
  - Status: In process.
  - Developments:
    - APRA conducts entity-specific and thematic in-depth reviews of governance and risk management on a regular basis.
    - Since November 2019 information paper "Transforming Governance, Culture, Remuneration and Accountability: APRA’s Approach," APRA focused on remediation of risk governance deficiencies identified from 2018 self-assessments; first remediations complete and capital overlays removed.
    - Methodology codification underway to integrate risk-transformation supervisory methodology into APRA’s supervision model.
    - APRA reviewing Prudential Standard CPS 510 Governance and Prudential Standard CPS 220 Risk Management.
    - APRA’s Supervision Risk and Intensity (SRI) model includes detailed guidance on governance, risk culture, remuneration and accountability (GCRA) to drive escalation and supervisory action.
- Recommendation: Strengthen integration of systemic risk analysis and stress testing into supervisory processes (APRA, RBA). Time Frame: I.
  - Status: Complete.
  - Developments:
    - SRI model incorporates an External Factors category covering macro and systemic risk; Strategic Insights teams maintain Industry Risk registers; Industry Strategies can trigger thematic or entity reviews.
    - SRI capital section requires supervisors to consider recent stress test results when rating capital. A stress testing handbook provides guidance.
    - APRA increased stress testing across regulated industries; collaboration with RBA in modeling scenarios increased. Ongoing scenario development includes contemporary macro risks such as high inflation.
    - APRA transitioned to an annual stress testing program for the ADI industry; continued development of internal stress testing models across banking, insurance and superannuation.

- Recommendation: Encourage further maturity extension and lower use of overseas wholesale funding (APRA). Time Frame: I.
  - Status: In process.
  - Developments:
    - Offshore funding is closely scrutinized; vulnerabilities mitigated because much foreign funding is swapped into Australian dollars to acquire Australian dollar assets.
    - Australian banks’ overseas wholesale funding is currently lower than in recent history given use of the RBA’s Term Funding Facility (TFF).
    - TFF closed to new drawdowns in June 2021; banks’ overseas issuance expected to pick up as they refinance maturing TFF debt through to June 2024. The refinancing task is assessed to be sizeable but manageable.

### Financial Stability Analysis and Data
- Recommendation: Commission and implement results of a comprehensive forward-looking review of potential data needs. Improve quantity, quality, granularity and consistency of data available to the CFR agencies (MT).
  - Status: In process.
  - Developments:
    - A Multi-Agency Data Collection Committee established including APRA, ASIC, RBA, Treasury, the Australian Taxation Office, and the Australian Bureau of Statistics.
    - Committee reviewing potential data needs, identifying data gaps, and exploring streamlining opportunities; endorsed a work program to regularly review programs to close data gaps.
    - APRA Connect launched in September 2021 as new data collection solution for APRA and all reporting entities; data used for prudential supervision, statistical publications, and shared with other agencies. New collections are more granular and require less transformation.
    - APRA released a discussion paper "APRA’s Direction for data collections" in March 2022 outlining vision for multi-use, deeper and broader data sets with greater sharing capacity.
    - APRA’s pipeline of new/amended data collections includes:
      - new tactical and strategic collections capturing relevant data for credit activities of banks;
      - 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;
      - Superannuation Data Transformation (SDT) project to facilitate more granular data collection.
    - ASIC built an advanced data collection portal; trial conducted in November 2021 with limited firms. Phase 2 scheduled for August 2023 to increase participating firms.

- Recommendation: Enhance monitoring, modeling, and stress testing framework for assessing solvency, liquidity and contagion risk; draw on results for policy (CFR agencies). Time Frame: ST.
  - Status: Complete.
  - Developments:
    - APRA undertakes stress tests across scenarios assessing resilience of banking and insurance industries, including solvency and liquidity components.
    - APRA enhanced internal stress testing modeling to challenge industry submissions and perform internal scenario stress tests; APRA and RBA stress testing teams engage directly.
    - APRA transitioned to annual stress testing of large ADIs.
    - APRA undertakes stress testing of broader scenarios and risks, including operational and climate change financial risks.
    - APRA conducted a Climate Vulnerability Assessment (CVA) of large banks in 2021-22; results published in November 2022. CVA objectives:
      - 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.

### Systemic Risk Oversight and Macroprudential Policy
- Recommendation: Raise formalization and transparency of the CFR and accountability of its member agencies through publishing meeting records and an Annual Report to Parliament by CFR agency Heads (CFR agencies). Time Frame: I.
  - Status: In process.
  - Developments:
    - CFR steps to increase transparency:
      - publishing a statement following regular CFR meetings since December 2018;
      - increasing coverage of CFR work in the RBA’s Financial Stability Review (released bi-annually);
      - updating the CFR website to be more informative about role and work of CFR.
    - Government established the Financial Regulator Assessment Authority (FRAA) to report on effectiveness and capability of ASIC and APRA; FRAA conducts biennial reviews.
      - FRAA completed inaugural review of ASIC in August 2022.
      - FRAA commenced review of APRA, due to report findings to the Government in June 2023.
      - FRAA does not have power to direct regulators, assess single cases/decisions, or deal with complaints about regulators.
    - Government’s Review of the Reserve Bank will consider macroprudential governance arrangements.
    - Macroprudential policies are discussed by the CFR; APRA may take account of those discussions in determining macroprudential policy.
- Recommendation: Undertake a CFR review of readiness to apply an expanded set of policies to address systemic risks, including data and legal/regulatory requirements; address impediments (CFR agencies). Time Frame: I.
  - Status: In process.
  - Developments:
    - Housing Market Risks Working Group under the CFR considers financial system risks and appropriate policies; continues work on potential tools, suitable circumstances, and restrictions (e.g., data availability).
    - November 2021: APRA published an information paper on its framework for macroprudential policy outlining objectives, toolkit, and CFR role.
    - APRA made changes to prudential framework to require banks be operationally positioned to implement specified macroprudential measures (e.g., limit higher risk lending) if needed. Changes took effect from September 2022 to improve transparency, timeliness and effectiveness of future responses to systemic risks.
- Recommendation: Commission analysis by CFR member agencies on financial stability issues including policies affecting household leverage and factors affecting international investment flows and implications for real estate markets (CFR agencies). Time Frame: MT.
  - Status: In process.
  - Developments:
    - CFR actively considers impact of policy changes on financial stability; Housing Market Risks Working Group frequently reports to CFR on housing market risks.
    - RBA participated in a CGFS working group studying property price dynamics and influence of international investors; report released February 2020.
    - RBA participating in a new CGFS study group on policies to mitigate housing-related risks; group commenced October 2022 and will submit report in September 2023.

### Financial Crisis Management and Safety Nets
- Recommendation: Complete resolution policy framework and expedite development of resolution plans for large and mid-sized banks and financial conglomerates; subject to annual supervisory review (APRA, Treasury). Time Frame: ST.
  - Status: In process.
  - Developments:
    - APRA on track to have a resolution planning framework in place for Australia in 2024 through CPS 900 Resolution Planning.
    - Over past 12 months APRA issued CPS 900 for consultation with accompanying guidance; standard and guidance expected to become effective from 1 January 2024.
    - APRA’s internal readiness to execute a resolution progressing with live case examples enhancing resolution operating model and resource build.
    - Resolution planning ongoing; pilot resolution planning exercises conducted with select entities including establishing entity-specific Crisis Management Groups (CMGs). Additional pilot exercises anticipated prior to CPS 900 in-force date.
    - FRAA conducting first review of APRA assessing effectiveness and capability of supervision and resolution functions, focusing on superannuation; review to be made public in second half of 2023.
- 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.
  - Status: Complete.
  - Developments:
    - November 8, 2018: APRA released a discussion paper proposing changes to capital adequacy framework to increase loss-absorbing capacity (LAC) for orderly resolution.
    - Early July 2019: APRA finalized approach to LAC for banks, including requiring D-SIBs to lift Total Capital by three percentage points of RWA by January 1, 2024.
    - 2021: APRA finalized requirement for D-SIBs increasing Total Capital by 4.5 percentage points in aggregate.
    - Requirements for other entities, including mid-sized banks, to be determined as part of resolution planning following finalization of CPS 900.
- Recommendation: Advance mutual understanding between Australia and New Zealand resolution authorities on cross-border bank resolution modalities through the Trans-Tasman Banking Council (TTBC) (CFR agencies). Time Frame: ST.
  - Status: In process.
  - Developments:
    - TTBC continues to discuss and develop mutual understanding on cross-border financial stability and bank resolution.
    - APRA works closely with CFR and TTBC members on crisis preparedness.
    - APRA and RBNZ established first entity-specific CMG for a Trans-Tasman bank at end-2019 comprising APRA and RBNZ resolution specialists, supervisors and members of ASIC, FMA and RBA; CMG met in 2021 and subsequently.

*IMF (Annex V. Financial Sector Assessment Program Update).*

### 2022. The CMG has proven to be an effective forum for the

### 1ausea2023001 - 2022. The CMG has proven to be an effective forum for the

### Resolution Planning and Crisis Management Group (CMG)
- The CMG has proven to be an effective forum for the development and evaluation of detailed resolution strategies.
- Once CPS 900 resolution planning is in force, APRA will look to undertake resolution planning with a broader cohort of the regulated population, which would include detailed resolution planning for other Trans-Tasman banks.

### Financial Market Infrastructure (FMI)
- Recommendation: Strengthen independence of RBA and ASIC for supervisory oversight, enhance enforcement powers and promote compliance with regulatory requirements.
  - Status: In process.
- CFR advice (July 2020) recommended enhancements to Australia’s FMI regulatory regime, including proposals for:
  - enhanced powers for ASIC and the RBA to support their supervision of FMIs, their ability to take action to address any identified deficiencies, and
  - the transfer of a range of licensing and supervisory powers from the Minister to ASIC and the RBA.
- Recommendation: Finalize the resolution regime for FMIs in line with the FSB Key Attributes (RBA, ASIC, Treasury).
  - Time Frame: ST
  - Status: In process.
- CFR advice (July 2020) included a proposal to establish a resolution regime for domestic clearing and settlement facility licensees.
- Government commitment: The government is committed to FMI reforms, but given complexities, implementation will take a few years.

### 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 (Attorney-General’s Department, Treasury, AUSTRAC).
  - Status: In process.
- AUSTRAC oversight and capacity:
  - AUSTRAC oversees the compliance of more than 17,000 Australian regulated businesses, referred to as reporting entities.
  - Reporting entities include banks and credit unions, non-bank lenders and stockbrokers, gambling and bullion service providers, remittance providers and digital currency exchanges.
  - The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) recognises that reporting entities are the first line of defence in protecting the financial system and establishes a risk-based approach.
  - AUSTRAC supervisory teams initiated 19 assessments which cover the operations of 174 reporting entities. 9 of the 19 assessments initiated in 2021-22 were in the banking sector.
  - AUSTRAC monitored 13 remediation activities during 2021-22 which were either open from a previous period or were initiated and will continue into future years.
  - Approximately 220 reporting entities are impacted through those remediation engagements.
- Data collection and analytics:
  - In 2021, AUSTRAC delivered the first strategic assessment of compliance risk.
  - AUSTRAC has introduced a data modelling capability to optimise strategic use of data.
  - In April 2019, AUSTRAC implemented a program of regulatory monitoring and alerting to analyse extensive data holdings; this capability has resulted in AUSTRAC swiftly engaging with reporting entities.
  - During the 2020-21 financial year, AUSTRAC finalized 31 compliance assessments across a range of sectors, including in the banking sector.
- Risk and intelligence work:
  - In 2020-21, AUSTRAC established a strategic intelligence capability. Since standing up the unit, eight strategic assessments have been completed.
  - Topics assessed include post covid-19 environment, cash hoarding, casinos (3 assessments), Central Bank Digital Currencies, cryptocurrencies, labour hire and sanctions evasion.
  - AUSTRAC delivered three risk assessments examining AML/CTF risks of remittance service providers, independent remitters and bullion dealers in Australia, and a ML/TF threat update of Australia’s superannuation sector.
- Education and guidance:
  - During 2021/22, AUSTRAC responded to over 13,000 enquiries via the Contact Centre, published 13 guidance products, undertook 21 induction workshops to over 800 participants, and completed 274 face to face onsite education sessions, predominantly to the pubs and clubs sector.
- Enforcement:
  - AUSTRAC applied to the Federal Court of Australia in March 2022 for civil penalty orders against Crown Melbourne Limited and Burswood Nominees Limited (Crown Perth).
  - AUSTRAC accepted an enforceable undertaking requiring a range of remedial actions from National Australia Bank on 29 April 2022.
  - From June 17, 2021, reforms to the AML/CTF Act came into effect. The reforms:
    - clarify obligations regarding customer due diligence before providing a designated service,
    - involve changes to strengthen the protections for correspondent banking relationships,
    - expand the circumstances in which reporting entities can rely on a third party for customer identification and verification, and
    - expand the exceptions to the prohibition of tipping off.

### Recent Crypto and CBDC Developments in Australia (Annex VI)
- Global context and 2022 events:
  - The crash of Luna and failure of TerraUSD in May 2022, liquidation of Three Arrows Capital in June 2022, and the collapse of FTX, Alameda Research and BlockFi in November 2022 highlighted the urgency for comprehensive regulation, supervision, and oversight.
- Size and characteristics of Australia’s crypto ecosystem:
  - The crypto ecosystem in Australia is small, with limited ties to the broader financial system, but with considerable interest across age cohorts.
  - There are more than 400 crypto asset exchanges registered in Australia, but the largest 10-12 account for the majority of retail activity.
  - The Australian Tax Office estimates that over 1 million Australians had crypto capital transactions in 2021-22.
  - A 2022 survey showed that around 5 percent of the population owned crypto assets.
  - ASIC Report (August 2022) found as of November 2021 that surveyed people aged 18-34 were the most likely to own crypto assets (58 percent); 46 percent of those aged 35-54 and 20 percent of those aged 55 and over also held crypto assets.
  - The ASIC survey showed that 41 percent of all surveyed investors said they had used social media as a main source of information since March 2020.
  - APRA and AUSTRAC released reports in 2022 warning about the scale and risks related to crypto assets.
  - Following the collapse of FTX, FTX’s Australian entities entered administration; linkages with the banking system appear to be very limited.
  - AUD-denominated stablecoins that have emerged include A$DC (a pilot issued by ANZ Bank), AUDT and TrueAUD, though usage has reportedly remained limited.
- International regulatory developments (high-level summary):
  - FATF: standards for virtual asset service providers on AML/CFT.
  - IOSCO: considerations for market integrity and investor protection via Fintech Task Force workstreams on Crypto and Digital Assets (CDA) and Decentralized Finance (DeFi).
  - BCBS: framing prudential treatment of banks’ crypto asset exposures.
  - CPMI and IOSCO: published regulatory guidance on stablecoins.
  - FSB: in October 2022 offered a new set of high-level recommendations for crypto regulation and revised high-level recommendations on global stablecoins.
- Global rollout of national regulation in 2022:
  - EU: started drafting Markets in Crypto Assets (MiCA) regulation.
  - UK: Treasury presented a roadmap focusing initially on stablecoins.
  - Japan: Payment Service Act regulates crypto service providers; amendments clarified wallets, exchanges and stablecoins in 2022.
  - Canada: Canadian Securities Administrators expect crypto asset trading platforms to provide pre-registration undertakings; released guidance on platforms’ marketing practices.
  - United States: SEC and CFTC increased enforcement efforts; in September 2022 US authorities set out a framework to regulate digital assets with a “whole of government” approach.
- Australia’s crypto regulatory progress:
  - Crypto asset exchanges must register with AUSTRAC and are supervised for AML/CFT compliance.
  - Crypto assets are largely unregulated for conduct and prudential purposes; different agencies provide some supervision under frameworks not designed for crypto assets.
  - ASIC monitors crypto activity that involves financial products or services under the Corporations Act and ASIC Act, which leaves grey areas on whether a crypto asset or service is a “financial product” or “financial service.”
  - Some licensed financial services entities are beginning to offer crypto exchange services alongside other financial services.
  - Treasury publicly consulted on options for licensing and custody requirements for crypto asset secondary service providers (CASSPrs) in March 2022.
  - APRA and ASIC are considering the treatment of crypto in their frameworks; APRA wrote to regulated entities with initial expectations on the risk management of crypto in April 2022.
  - Treasury is conducting a “token mapping” exercise to understand broad groups of crypto assets in circulation to identify regulatory gaps and inform regulation of crypto asset service providers.
  - Once token mapping is completed, the government plans to release a consultation paper on a proposed custody and licensing regulatory framework.
  - A 2021 senate enquiry recommended wide-ranging regulations for the crypto ecosystem.
  - Stablecoins are not prudentially regulated in Australia for the time being, but Treasury with other CFR members is working toward establishing a regulatory perimeter for payment stablecoins.
  - A range of regulatory proposals for payment stablecoins are being considered, which may utilize the framework for Stored-Value Facilities (SVFs).
  - Consultation on the payments licensing framework, including SVFs, is expected to be undertaken in 2023.
- Policy recommendations and priorities for Australia’s crypto agenda (consistent with IMF frameworks cited):
  - (1) Develop a comprehensive regulatory framework for the broad crypto ecosystem, covering issuers, crypto asset providers, legal classification of crypto assets, prudential regulation commensurate with risk, wind-down arrangements and resolution, and legislation to boost consumer protection.
  - (2) Consider risks of crypto assets as part of existing regulatory and supervisory duties via the regulated banking system and newer entrants to address spillover risk; APRA should enhance prudential regulation to mitigate spillovers; ASIC should have a clear mandate to investigate, evaluate and supervise conduct risks for crypto asset providers and new entrants.
  - (3) Provide greater clarity on coordination among regulatory and supervisory entities (Treasury, APRA, ASIC, AUSTRAC and RBA), enhance regulatory expertise, augment resources and training, and promote greater international cooperation due to cross-border nature of service providers.
  - (4) Ensure effective and timely risk monitoring for early detection of risks, including better access to data, continuous assessment of risks and regulations, and use of the CFR for coordination.
- Stablecoin-specific considerations:
  - Regulatory framework could set requirements related to issuance, redemption rights, stabilization mechanisms, and management, disclosure and auditing requirements of reserve assets.
  - Collaboration with foreign regulators is needed due to cross-border nature and differing uses of stablecoins.
  - Additional considerations include financial stability, consumer and investor protection, and operational risks to allow stablecoins’ potential to materialize in a technology-neutral manner.

*Italic: Source — 1ausea2023001 - 2022. The CMG has proven to be an effective forum for the (IMF PDF).*

### 7.      The RBA has been researching central bank digital currencies (CBDCs) actively but has

### 1ausea2023001 - 7.      The RBA has been researching central bank digital currencies (CBDCs) actively but has

### CBDC research and recent projects
- The Reserve Bank of Australia (RBA) has been researching central bank digital currencies (CBDCs) actively but has no immediate plans for issuing one.
- The RBA completed a proof of concept for a CBDC using DLT under Project Atom in 2021.
- The RBA has collaborated with the Bank for International Settlements (BIS), participating in Project Dunbar, as well as with other central banks.
- The RBA embarked on a new research project in August 2022 to explore use cases for a CBDC via the operation of a limited-scale pilot.

### Policy exploration and coordination
- As part of the payments system reforms, the RBA and the Treasury are exploring the policy case for a CBDC in Australia, but so far there are no plans to issue one.
- The RBA’s approach aligns with trends in other advanced economies, especially in Asia, which are also looking at potential use cases of CBDCs.

### Key dates and facts
- Project Atom: completed in 2021.
- New RBA research project and limited-scale pilot: August 2022.
- Current stance: no immediate plans to issue a CBDC.

*Source: 1ausea2023001 - IMF staff report excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1ausea2023001.pdf_