## 1. Australia’s Savings Rate

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### Context and near-term imbalances
- Post-pandemic recovery stronger than peers, but high inflation and tighter financial conditions weighing on household consumption.
- Structural headwinds include: secular slowdown in productivity growth, population ageing, climate change, and geo-economic fragmentation.
- Policy responses and reviews in train: Intergenerational Report, 5-year Productivity Inquiry, RBA review, Independent Strategic Review of the Infrastructure Investment Program.

### Recent macroeconomic developments and key statistics
- Real GDP growth: 3.7 percent (y/y) in 2022; 2.1 percent (y/y) in 2023Q2.
- Inflation:
  - Peak: 7.8 percent in 2022Q4.
  - 2023Q3: 5.4 percent.
  - RBA target range: 2-  3 percent.
- Population growth: 2.2 percent y/y in 2023Q1.
- Labor market:
  - Unemployment rate: 3.6 percent in September 2023.
  - Estimated NAIRU: ~4½ percent.
  - Vacancy-to-unemployment ratio declined.
- Fiscal:
  - Overall deficit of consolidated general government declined to below one percent of GDP.
  - Commonwealth Government achieved first cash-balance surplus in 15 years.
  - Cyclically adjusted primary balance close to pre-COVID levels.
- Monetary policy:
  - Cash rate: cumulative rise of 425 basis points since May 2022; policy rate hiked by 25bps in November (source).
  - Cash rate reported at 4.35 percent in staff baseline.
  - RBA allowing asset purchase portfolio to decline passively through maturities.
- Housing and financial vulnerability:
  - House prices declined 8 percent peak-to-trough between 2022Q1 and 2023Q1, then increased again.
  - Variable rate mortgages: 80 percent of outstanding housing credit.
  - Fixed rates typically for three years or less.
  - Average fixed rates for new owner-occupier loans (≤3 years) bottomed at 1.95 percent in May 2021; average variable rates for new owner-occupier borrowers are now 6 percent.
  - Average loan size in May 2021: AU$ 549,498 (30-year term).

### Outlook and key projections
- Growth projections:
  - Around 1.8 percent y/y in 2023.
  - 1.4 percent y/y in 2024.
  - Medium-term recovery to around 2¼ percent (staff potential output estimate).
- Inflation path:
  - Staff projection: return to RBA’s target range in 2026.
  - Authorities (August Statement of Monetary Policy outlook): expected return in 2025.
- Labor market medium-term: unemployment projected to rise to 4.8 percent and hover around the NAIRU.
- External position:
  - Trade surplus: record 5.8 percent of GDP in 2022; expected to decline below 2 percent of GDP.
  - Current account: expected to revert to a small deficit in 2023Q4.
  - Staff estimate cyclically adjusted external position: -0.3 percent of GDP in 2023 vs. -0.9 percent of GDP implied by fundamentals and desirable policies.
- Baseline public debt (percent of GDP):
  - 2022: 50.8; 2023: 51.7; 2024: 54.9; 2025: 55.7; 2026: 56.1; 2027: 55.7; 2028: 54.8; 2029: 53.8; 2030: 52.7; 2031: 51.4; 2032: 49.9.
- Memo macro projections:
  - Real GDP growth: 2022: 3.7; 2023: 1.8; 2024: 1.4; 2025–2032: 2.0/2.2/2.3/2.3/2.3/2.3/2.3/2.3.
  - Inflation (GDP deflator; percent): 2022: 7.9; 2023: 1.7; 2024: 0.7; 2025–2032: 3.0/2.6/2.6/2.6/2.6/2.6/2.6/2.6.
  - Effective interest rate (percent): 2022: 2.7; 2023: 3.3; 2024: 4.7; 2025: 4.9; 2026: 4.7; 2027: 4.8; 2028: 4.7; 2029: 4.7; 2030: 4.8; 2031: 4.9; 2032: 5.1.

### Savings-rate dynamics and key figures (Box: Australia’s Saving Rate)
- Pandemic-era excess savings accumulation (between 2020Q2 and 2022Q2): over $240-280 billion.
- Household saving rate:
  - Peak: 23.6 percent in 2020Q2.
  - 2023Q2 saving rate: 3.2 percent.
- Depletion timing estimates:
  - AR(1) model with linear time trend: excess savings depleted by 2023Q4.
  - Hamilton filter trend-based measure: depletion later in 2024.
- Household consumption estimated to have contracted by an average -6 percent in 2020.

### Transmission to households and credit (monetary policy impacts)
- Fixed-rate loan expiries:
  - Around 880,000 fixed rate loans (term ≤3 years) taken during the pandemic expected to expire in 2023.
  - Another 450,000 loans expected to expire in 2024.
  - Average repayment increase for such borrowers: 60 percent.
- Household interest payments:
  - Share of disposable income: from 5.2 percent in 2021 to around 11 percent at the end of 2022; projected to reach 13 percent by the end of 2023.
- Mortgage and buffer considerations:
  - Accumulated pandemic savings provide buffers that could dampen/delay transmission depending on behavioral responses.

### Housing affordability and supply pressures
- House prices: 8 percent peak-to-trough decline did not materially improve affordability; prices remain around 30 percent higher than pre-pandemic levels.
- National dwelling value-to-income ratio: increased from around 6 percent pre-pandemic to 7.3 percent in March 2023.
- Time to save for 20 percent deposit (assuming saving 15 percent of gross annual income): almost 10 years.
- Borrowing-capacity approach: median housing prices are 60 percent above the price the median household could afford with a debt service-to-income ratio of 30 percent.
- CoreLogic hedonic rental value index: reached 10.2 percent in December 2022.
- Rental affordability:
  - Share of median household income required to service rent on a new lease: increased from 26.5 percent in September 2020 to 30.8 percent in April 2023.
  - Corresponding figure for lower income households: 51.6 percent.
- Supply constraints drivers: low vacancy rates, decline in social housing share, construction capacity constraints, surge in migration.
- Policy measures announced:
  - AU$10 bn Housing Australia Future Fund to fund 30,000 social housing units over the next 5 years.
  - AU$2 bn Social Housing Accelerator payment.
  - Target: build 1.2 million new homes over five years from July 2024 (including performance-based funding).
  - Planned Help-to-Buy Scheme: support up to 40,000 low- and middle-income families; Government equity contribution up to 40 percent for new homes and 30 per cent for existing homes.
  - Home Guarantee Scheme: covers 50,000 households (including >6,000 through Regional First Home Buyer Guarantee).

### Fiscal policy stance, risks, and recommendations
- Fiscal developments:
  - Gross public debt peaked at around 56 percent of GDP.
  - Saving windfall revenue in FY2022/23 delivers savings in interest payments amounting to 3½ percent of 2022 GDP over the next decade.
  - 2023/24 Budget projects overall balance to turn back into a small deficit (¼ percent of GDP in FY2023/24) and deteriorate to 1¼ percent of GDP in FY2024/25 due to personal income tax reforms (reducing revenues annually by 1 percent of GDP).
- Cyclically-adjusted primary balance (CAPB): projected to turn back into a deficit of around 0.1-  0.4   percent of potential GDP for FY23/24-FY24/25, delivering a small fiscal impulse.
- Examples of cost-of-living relief (Commonwealth spending as percent of FY22/23 GDP; period):
  - Reduce the Cost of Health Care: 0.23; FY22/23-FY26/27
  - Increase the JobSeeker Payment and Other Eligible Income Support Payments: 0.19; FY22/23-FY26/27
  - Commonwealth Rent Assistance (increase max rates by 15 percent): 0.11; FY22/23-FY26/27
  - Expanded Access to Parenting Payment (Single): 0.08; FY22/23-FY26/27
  - Energy Bill Relief: 0.06; FY22/23-FY25/26
- Fiscal policy recommendations:
  - Maintain fiscal discipline to help contain inflation if inflation proves persistent.
  - Within disinflation-consistent envelope, enhance targeting of income support to vulnerable households.
  - Prioritize infrastructure projects with high productivity gains while containing inflationary wage pressures.
  - Improve spending efficiency and strengthen performance-based budgeting.
  - Rebalance tax base from direct to underutilized indirect taxes; consider property-tax reforms to replace stamp duties at the state level; mitigate regressive impacts via targeted transfers.
  - Reduce tax breaks for high-income earners; expand measures limiting concessions to capital gains tax.

### Financial stability, banks, and systemic resilience
- Banking sector indicators:
  - Major banks’ capital ratios exceed APRA’s 10½ percent benchmark.
  - Domestic systemically important bank total capital ratios are well above the 18.25 per cent loss absorbing capacity requirement (effective 2026).
  - Liquidity coverage ratios (LCRs) for major banks: 132 as of 2023Q2.
- Commercial real estate exposure: CRE is 6 percent of total assets in aggregate; loan-to-value ratios less than 65 percent.
- Term Funding Facility (TFF) maturities:
  - Two TFF maturity dates (September 2023 and June 2024) total approximately $130 billion (3 percent of banks' total liabilities).
  - Banks pre-funded some expiring TFF financing with bond issuance in 2022 and 2023 above historical average.
- Stress testing:
  - IMF’s Global Bank Stress Testing (GST) Tool and RBA stress-testing suggest banks could continue extending credit under materially worse economic conditions.
- Policy recommendations:
  - Consider additional borrower-based macroprudential tools (LTV and DTI limits).
  - Prepare for mitigation of household distress given high share of variable-rate mortgages (80 percent).
  - Monitor wholesale funding needs as TFF rolls off; be ready to provide liquidity windows if funding stress arises.

### External sector, commodity-market fragmentation, and vulnerabilities
- External balance and NIIP:
  - NIIP: -32.5 percent of GDP (2023, % GDP).
  - Gross Assets: 152.4; Debt Assets: 66.9; Gross Liab.: 184.9; Debt Liab.: 114.3 (2023, % GDP figures).
  - NIIP level and trajectory assessed as sustainable; structure mitigates negative NIIP vulnerabilities.
- Current account:
  - CA peaked at 3.0 percent of GDP in 2021.
  - 2023 projected CA: 0.7 percent of GDP.
  - Merchandise trade balance: 6.6 percent of GDP in 2022; projected 4.4 percent in 2023.
- Fragmentation in commodity markets (Box 2 implications):
  - Fragmentation can cause large price spikes and volatility in minerals (cobalt, copper, lithium, iron ore, nickel).
  - DSGE model simulations: fragmentation can lead to, on average, a -0.3 percent real GDP deviation in 3 years and a 0.4 percentage point deviation in inflation within a year for Australia.
  - If confined to trading within a bloc, Australia could face reduced external demand, increased inflation, and higher volatility; refining capacity concentration implies potential adjustment costs.

### Risks, likelihoods, and recommended policy responses (Risk Assessment Matrix highlights)
- Monetary policy miscalibration:
  - Likelihood: Medium; Expected Impact: High.
  - Recommendation: Nimble, data-dependent monetary policy; coordinate fiscal policy; strengthen intergovernmental communication.
- Abrupt global slowdown or China recession:
  - Likelihood: Medium; Expected Impact: Medium.
  - Recommendation: Combined monetary and fiscal easing if warranted; time-bound, targeted fiscal measures (e.g., low-income tax offsets) if inflation allows.
- Deepening geoeconomic fragmentation:
  - Likelihood: High; Expected Impact: High.
  - Recommendation: Strengthen multilateral trade rules and international cooperation.
- Extreme climate events:
  - Likelihood: Medium; Expected Impact: Medium.
  - Recommendation: Build fiscal buffers for climate risks; combine fiscal/monetary easing if appropriate.
- Insufficient housing supply:
  - Likelihood: Medium; Expected Impact: Medium.
  - Recommendation: Prioritize increasing housing supply and social housing without exacerbating cost pressures; ease construction capacity constraints.

### Structural priorities and governance
- Productivity and innovation:
  - Decline in labor productivity and multifactor productivity growth; low R&D spending relative to Germany, Japan, US; ICT investment fallen from near top OECD levels.
  - Policy directions: boost competition, ICT adoption, digital infrastructure, R&D, open FDI, labor-market integration of skilled immigrants.
- Labor market and inclusion:
  - High participation and high part-time work (especially among women); policies to reduce barriers (childcare subsidies) and boost vocational training in place.
- Climate policy:
  - NDC legislated in 2022; target 82 percent renewable energy by 2030; net zero by 2050.
  - Staff view: broad-based carbon price is most effective; if infeasible, sectoral policies with price signals recommended.
  - Safeguard Mechanism reform: facilities >100,000 tons CO2-e (around 215 emitters; 28 percent of total emissions); automatic baseline reduction of 4.9 percent annually (lower for manufacturing); government support up to AUD1 billion for exposed firms.
- Governance and anticorruption:
  - Voluntary IMF transnational corruption assessment underway; planned AML strengthening in real estate.
  - Legislative measures and institutional reforms noted (National Anti-Corruption Commission established 1 July 2023; Crimes Legislation Amendment introduced 2023).

*Source: IMF staff.*

### 1. Australia’s Savings Rate  _______________________________________________________________________ 31

### 1. Australia’s Savings Rate

### Context and near-term imbalances
- Post-pandemic recovery stronger than peers, but high inflation and tighter financial conditions are weighing on household consumption.
- Structural headwinds include a secular slowdown in productivity growth, population ageing, and climate change, amid geopolitical fragmentation.
- Labor Government and recent reviews (Intergenerational Report, 5-year Productivity Inquiry, RBA review, Independent Strategic Review of the Infrastructure Investment Program) aim to address productivity and infrastructure sustainability.

### Recent macroeconomic developments and key statistics
- Growth decelerated from 3.7 percent (y/y) in 2022 to 2.1 percent (y/y) in 2023Q2.
- Inflation: 5.4 percent in 2023Q3 (from a peak 7.8 percent in 2022Q4); RBA target range 2-  3 percent.
- Migration and population: population growth 2.2 percent y/y in 2023Q1.
- Labor market: unemployment rate (3. 6   percent in September 2023); vacancy-to-unemployment ratio declined; estimated NAIRU ~4½ percent.
- Fiscal: overall deficit of consolidated general government declined to below one percent of GDP; Commonwealth Government achieved first cash-balance surplus in 15 years; cyclically adjusted primary balance close to pre-COVID levels.
- Monetary policy: policy rate hiked by 25bps in November; cash rate has risen by 425 basis points since May 2022; RBA allowing asset purchase portfolio to decline passively through maturities.
- Housing: house prices declined 8 percent peak-to-trough between 2022Q1 and 2023Q1, then increased again; recent gains broad based across regions and property types.
- Financial vulnerability: variable rate mortgages make up 80 percent of outstanding housing credit; fixed rates typically for three years or less.

### Outlook and risks
- Growth projections: around 1.8 percent y/y in 2023 and 1.4 percent y/y in 2024.
- Inflation path: projected to decline gradually and return to the RBA’s target range in 2026 (staff projection); authorities expected a return in 2025 based on the August Statement of Monetary Policy outlook.
- Labor market medium-term: unemployment projected to rise to 4.8 percent and hover around the NAIRU.
- External position: trade surplus expected to decline below 2 percent of GDP from a record 5.8 percent of GDP in 2022; current account expected to revert to a small deficit in 2023Q4; staff estimate cyclically adjusted external position at -0.3 percent of GDP in 2023 vs. -0.9 percent of GDP implied by fundamentals and desirable policies.
- Baseline risks are balanced; key downside risks:
  - Protracted downturn in China (distressed property market, weaker imports) lowering demand for key commodity exports.
  - Tighter-for-longer financial conditions in advanced economies and Australia, with potential for pockets of household distress and spillovers to the banking system.
  - Sticky inflation and risk of de-anchored inflation expectations leading to a wage-price spiral.
  - Depletion of pandemic-era savings causing a sharper fall in domestic demand.
  - Deepening geo-economic fragmentation, climate-related natural disasters, and cybersecurity risks.
- Upside risks: acceleration in housing price increases could boost consumption via wealth effects but exacerbate inflation and policy challenges.

### Policy implications and recommended coordination
- Monetary policy: RBA has tightened policy substantially; short-term inflation expectations are moderating while medium-term expectations remain anchored — continued careful monitoring of inflation persistence and wage dynamics is required.
- Fiscal policy: substantial fiscal space and improved public sector balance sheet allow for targeted, time-bound fiscal responses if domestic conditions deteriorate; fiscal policy should be ready to support inclusive growth if inflation remains elevated (example: low-income tax offsets).
- Financial stability: given high share of variable-rate mortgages (80 percent), policy should prepare to mitigate household distress and distributional impacts; coordination between macroeconomic policy and targeted support to vulnerable households is important.
- External and structural policies: monitor commodity price volatility and trade exposures stemming from geo-economic fragmentation; advance productivity-enhancing reforms and infrastructure investment guided by recent reviews to address longer-term challenges.

*Source: IMF staff.*

### 14.      The authorities have taken decisive measures to tighten, relative to pandemic-era

### 1ausea2024001 - 14.      The authorities have taken decisive measures to tighten, relative to pandemic-era

### Macro context and policy challenge
- Output remains above potential, unemployment at record lows, and inflation significantly above target.
- Rapid public investment execution could fuel demand pressures amidst supply constraints.
- A tight monetary stance is warranted to ensure inflation is coming back to target by 2025 and minimize the risk of de-anchoring inflation expectations.
- Policy coordination is emphasized as distributional impacts of monetary tightening become more visible.
- Fiscal policy should support the RBA’s efforts through a tighter overall stance while ensuring income support measures are well-targeted and prioritizing infrastructure projects with higher multiplier effects. A more growth-friendly tax structure and measures to improve spending efficiency would help address supply-side constraints.

### Fiscal policy — Avoid costly delays in addressing challenges
Findings:
- The Commonwealth Government has delivered its commitment for budget repair and committed to further measures.
- Gross public debt peaked at around 56 percent of GDP.
- Saving windfall revenue in FY2022/23 delivers savings in interest payments amounting to 3½ percent of 2022 GDP over the next decade.
- The 2023/24 Budget upholds the pledge to restrain fast-growing expenditure of the National Disability Insurance Scheme (NDIS) via a Financial Sustainability Framework to limit annual cost growth to less than 8 percent, starting FY2026/27.
- The overall balance is projected to turn back into a small deficit (¼ percent of GDP in FY2023/24) and further deteriorate (to 1¼ percent of GDP in FY2024/25), reflecting the last stage of the personal income tax reforms, which will reduce revenues annually by 1 percent of GDP.
- Expenditure as a share of GDP is projected to increase with cost-of-living relief and other programs; new measures are partly financed by modest savings from prioritization of existing programs.
- The budget is built on conservative commodity price assumptions and envisages small tax-revenue gains from better targeting superannuation tax concessions and reforms to the Petroleum Resource Rent Tax.

Policy recommendations (near term and medium term):
- Maintain fiscal discipline to help contain inflation as inflation proves more persistent than expected.
- Within the envelope consistent with the disinflation objective, enhance targeting of income support to vulnerable households disproportionately affected by tighter monetary and financing conditions.
- Prioritize infrastructure projects to support productivity gains and the green transition while containing high multiplier effects of capital spending and its impacts on wages.
- Improve spending efficiency, given current indexing for inflation on expenditures.
- Strengthen performance-based budgeting to improve outcomes and contain structural spending growth in health, aged care, and the NDIS.
- Improve infrastructure governance at all levels of government to minimize unrealized potential gains from public investment.

### Fiscal stance, projections, and quantitative indicators
- Cyclically-adjusted primary balance (CAPB) is projected to turn back into a deficit of around 0.1-  0.4   percent of potential GDP for FY23/24-FY24/25 and deliver a small fiscal impulse, which will add to domestic demand.
- Examples of cost-of-living relief measures (Commonwealth Government: Spending as percent of FY22/23 GDP; period):
  - Reduce the Cost of Health Care: 0.23; FY22/23-FY26/27
  - Increase the JobSeeker Payment and Other Eligible Income Support Payments: 0.19; FY22/23-FY26/27
  - Commonwealth Rent Assistance (increase max rates by 15 percent): 0.11; FY22/23-FY26/27
  - Expanded Access to Parenting Payment (Single): 0.08; FY22/23-FY26/27
  - Energy Bill Relief: 0.06; FY22/23-FY25/26
- Primary balance projection: primary balance is projected to turn surplus by 2030 (budget charts referenced).
- Budget repair bends down the spending trajectory (figures summarized across FY13/14-FY33/34 in the source).

### Expenditure policy focus and risks
- Reduce demand pressures: modest increases in expenditure add demand pressures in the tight labor market; capital expenditure projects can add to inflation and wage pressures given labor and supply shortages in construction.
- Improve outcomes: stronger performance-based budgeting and the new national wellbeing framework aim to improve quality of lives and foster cooperation across governments; delivery of the health system (run by all levels of government) can become more efficient.
- Promote sustainability: ongoing NDIS Review is expected to improve the scheme’s design, operations and sustainability.
- Improve infrastructure governance: inefficiencies in public investment processes often undermine potential gains; a cited study shows inefficiencies lead to about 30 percent unrealized potential gains.

### Infrastructure pipeline and labor-market pressures
- Infrastructure projects were under-executed during COVID-19; projects in pipeline have been reprofiled for implementation in later years, adding to pressures in labor markets.
- Construction sector indicators and job vacancies suggest constrained capacity and potential amplification of inflation/wage pressures from ramping up public investment.

### Tax reform and fiscal sustainability
Findings:
- High reliance on direct taxation amplifies challenges of financing health and aged care as population ageing lowers the share of workers and declining productivity growth drags on wages.
- The 2023 Intergenerational Report underscores growing dependence on bracket creep absent tax reforms.

Recommendations:
- Rebalance the tax base from high direct to underutilized indirect taxes to improve efficiency and generational equity and promote productivity growth; mitigate regressive impacts via targeted cash transfers and cost-of-living reliefs to vulnerable households.
- Secure revenues for expenditure decentralization: implement recurring property taxes in lieu of stamp duties at the state and territory level to promote housing affordability, more efficient use of housing stock, labor mobility, and more stable tax bases; transitional revenue losses could be bridged with higher GST if substantial.
- Reduce tax breaks to strengthen fairness and sustainability: expand measures to minimize tax breaks for high-income earners, including limiting concessions to capital gains tax. The 2023-24 budget’s improved targeting of superannuation concessions is a step in the right direction but limited relative to foregone revenues.

### Subnational (states and territories) fiscal dynamics
Findings:
- Pace of fiscal consolidation varies across states and territories; uneven post-pandemic recoveries amplify budget repair challenges for some states.
- Pandemic and commodity market developments had heterogeneous effects:
  - Some states (NSW, VCT) faced more severe lockdowns and injected large fiscal stimulus.
  - States with large commodity exporters (WA, QLD) benefited from favorable commodity markets.
  - Jurisdictions with strong employment growth (WA, QLD, TAS, ACT) generated sizable tax revenue gains.
- Some states (NSW, VCT) introduced new tax-revenue measures (e.g., payroll tax increases) to finance elevated expenditure, driven in part by rising costs of debt services.
- Monetary policy tightening impacts budgets unevenly across jurisdictions, creating divergent fiscal consolidation speeds and varying effects on public balance sheets.

Recommendation:
- Re-calibrating parameters of the equalization formula to address vertical and horizontal imbalances will facilitate productivity-enhancing tax reforms at the subnational level and prevent distortionary tax measures.

### Authorities’ views and commitments
- Authorities emphasize fiscal policy should focus on medium-term objectives: expanding productive capacity, preserving fiscal sustainability, and supporting monetary policy to address inflationary pressures.
- Authorities consider the fiscal stance has not added to the inflationary challenge; the Government has banked most cyclical windfalls from higher commodity prices and a stronger labor market to improve the fiscal position.
- Cost-of-living reliefs are presented as targeted and fiscally responsible.
- Government will work with states and territories to better align infrastructure investment with market capacity, following the Independent Strategic Review of the Infrastructure Investment Program, to reduce cost pressures and improve pipeline sustainability.
- Government commitments:
  - Strengthen tax integrity for multinational enterprises.
  - Improve targeting of superannuation tax concessions.
  - Raise the level of tax collected under the Petroleum Resource Rent Tax.
  - Implement key components of Pillar Two (a 15 percent global minimum tax and a domestic minimum tax for large multinational enterprises) in 2024.
  - Provide a full response in 2024 to the independent review of the NDIS.
  - Expand program evaluation activities to better target investment in health and aged care.
  - New national wellbeing framework will guide policy decisions and complement the establishment of Australian Centre for Evaluation.
  - Productivity Commission to review the equalization formula by end-2026.

*Source: Excerpt from IMF staff report chapter on Australia (as provided in the supplied content).*

### 23.      Monetary policy has tightened

### 23.      Monetary policy has tightened

### Monetary policy stance and outlook
- The cash rate is expected to remain at its current restrictive level of 4.35 percent for some time, with rates projected to stay high until 2025 under staff baseline.
- The impact of policy rate is expected to peak after 12 to 18 months.
- Continued tightening of financial conditions is anticipated as mortgage rates reset and low-interest Term Funding Facility (TFF) financing is rolled over at sharply higher market rates.

### Transmission to households and credit
- Around 880,000 fixed rate loans, with a term of three years or less, taken out during the pandemic at very low interest rates are expected to expire in 2023, followed by another 450,000 loans in 2024.
- On average, this will result in a 60 percent increase in repayment for such borrowers.
- Rising interest rates have more than doubled household interest payments as a share of disposable income (from 5.2 percent in 2021 to around 11 percent at the end of 2022), projected to reach 13 percent by the end of 2023.
- The average fixed rates for new owner-occupier loans with terms of three years or less bottomed out at 1.95 percent in May 2021, while average variable rates for new owner occupier borrowers are now 6 percent. The average loan size in May of 2021 was AU$ 549,498 on a 30-year loan term.
- Accumulated savings during the pandemic provide buffers that could dampen and delay transmission, depending on households' behavioral responses.

### Policy recommendations and considerations
- More adjustments to the policy mix are recommended to bring inflation to target earlier than 2026 envisaged in the baseline, and ensure expectations remain anchored.
- There is no scope for a cut in the cash rate in the near term given still high and broad-based non-tradeable and services inflation, a still-positive output gap, and tightness in the labor market.
- A careful assessment of demand pressures and close fiscal and monetary policy coordination is critical to ensure that monetary policy does not disproportionately share the burden of containing domestic demand.
- Further rate hikes will likely be needed in the absence of supportive alternative policies.
- Alternate tools, such as fiscal policy, must ensure that other sectors of the economy do their part. Greater public capital expenditure at the state level has a higher multiplier effect and, absent adequate fiscal-monetary coordination, could increase inflationary pressures necessitating further monetary tightening.
- Consideration should be given to additional borrower-based macroprudential tools, such as loan-to-value (LTV) and debt-to-income (DTI) limits, to boost the macroprudential toolkit.

### Distributional and sectoral impacts
- Higher policy rates have primarily affected lower income households with mortgages (around 40 percent of households).
- Businesses have felt less of an impact as evidenced by still-healthy credit conditions, and households who own their homes are set to benefit from a recovery in housing prices.
- A careful coordination of policies will be key to ensuring an equitable distribution of the burden of adjustment.

### RBA review and governance
- The independent review of the RBA has clearly defined and clarified the dual monetary policy objectives of price stability and full employment.
- The review reaffirms the RBA’s independence and proposes strengthened governance arrangements and decision-making processes.
- The review recommends retaining the Treasury Secretary as part of the Monetary Policy Board; staff view alternative arrangements with regular data and information sharing as preferable to avoid potential risks to RBA autonomy.
- The proposal for a 5-year periodic review of the RBA is welcomed; a Central Bank Transparency review could help anchor public expectations.

### Authorities’ views on monetary policy
- The authorities reiterated determination to bring inflation down while continuing to keep employment growing.
- The RBA noted the cash rate is in restrictive territory and household consumption growth has slowed and is set to remain below trend growth.
- The RBA emphasized commitment to bring inflation back to target within a reasonable timeframe, citing the November 2023 cash rate increase after cumulative data since August came in stronger than earlier expected.
- Authorities noted wage pressures remain contained and saw no evidence of de-anchoring of inflation expectations or a wage-price spiral.
- Authorities welcomed the RBA review recommendations and highlighted that the presence of the Treasury secretary on the RBA board has worked well in Australia.

### Financial stability: risks and resilience
- Financial stability risks appear contained but persistent; spillover risks from global financial conditions have increased.
- Commitments for new housing loans declined sharply in 2022 but started increasing in 2023.
- Business credit growth has stabilized at well below 2022 peaks; business insolvencies have increased to pre-pandemic levels, driven by small businesses and construction firms.
- The negligible share of loans in negative equity limits losses to banks and borrowers in the event of default; corporates' interest coverage ratios remain manageable.
- Major banks’ capital ratios are in excess of APRA’s 10½ percent benchmark and domestic systemically important bank total capital ratios are well above the 18.25 per cent loss absorbing capacity requirement which will come into effect in 2026.
- IMF’s Global Bank Stress Testing (GST) Tool and RBA stress-testing suggest banks would be able to continue extending credit even if economic conditions were materially worse than expected.
- Banks’ exposure to commercial real estate is limited: CRE is 6 percent of total assets in aggregate, with low loan-to-value ratios (less than 65 percent).
- Banks’ liquidity positions are robust: liquidity coverage ratios (LCRs) at 132 as of 2023Q2 for major banks.
- Two TFF maturity dates (September 2023 and June 2024) total approximately $130 billion (3 percent of banks' total liabilities), increasing exposure to wholesale funding markets. Banks have pre-funded some expiring TFF financing with bond issuance in 2022 and 2023 well above historical average.
- The potential for renewed global banking stress remains a key risk that could lead to further tightening in financial conditions.

### Housing affordability and supply
- The 8 percent peak-to-trough decline in prices did not materially improve affordability given prices remain around 30 percent higher than their pre-pandemic levels.
- National dwelling value-to-income ratio increased from around 6 percent before the pandemic to 7.3 percent in March 2023.
- The period a median household needs to save for a 20 percent deposit, assuming it saves 15 percent of its gross annual income, has increased to almost 10 years.
- A borrowing capacity approach suggests median housing prices are 60 percent above the price the median household could afford to finance with a debt service-to-income ratio of 30 percent.
- CoreLogic hedonic rental value index reached an all-time high of 10.2 percent in December 2022.
- Rental affordability (share of median household income required to service rent on a new lease) increased from 26.5 percent in September 2020 to 30.8 percent in April 2023; the corresponding figure hit 51.6 percent for lower income households.
- Low vacancy rates, decline in the share of social housing, capacity constraints in construction, and a recent surge in migration have added to rental pressures.
- Policy measures announced:
  - AU$10 bn Housing Australia Future Fund would fund 30,000 social housing units over the next 5 years.
  - AU$2 bn Social Housing Accelerator payment will target social homes across Australia.
  - Authorities announced a target to build 1.2 million new homes over five years, from July 2024, including performance-based funding for states and territories.
  - Planned Help-to-Buy Scheme would support up to 40,000 low- and middle-income families; Government equity contribution up to 40 percent for new homes and 30 per cent for existing homes.
  - Home Guarantee Scheme covers 50,000 households, including more than 6,000 through the new Regional First Home Buyer Guarantee.
- Measures such as foreigner surcharge on land taxes in New South Wales and Tasmania are likely to have a very limited role in supporting affordability and are classified as CFM measures under the IMF’s Institutional View.

*INTERNATIONAL MONETARY FUND*

### 38.      Like staff, authorities remain concerned about deteriorating housing affordability.

### 1ausea2024001 - 38.      Like staff, authorities remain concerned about deteriorating housing affordability.

### Housing affordability and supply
- Authorities and staff note quickly rising rents and continued worsening of affordability.
- National Housing Accord (October 2022) target: delivering 1.2 million homes over 5 years from 2024.
- Authorities caution the target is ambitious in the near term due to labor and material constraints.
- Staff recommendation: increase housing stock and implement supportive planning and land-use policies.
- Observations:
  - Mortgage payments as a share of disposable income have doubled due to higher interest rates.
  - Rents have increased at a very fast pace.
  - Strong immigration after post-COVID re-opening has added to housing pressures.

### Productivity growth, innovation, and competition
- Recent decline in labor productivity growth; multifactor productivity growth and investment significantly lower than in the 1990s and early 2000s (except mining-related boom in 2005-15).
- Manufacturing productivity has been particularly low.
- Consequences: rapid increase in unit labor costs and high real exchange rate (as of 2022, among the highest in the world).
- Productivity Commission (February 2023) emphasized importance of:
  - (i) competition as a driver of productivity;
  - (ii) technology adoption, especially ICT, to catch up with the global frontier;
  - (iii) fostering productivity growth in the non-market sector;
  - (iv) building and making the most of a skilled workforce;
  - (v) minimizing the productivity impact of the transition to net zero.
- Key gaps and policy directions:
  - Spending on R&D is significantly lower as a share of GDP than in Germany, Japan, or the US.
  - ICT investment has fallen from near top OECD levels in the late 1990s to significantly below peers.
  - Digital infrastructure: fixed broadband connections per capita close to OECD average, but experienced internet speeds relatively low.
  - Businesses underuse data analytics and artificial intelligence; primary impediments include lack of skills and uncertainty about technology gains.
  - Policy suggestions: continued investment in digital infrastructure; more open FDI regime; better labor market integration of skilled immigrants.
  - Authorities’ Competition Policy Review (announced August 2023) is a welcome initiative.

### Labor market, skills, and inclusion
- Australia has relatively high labor force participation but also high part-time work, especially among women.
- Authorities increased childcare subsidy rates to reduce participation barriers.
- Immigrants have, on average, higher education levels than Australian-born, but face placement challenges; immigrant women are less well integrated in the labor force.
- Authorities are boosting vocational training (including free vocational training), expanding university capacity, and finalizing a Migration Strategy to address skills shortages.
- Declining education outcomes (declining test scores) warrant additional action.

### Fiscal policy and public investment
- Fiscal policy can do more to support growth: recommendation to rebalance the tax system from direct to indirect taxes to incentivize labor supply and investment and counteract strong real exchange rate appreciation.
- Over the medium term, governments need to reduce structural deficits, improve expenditure outcomes, and contain structural spending growth.
- New national wellbeing framework designed to improve outcomes across levels of government.
- Greater expenditure decentralization and recalibration of the GST equalization formula are suggested to address subnational fiscal sustainability differentials.
- Public investment projects should be implemented at a measured and coordinated pace given supply constraints to alleviate inflationary pressures.

### External sector, trade policy, and corruption
- Australia’s continued strong support for the WTO is helping to buttress the rules-based trading system.
- Continued judicious use of the national security test recommended to keep FDI approval transparent.
- Authorities engage stakeholders to address correspondent banking pressures in the Pacific and facilitate regional solutions.
- Australia committed to IMF’s voluntary assessment of transnational aspects of corruption; assessment reflected in Box 4 (and Annex IX).
- Voluntary review: progress on detecting foreign bribery and strengthening private sector awareness, but gaps in foreign bribery enforcement acknowledged.
- Authorities plan to strengthen the anti-money laundering framework, particularly in the real estate sector.

### Climate change mitigation and Safeguard Mechanism
- Australia is one of the largest GHG emitters; the NDC (legislated in 2022) implies significant emissions reduction, but staff encourages greater ambition.
- Staff view: an economy-wide carbon price is the most effective way to achieve net zero, complemented by active labor market policies to support displaced workers.
- In the absence of a broad carbon price, strong sectoral policies with price signals where possible can deliver abatement.
- Safeguard Mechanism (SM) reform highlights:
  - Coverage: facilities with annual emissions above 100,000 tons of CO2-equivalent (around 215 emitters accounting for 28 percent of total emissions).
  - Key reform features: ceilings on aggregate net emissions under the SM; automatic reduction of each emitter’s baseline net emissions by 4.9 percent annually (with lower rates for manufacturing); establishing a carbon price via tradable carbon credits for overperformance; a ceiling on gross emissions to limit reliance on offsets.
  - Government support under new law: up to AUD1 billion to support manufacturers and firms exposed to trade.
- Authorities’ objectives and policies:
  - Target to increase share of renewable energy to 82 percent by 2030.
  - Announcement to impose fuel efficiency standards in the National Electric Vehicle Strategy.
  - Staff caution tax incentives for EV purchases may be regressive and less effective given supply bottlenecks.
  - Recommendation to step up energy sector investment under the Rewiring the Nation program and consider price signals (e.g., feebates) in energy and transport to induce behavioral responses.
- Staff recommendation: consider gradually expanding SM coverage and safeguard integrity of carbon offsets (ACCUs).

### Authorities’ views (summary)
- Agree slowing productivity growth poses challenges; identify declining dynamism and competition, slower technology adoption, and slowdown in trade growth as key factors.
- Support increasing productivity and progressing a policy agenda via the Council on Federal Financial Relations.
- Agree with need to address skills shortages and improve labor outcomes for women; Employment White Paper lays out policy agenda.
- Finalizing a Migration Strategy to better address skills shortages and simplify the system.
- Acknowledge achieving the 2030 climate target is ambitious but committed to net zero by 2050 via detailed sectoral emissions reduction plans across electricity and energy, transport, industry and waste, agriculture and land, resources, and built environment.
- View: efficient, competition-underpinned approaches will achieve low-cost abatement and support Australian businesses and workers.

### Staff appraisal and macro outlook
- Economic outlook:
  - Australia’s economy expected to further decelerate in 2023 and 2024, while avoiding a recession.
  - Inflation projected to decline gradually to the target range in 2026Q1, subject to significant uncertainty.
  - On a preliminary basis, the external position expected to be broadly in line with medium-term fundamentals and desirable policies.
- Downside risks: stronger-than-expected decline in household consumption; protracted global and China growth slowdown; persistently high inflation (especially services); rising geo-economic fragmentation.
- Upside: stronger-than-expected immigration fueling domestic demand.
- Monetary and fiscal policy coordination:
  - Monetary policy has tightened by cumulative rate hikes of 425 basis points since May 2022.
  - Fiscal deficit has contracted faster than in other advanced economies.
  - Further monetary tightening likely needed to bring inflation back to target range by 2025 and avoid de-anchoring expectations.
  - Continued coordination between monetary and fiscal policy needed for equitable burden sharing.
- Financial stability and housing:
  - Financial system appears robust; increase in banks’ required capital buffers is welcome.
  - Liquidity coverage ratios well above regulatory minimums, but expected increase in bank wholesale funding at higher rates may pose vulnerabilities.
  - Staff recommend additional borrower-based tools in response to resumed house price increases and potential vulnerabilities.
  - Potential cyberthreats require investment, monitoring, and contingency planning.
- Structural priorities:
  - Delivering quality infrastructure requires streamlining the infrastructure pipeline and addressing construction sector capacity constraints.
  - Reigniting productivity and boosting inclusion requires structural reforms, upskilling, and continued support for open trade.
- Climate mitigation:
  - Meeting 2030 NDC target will be challenging; additional efforts needed to stay on track for net zero by 2050.
  - A broad-based carbon price is the most cost-effective approach; if politically infeasible, sectoral policies with price signals should be used.
- Governance:
  - Voluntary participation in transnational corruption review is commendable; planned reforms (including AML strengthening in real estate) send positive signals.

### Box: Australia’s Saving Rate (key figures)
- Between 2020Q2 and 2022Q2, Australian households accumulated over $240-280 billion in excess savings.
- Household saving rate:
  - Peak: 23.6 percent in 2020Q2.
  - 2023Q2 saving rate: 3.2 percent (dropped from peak; slightly below long-term average).
- Estimates of depletion timing vary by methodology:
  - AR(1) model with linear time trend suggests excess savings depleted by 2023Q4.
  - Hamilton filter trend-based measure suggests depletion later in 2024.
- Note: household consumption is estimated to have contracted by an average -6 percent in 2020.

*International Monetary Fund — Australia Country Report (excerpt).*

### Box 2. Fragmentation in Commodity Markets

### Box 2. Fragmentation in Commodity Markets

### Overview
- Integration in commodity markets, following decades of progress from technological innovation and declines in transport costs, has been reversing in the past years.
- The disruption in commodity trade following Russia’s invasion of Ukraine contributed to surging inflation in 2022 and food insecurity in low-income countries, with positive terms of trade shocks to some countries, including Australia.
- More recently, re-shoring of supply chains has emerged, driven by geopolitical or national security reasons, including for critical minerals needed for cleaner technologies, semi-conductors, and defense.
- Measures restricting commodities trade were far higher in 2022, compared to other traded goods.

### Drivers and vulnerabilities
- Commodities are particularly vulnerable to fragmentation because of:
  - High concentration in a few countries.
  - Short-term difficulty in substituting them with different goods.
  - Strong demand for many commodities.
- Re-shoring and geopolitical motives can concentrate supply chains and trade patterns, increasing fragility.
- Fragmentation can create misalignments between supply and demand if producers are confined to trading within a specific bloc.

### Model simulations and macroeconomic effects
- The box draws on model simulations from the World Economic Outlook which assume a world fragmented into two blocks based on the 2022 UN vote of the war on Ukraine (countries that voted for withdrawal of Russia are included in the “USA-Europe+ bloc).
- Simulations indicate:
  - Fragmentation in commodity prices can cause large price spikes, with a significant rise in prices of minerals, including cobalt, copper, lithium, iron ore, and nickel.
  - Fragmentation would add significant volatility to commodity prices.
- Mechanisms driving effects:
  - Smaller effective market sizes make countries more vulnerable to negative supply shocks.
  - Commodity producers may face incentives to switch geopolitical allegiances depending on prices in each market, adding to demand and supply shocks.
- Results from a DSGE model where fragmentation is defined as a ban on commodity trade between the two hypothetical blocs find:
  - Fragmentation leads to notable global GDP losses and inflation effects via (a) expenditure switching and trade diversions, and (b) price-volatility-inducing imbalances between supply and demand in the presence of rigidities that constrain adjustment (for example, pipelines and other structures that would constrain natural gas diversion).
  - Cross-country evidence suggests Australia could be significantly impacted: fragmentation in energy and minerals can lead, on average, to a -0.3 percent real GDP deviation in 3 years, and a 0.4 percentage point deviation in inflation within a year.

### Implications for Australia
- Gains from higher commodity prices may not be fully realized for exporters of minerals and metals like Australia:
  - Australia is in the top three producers of many minerals which are essential inputs into multiple global value-chains.
  - If confined to trading only in a specific bloc, supply and demand may be temporarily misaligned; if mineral demand is concentrated in an opposing bloc, Australia may end up with excess mineral capacity.
  - Refining capacity for many exported minerals is highly concentrated in a small number of countries; fragmentation could result in significant adjustment costs as new refining capacity would need to be developed.
- Potential outcomes for Australia include reduced external demand, increased inflation, and greater exposure to volatility if commodity markets become more concentrated.

### Representative share listings (as shown in the source)
- DRC (67); Philippines (6); Australia (5)
- China (70); Myanmar (11); Australia (8)
- China (28); South Africa (15); Australia (13)
- China (30); Peru (11); Australia (11)
- China (42); Australia (11); Mexico (8)
- Australia (30); Guinea (20); China (18)
- Australia (30); China (28); Brazil (13)
- Australia (64); Chile (28); Argentina (8)
- Australia (36); South Africa (27); United States (7)
- China (56); Russia (6); India (6)
- China (46); United States (9); Korea (6)
- China (46); Korea (7); India (5)
- Share categories shown: Cobalt mined; Rare Earths mined; Titanium mined; Zinc mined; Lead mined; Aluminium mined; Iron ore mined; Lithium mined; Zirconium mined; Aluminium refined; Lead refined; Zinc refined
- Chart label: Share of Top 3 Commodities in World Production (Percentage of total production)
- Source noted in figure: WEO 2023

*Source: Box 2. Fragmentation in Commodity Markets (concluded) from the provided IMF material.*

### Annex I. Previous IMF Policy Recommendations

### Annex I. Previous IMF Policy Recommendations

### Sound macroeconomic policies and recovery
- Sound macroeconomic policies contributed to the post-pandemic recovery and pinning down a transition to a soft landing.
- Policies have been broadly consistent with staff’s advice.
- During the pandemic, Australia implemented one of the largest fiscal stimulus packages among AEs.
- Together with monetary easing, this helped weather the pandemic, pave the way for economic recovery despite repeated lockdowns in 2020 and 2021, and limit economic scarring.
- All levels of government have subsequently started to consolidate, and the RBA has been lifting the policy rate.
- Since the last Article IV consultation, further tightening of macroeconomic policies have been implemented to support a durable handover from public to private demand and address inflation.

### Fiscal policy and consolidation
- The pace of fiscal consolidation was well-calibrated to the strength of the underlying economic recovery.
- The overall deficit in FY2022/23 further declined, with continued efforts for fiscal consolidation.
- The Commonwealth Government saved additional tax receipts, generated by favorable terms-of-trade and strong labor market developments, and turned the cash balance into a surplus for the first time in 15 years.
- This follows the fiscal strategy of budget repair and is in line with staff advice to calibrate the fiscal stance for further consolidation and to support a durable transition from public to private demand.
- Cyclically adjusted primary balance is now close to the pre-pandemic levels.

### Monetary policy tightening
- RBA has tightened monetary policy appropriately to address above-target inflation.
- Consistent with staff advice, RBA hiked the policy rate cumulatively by 425 basis points since May 2022.
- This has resulted in a moderation in private sector credit growth and continued tightening of financial conditions, as mortgage rates reset.
- The proposal for a 5-year periodic review of the RBA, in line with the practice in some other central banks and staff advice, is welcome.

### Financial sector reforms and resilience
- Financial sector reforms have progressed, and the increase in banks’ interest serviceability buffer enhanced resilience during the housing price correction.
- Strong bank capitalization provides additional buffers, despite banks’ high concentration in mortgage lending.
- Consistent with staff recommendations, APRA raised the minimum serviceability buffer from 2.5 to 3 percent, requiring lenders to use the higher interest rate spread in assessing borrowers’ ability to service their mortgage loans, thereby strengthening their repayment capacity as interest rates increase.
- Progress is being made in addressing climate and cyber risks, which is essential to ensure financial resilience in a changing environment.

### Structural policies
- Progress has been made on structural policies, especially in climate change mitigation, though tax policy reforms remain elusive.
- The Safeguards Mechanism reform makes greater use of price signals and market mechanisms in achieving emissions reduction, consistent with past staff advice, though a broad-based economy-wide carbon price is still not being considered.
- The government’s focus on education and female labor force participation is also consistent with previous staff recommendations.
- The longstanding policy advice of rebalancing the tax structure away from direct taxes to indirect taxes remains difficult to implement.

*Source: Annex I. Previous IMF Policy Recommendations*

### 1.      Background. Australia’s cyclical position is stronger than in most advanced economies, with

### 1ausea2024001 - 1.      Background. Australia’s cyclical position is stronger than in most advanced economies, with

### Background
- Australia has a positive output gap and a tight labor market, supported by favorable terms-of-trade developments.
- Commonwealth and state/territory governments began unwinding stimulus in FY2021/22 and continued in FY2022/23 to help bring down inflation while supporting growth and vulnerable households.
- The overall fiscal deficit reached 0.8 percent of GDP in FY2022/23, down from a record high of 9¼ percent in FY2020/21.
- Cyclical factors and gains in commodity-related windfall revenues contributed to sizable fiscal consolidation.

### Baseline Scenario — Macroeconomic assumptions
- Growth projections:
  - Around 1¾ percent in 2023
  - 1¼ percent in 2024
  - Recovering gradually over the medium-term to around 2¼ percent (consistent with staff’s potential output estimates)
- Inflation:
  - Peaked in 2022 and started moderating in recent quarters
  - Projected to remain elevated in the near term
- Monetary policy:
  - The RBA has tightened monetary policy by 425 basis points (cumulative) since May 2022
  - Cash rate target at 4.35 percent
  - RBA signaled further tightening will be data-dependent
- Long-term inflation expectations remain anchored.
- 10-year Treasury bond yield:
  - Peaked at around 5 percent at end-October
  - Has since come down to 4¾ percent

### Debt trajectory
- The cyclically adjusted primary deficit in FY2022/23 is close to pre-COVID levels.
- The deficit is projected to increase at the consolidated general government level in FY2023/24-FY2024/25, with weakening growth momentum and growing debt servicing costs.
- Gross public debt is projected to increase as a share of GDP in the near term but stabilize over the medium term as fiscal consolidation resumes and the primary balance improves gradually.
- FY2024/25: the deficit increase is mainly resulting from the already-legislated personal income tax reform, lowering tax revenue by around 1 percent of GDP (as per the FY2022/23 budget).

### Realism of baseline
- Baseline economic assumptions are generally within the error band observed for all countries.
- Baseline fiscal projections and implied near-term adjustments are in the upper quartile compared with historical and cross-country experience but are considered realistic given a moderate pace of fiscal consolidation over the medium term.

### Vulnerabilities and financing
- Share of Australian Government Securities held by non-residents reached around 45 percent at end 2023Q2 (or 15 percent of 2022 GDP).
- Given sound fiscal and monetary frameworks, strong institutions, and a triple-A sovereign rating, foreign demand for Treasury securities is expected to remain high.
- Gross financing needs (GFN) are projected to increase in the near term as governments rely more on short-term securities to finance deficits.
- Overall risks remain low due to deep and liquid capital markets in Australia.

### Risk of sovereign stress — summary conclusions
- Commentary: Australia is at a low overall risk of sovereign stress, and debt is sustainable with an AAA sovereign credit rating.
- Drivers of the assessment:
  - Sustained post-pandemic economic recovery with strong labor market and favorable commodity developments boosted revenues.
  - Withdrawal of fiscal stimulus contributed to sizable fiscal consolidation.
  - Moving forward, the deficit is projected to increase in the near term, but debt is projected to stabilize over the medium term with improvements in the primary balance.
  - Despite high and persistent inflation and monetary policy tightening, medium-term liquidity risks (as analyzed by the GFN Financeability Module) and long-term risks remain low.
  - Growth in age-related spending is projected to pick up, but its pace is contained relative to other AEs since population aging in Australia is not as acute as in other AEs.

### Debt coverage and public debt structure (high-level)
- Perimeter shown is general government.
- Subsectors included in baseline coverage:
  - Budgetary central government: Yes
  - State governments: Yes
  - Local governments: Yes
  - Extra budgetary funds (EBFs): No
  - Social security funds (SSFs): No
  - Public nonfinancial corporations: No
  - Central bank: No
  - Other public financial corporations: No

### Baseline numeric projections (selected items from "Figure 4. Baseline Scenario"; percent of GDP unless indicated otherwise)
- Public debt:
  - 2022: 50.8
  - 2023: 51.7
  - 2024: 54.9
  - 2025: 55.7
  - 2026: 56.1
  - 2027: 55.7
  - 2028: 54.8
  - 2029: 53.8
  - 2030: 52.7
  - 2031: 51.4
  - 2032: 49.9
- Change in public debt:
  - 2022: -5.1
  - 2023: 1.0
  - 2024: 3.2
  - 2025: 0.8
  - 2026: 0.4
  - 2027: -0.3
  - 2028: -0.9
  - 2029: -1.0
  - 2030: -1.1
  - 2031: -1.3
  - 2032: -1.5
- Contribution of identified flows:
  - 2022: -3.7
  - 2023: -0.5
  - 2024: 1.3
  - 2025: -0.3
  - 2026: -0.6
  - 2027: -0.8
  - 2028: -1.1
  - 2029: -1.3
  - 2030: -1.4
  - 2031: -1.6
  - 2032: -1.8
- Primary deficit (percent of GDP):
  - 2022: 1.4
  - 2023: 0.0
  - 2024: 0.4
  - 2025: 0.2
  - 2026: -0.2
  - 2027: -0.3
  - 2028: -0.5
  - 2029: -0.7
  - 2030: -0.9
  - 2031: -1.2
  - 2032: -1.5
- Noninterest revenues (percent of GDP):
  - 2022: 35.3
  - 2023: 36.3
  - 2024: 36.1
  - 2025: 35.1
  - 2026: 34.9
  - 2027: 34.7
  - 2028: 34.7
  - 2029: 34.7
  - 2030: 34.8
  - 2031: 34.8
  - 2032: 34.8
- Noninterest expenditures (percent of GDP):
  - 2022: 36.7
  - 2023: 36.3
  - 2024: 36.5
  - 2025: 35.3
  - 2026: 34.7
  - 2027: 34.4
  - 2028: 34.2
  - 2029: 34.0
  - 2030: 33.8
  - 2031: 33.6
  - 2032: 33.3
- Automatic debt dynamics:
  - 2022: -4.6
  - 2023: -0.1
  - 2024: 1.3
  - 2025: -0.1
  - 2026: -0.1
  - 2027: -0.1
  - 2028: -0.1
  - 2029: -0.1
  - 2030: -0.1
  - 2031: 0.0
  - 2032: 0.1
- Real interest rate and relative inflation (real interest rate):
  - 2022: -2.6
  - 2023: 0.8
  - 2024: 2.0
  - 2025: 1.0
  - 2026: 1.1
  - 2027: 1.1
  - 2028: 1.2
  - 2029: 1.1
  - 2030: 1.2
  - 2031: 1.2
  - 2032: 1.2
- Other identified flows: consistently -0.4 (2022–2032)
- (minus) Interest Revenues: consistently -0.4 (2022–2032)
- Contribution of residual:
  - 2022: -1.5
  - 2023: 1.5
  - 2024: 1.9
  - 2025: 1.1
  - 2026: 1.0
  - 2027: 0.5
  - 2028: 0.2
  - 2029: 0.3
  - 2030: 0.3
  - 2031: 0.3
  - 2032: 0.3
- Gross financing needs (percent of GDP):
  - 2022: 7.8
  - 2023: 9.4
  - 2024: 9.9
  - 2025: 10.0
  - 2026: 9.0
  - 2027: 8.9
  - 2028: 8.4
  - 2029: 8.9
  - 2030: 9.3
  - 2031: 9.8
  - 2032: 9.3
- Of which: debt service (percent of GDP):
  - 2022: 6.8
  - 2023: 9.8
  - 2024: 9.9
  - 2025: 10.2
  - 2026: 9.6
  - 2027: 9.6
  - 2028: 9.3
  - 2029: 10.1
  - 2030: 10.7
  - 2031: 11.4
  - 2032: 11.2
- Local currency debt service: same series as debt service (foreign currency = 0.00 across projections)
- Memo:
  - Real GDP growth (percent): 2022: 3.7; 2023: 1.8; 2024: 1.4; 2025–2032: 2.0/2.2/2.3/2.3/2.3/2.3/2.3/2.3 (as listed)
  - Inflation (GDP deflator; percent): 2022: 7.9; 2023: 1.7; 2024: 0.7; 2025–2032: 3.0/2.6/2.6/2.6/2.6/2.6/2.6/2.6
  - Nominal GDP growth (percent): 2022: 11.9; 2023: 3.5; 2024: 2.2; 2025–2032: 5.0/4.8/5.0/4.9/4.9/4.9/4.9/4.9
  - Effective interest rate (percent): 2022: 2.7; 2023: 3.3; 2024: 4.7; 2025: 4.9; 2026: 4.7; 2027: 4.8; 2028: 4.7; 2029: 4.7; 2030: 4.8; 2031: 4.9; 2032: 5.1
- Commentary: Public debt is projected to increase in the near term due to rising debt servicing costs and primary deficits, but stabilize over the medium term as the primary balance turns into surplus and the economy reaches a steady growth path.

### Realism and historical performance
- The strong economic recovery raised revenues, outperforming budgets by a significant margin, and reduced the overall deficit and debt-to-GDP ratio through FY2022/23.
- Staff projections in recent years are more closely aligned with outturns.
- Primary balance projected to relapse in the near term but improve over the medium term; debt projected to stabilize despite rising debt servicing costs.

### Medium-term risk analysis (selected indicators and assessments)
- Debt fanchart module:
  - Fanchart width: 30.2 (percent of GDP)
  - Terminal debt-to-GDP: x8.3 (percent)
  - Debt fanchart index (DFI): 0.8
  - Risk signal: Low
- Gross financing needs (GFN) module:
  - Average baseline GFN: 9.3 (percent of GDP)
  - Banks' claims on the general government (pct bank assets): 5.0
  - GFN financeability index (GFI): 4.8
  - Risk signal: Low
- Medium-term index:
  - Final assessment: Prob. of missed crisis, 2023-2028, if stress not predicted: 0.0 pct.
  - Prob. of false alarms, 2023-2028, if stress predicted: 76.1 pct.
  - Final assessment: Low risk
- Commentary: Risk of debt not stabilizing in the medium term remains low. Debt-rollover risk remains low as indicated by GFN analysis, driven by depth of financial sector and domestic capital markets. Results are consistent with credible fiscal framework, institutions, and deep capital markets.

### External Sector Assessment (Annex V)
- Overall Assessment:
  - On a preliminary basis (data as of end-June and staff projections for 2023H2), the external position in 2023 is expected to be broadly in line with the level implied by medium-term fundamentals and desirable policies.
  - Current account (CA) surplus:
    - 2022: 1.1 percent of GDP
    - 2023 projected: 0.7 percent of GDP (decline as export commodity prices have declined)
  - In the medium term, the CA is projected to return to a slight deficit as commodity prices further decline, savings return to historical levels, and investment picks up.
  - The assessment is highly uncertain given lack of full-year 2023 data and volatility in commodity prices.
- Potential Policy Responses:
  - Given the positive output gap and still elevated inflation, fiscal and monetary restraint remains warranted for Australia.
  - Closing of the output gap will push the current account surplus higher, but this should be offset by a decrease in private savings (which are at elevated levels partly due to large pandemic-related fiscal stimulus).
  - Policies that boost investment can contribute to reducing the CA surplus, including:
    - 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: Australia’s NIIP is projected to improve to -32.5 percent of GDP by end-2023 (text cuts off at that figure in source).

*Source: IMF staff (content unit: 1ausea2024001).*

### 38.2 percent of GDP in 2022, driven by the CA surplus,  revaluation effects of foreign equities, and

### 1ausea2024001 - 38.2 percent of GDP in 2022, driven by the CA surplus,  revaluation effects of foreign equities, and

### External balance sheet and NIIP
- Key drivers and structure:
  - 38.2 percent of GDP in 2022, driven by the CA surplus, revaluation effects of foreign equities, and rising interest rates that have reduced the value of external debt.
  - 61 percent of Australia’s gross liabilities are debt obligations.
  - Around half of the debt liabilities are denominated in domestic currency.
  - 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.
  - The structure of Australia’s external balance sheet reduces vulnerability associated with its negative NIIP.
  - With a positive net foreign currency asset position, a nominal depreciation tends to strengthen the external balance sheet, all else being equal.
  - The banking sector’s net foreign currency liability position is mostly hedged and the maturity of banks’ external funding has lengthened since the global financial crisis.
  - 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.
- 2023 (% GDP) statistics:
  - NIIP: -32.5
  - Gross Assets: 152.4
  - Debt Assets: 66.9
  - Gross Liab.: 184.9
  - Debt Liab.: 114.3

### Current Account (CA)
- Background and recent developments:
  - Australia historically ran CA deficits; the CA balance has been in surplus since 2019 due to an upswing in export commodity prices.
  - CA peaked at 3.0 percent of GDP in 2021 and is projected to decline to 0.7 percent of GDP in 2023.
  - Merchandise trade balance projected to moderate from 6.6 percent of GDP in 2022 to 4.4 percent of GDP in 2023 as terms of trade deteriorate.
  - Trade surplus is nearly offset by:
    - a 3.7 percent of GDP deficit in the primary income balance (due to higher dividend payments on Australia’s equity liabilities, especially in the mining sector),
    - a 0.1 percent of GDP deficit in the services balance (tourism and education service exports have not yet fully recovered).
  - From a savings-investment perspective, the decline in surplus in 2023 is driven by a projected decline in the savings rate from pandemic-era highs and accelerating public investment.
  - Medium-term outlook: CA expected to gradually return to a small deficit as commodity prices decline, investment picks up, and savings decline further from still elevated levels.
- Assessment (EBA model, 2023 (% GDP)):
  - CA: 0.7
  - Cycl. Adj. CA: -0.3
  - EBA Norm: -0.9
  - EBA Gap: 0.6
  - COVID-19 Adj.: (not specified)
  - Other Adj.: (not specified)
  - Staff Gap: 0.6
  - Interpretation: On a preliminary basis, the EBA model estimates a cyclically adjusted CA balance of -0.3 percent of GDP compared with a CA norm of -0.9 percent of GDP, suggesting a model-based CA gap of 0.6 percent of GDP. Hence, the CA is broadly in line with levels implied by fundamentals and desirable policies.

### Real exchange rate (REER)
- Background:
  - In 2023, the Australian dollar depreciated against the US dollar.
  - In real effective terms, the exchange rate has been broadly stable as of end-June and slightly higher than the average level of the past 5 years.
- Assessment:
  - Staff’s CA gap implies a REER gap of -3 percent (applying an estimated elasticity of 0.18).
  - The EBA REER level model points to an overvaluation of 24.4 percent.
  - The index model points to an undervaluation of 8.1 percent.
  - Consistent with the CA gap, staff assesses the REER gap to be in a range of -6 to 0 percent, with a midpoint of -3 percent.

### Capital and financial accounts: flows and policy measures
- Background:
  - The financial account recorded cumulative net outflows in the first half of 2023, reflecting the CA surplus.
  - Net FDI returned to a small deficit in 2023H1 (from a temporary surplus in 2022), which was small relative to the net outflows related to portfolio investment.
- Assessment:
  - Vulnerabilities related to the financial account remain contained, supported by a credible commitment to a floating exchange rate.

### FX intervention and reserves level
- Background:
  - The currency has been free-floating since 1983.
  - The central bank has not intervened in the FX market since the global financial crisis.
  - Reserve assets have remained stable in 2022.
- Assessment:
  - The authorities are strongly committed to a floating regime, which reduces the need for reserve holdings.
  - Although domestic banks’ external liabilities remain sizable, they are either in local currency or hedged. Hence, reserve needs for prudential reasons are also limited.

### Risk Assessment Matrix — summary of key risks, likelihoods, impacts, and policy recommendations
- Monetary policy miscalibration
  - Likelihood: Medium
  - Expected Impact: High. Risks include premature loosening that de-anchors inflation expectations, triggering a wage-price spiral and household distress given variable rate mortgages. Higher-for-longer interest rates could trigger pockets of household distress.
  - Policy recommendations:
    - Policies should remain nimble and data dependent.
    - Monetary policy should focus on the inflation outlook and the output gap, while managing financial volatility through macroprudential and financial stability tools.
    - Fiscal policy should coordinate with monetary policy to reduce price pressures.
    - Strengthen communication between central and local governments.
- Abrupt global slowdown or recession in China
  - Likelihood: Medium
  - Expected Impact: Medium. A sharper-than-expected slowdown in China’s property sector could reduce demand for Australia’s key exports (including iron ore) and dampen terms of trade, government revenues, and growth.
  - Policy recommendations:
    - Combined monetary and fiscal policy easing would be needed to respond to a global recession, with the strength dependent on inflation developments.
    - If inflation remains elevated, fiscal policy should weigh in with time-bound, well-targeted stimulus measures (e.g., low-income tax offsets).
- Intensification of regional conflict(s)
  - Likelihood: High
  - Expected Impact: High. Escalation could cause commodity price volatility, disrupt trade, and increase uncertainty; while Australia may benefit from higher commodity prices, higher import and energy prices can adversely impact inflation.
  - Policy recommendations:
    - In case of commodity price volatility and trade disruption, monetary policy should tighten faster if inflation expectations rise.
    - Fiscal policy can provide targeted support in case of heightened uncertainty, while avoiding fueling inflation.
- Systemic financial instability
  - Likelihood: Medium
  - Expected Impact: Medium. Banking turmoil from the U.S. or Europe could spill over to Australia via confidence channels or global interlinkages.
  - Policy recommendations:
    - Continue monitoring banks and NBFIs balance sheets.
    - Authorities should be ready to provide liquidity windows if funding stress arises.
- Deepening geoeconomic fragmentation
  - Likelihood: High
  - Expected Impact: High. Fragmentation could reconfigure trade and FDI, disrupt supplies, raise input costs, and lower potential growth, negatively impacting Australia.
  - Policy recommendations:
    - Strengthen the rules-based multilateral trading system and deepen international and regional economic cooperation.
- Extreme climate events
  - Likelihood: Medium
  - Expected Impact: Medium. Australia is exposed to severe droughts, bushfires, and floods, risking economic disruptions.
  - Policy recommendations:
    - Fiscal policy easing combined with monetary easing if inflation permits.
    - Explicitly build buffers for climate risks in the medium-term fiscal framework.
- Cyberthreats
  - Likelihood: Medium
  - Expected Impact: Medium. Cyberattacks on critical infrastructure could trigger financial instability and disrupt economic activities.
  - Policy recommendations:
    - Preventative investment in strengthening defenses and infrastructure.
    - Ensure fast liquidity mechanisms are in place for financial market disruptions.
- Insufficient housing supply
  - Likelihood: Medium
  - Expected Impact: Medium. Inadequate housing stock could put upward pressure on housing prices and reduce affordability.
  - Policy recommendations:
    - Prioritize increasing housing supply and the share of social housing without adding to cost pressures.
    - Ease capacity constraints and bottlenecks in the construction sector.
- Faster-than-anticipated execution of public infrastructure projects
  - Likelihood: Medium
  - Expected Impact: Medium. Uncoordinated execution across states could result in price pressures amid high input costs.
  - Policy recommendations:
    - Improve communication and coordination between local authorities and the central government to avoid excessive price pressures.

### RBA Review — implementation, governance, and operational changes
- Background:
  - Independent Review of the Reserve Bank of Australia announced on 20 July 2022; final report submitted on March 31, 2023 with 51 specific recommendations under 14 headings, grouped into 5 themes.
  - Review recommended clarification of the RBA’s monetary policy mandate and financial stability role, independence, core objectives, and focused on governance, accountability, operational structure, management style, and culture.
- Government and authorities’ response:
  - Government committed to implement the recommendations collaboratively and constructively, involving amendments to the RBA Act to:
    - Reinforce the RBA’s autonomy with respect to the operation of monetary policy.
    - Strengthen the RBA’s mandate to clarify that Australia’s monetary policy framework will have the dual objectives of price stability and full employment.
    - Amend the RBA’s governance by introducing a Monetary Policy Board and a Governance Board to improve decision making and oversight.
  - The Treasurer plans a new Statement on the Conduct of Monetary Policy before end-2023 to reaffirm the RBA’s autonomy and support its inflation targeting framework, and to set out a common understanding for strengthening decision making, accountability and transparency.
  - The Treasurer will encourage the Council of Financial Regulators to renew the memorandum of understanding to reinforce cooperation on promoting financial stability.
  - Note: The Treasury Secretary’s inclusion in monetary policy decision-making is described as unusual by international standards; monetary policy formulation is ideally fully independent of political influence.
- RBA operational changes announced (starting 2024):
  - Fewer but longer meetings: eight meetings a year instead of eleven.
  - Outcomes announced at 2.30pm on the second day of the meeting.
  - Quarterly Statement on Monetary Policy (SMP) released on the same day as the monetary policy decision.
  - Governor will hold a press conference after each meeting.
  - Board members will have opportunity to attend internal staff meetings and oversee the RBA’s research agenda.
  - Regular, 5-yearly open and transparent reviews of the monetary policy framework (as opposed to ad hoc).
  - Planned changes once the Reserve Bank Act is amended: publication of an unattributed vote count; all Board members making regular public appearances to discuss their thinking; establishment of an expert advisory group to engage with the Board; and Board papers being published with a five-year lag.
- RBA management and governance changes:
  - 360-degree feedback process for all senior leaders.
  - More management vacancies advertised externally and increased transparency around internal rotation opportunities.
  - Appointment of a Chief Operating Officer.
  - Review of the risk management framework.
  - Establishment of a separate Communications Department.

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

### Annex VIII  . Financial Sector Assessment Program (FSAP) Update

### Annex VIII  . Financial Sector Assessment Program (FSAP) Update

### Banking and Insurance Supervision
- Recommendation: Strengthen the independence of APRA and ASIC, by removing constraints on policy making powers and providing greater budgetary and funding autonomy; strengthen ASICs enforcement powers and expand their use to mitigate misconduct (Treasury, APRA, ASIC). Time Frame: ST. Developments and Implementation: Complete.
  - The Government sets ASIC’s total budget to fund its regulatory activities, of which ASIC recovers the majority through its industry funding model (IFM) which was established in 2017. Within this total budget, ASIC determines how it allocates its resources to regulate different industry sectors and achieve its statutory objectives. The Government is currently reviewing the ASIC IFM.
  - ASIC has been provided with significant additional funding since 2019-20 to support the implementation of the Financial Services Royal Commission, as well other measures.
  - Changes to ASIC’s enforcement powers:
    - April 6, 2019: ASIC was granted a product intervention power to temporarily intervene, including to ban financial products and credit products when there is a risk of significant consumer detriment. ASIC has used this power in the area of 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; and establish a mandatory code of conduct framework for the financial services and consumer credit industry through regulations, with the ability to designate certain provisions as civil penalty provisions. The regime became effective from January 1, 2021.
      - enhance ASIC’s regulatory and supervisory tools by strengthening breach reporting requirements for financial service and credit licensees. The regime commenced on October 1, 2021.
    - September 5, 2023: Parliament passed legislation that imposes a strengthened responsibility and accountability framework for entities in the banking, insurance and superannuation industries and their directors and senior executives (Financial Accountability Regime). ASIC and APRA will have joint responsibilities under this legislation.
  - The Government sets APRA’s total budget to fund its regulatory activities, of which APRA recovers the majority through its Financial Institutions Supervisory Levies (FISLs) levied on APRA-regulated institutions. Within this total budget, APRA determines how it allocates its resources to regulate different industry sectors and achieve its statutory objectives. APRA was provided A$67.3 million in additional funding in the 2021-22 MYEFO to maintain its capacity to respond to risks within the financial system.

- Recommendation: Enhance APRA’s supervisory approach by carrying out periodic in-depth reviews of governance and risk management (APRA). Time Frame: ST. Developments and Implementation: In process.
  - APRA has established a dedicated risk team and built supervisor capability to undertake in-depth reviews of governance and risk management and conducts entity-specific and thematic reviews in this area on a regular basis.
  - Since November 2019 information paper Transforming Governance, Culture, Remuneration and Accountability: APRA’s Approach, APRA has concentrated supervisory efforts on ensuring risk governance deficiencies identified from a program of self-assessments in 2018 are addressed through remediation plans. The first of these are now complete, leading to removal of capital overlays put in place to address these weaknesses.
  - APRA is applying this enhanced supervisory approach to other institutions showing similar deficiencies and has developed a risk transformation framework to support supervisors in oversight of entity risk transformation programs.
  - APRA is reviewing prudential standards for governance and risk management. Policy work to update prudential standard CPS 510 Governance is underway and a consultation is expected to be published in early 2024. Prudential standard CPS 220 Risk Management will be updated following the governance review.
  - The enhanced focus on governance and risk management under APRA’s Supervision Risk and Intensity (SRI) model has detailed guidance supporting assessment of governance, risk culture, remuneration and accountability (GCRA), ensuring weaknesses drive escalation and supervisory action.
  - APRA’s focus on organizational resilience has addressed Royal Commission recommendations related to governance, culture, remuneration and accountability.
  - APRA has strengthened requirements and increased supervision of remuneration, developed and implemented tools to sharpen the supervision of risk culture, and embedded these in supervision and enforcement of the Financial Accountability Regime. Transforming GCRA practices is no longer a headline item in APRA’s Corporate Plan, though GCRA remains a major supervisory focus.

- Recommendation: Strengthen the integration of systemic risk analysis and stress testing into supervisory processes (APRA, RBA). Time Frame: I. Developments and Implementation: Complete.
  - APRA’s SRI model incorporates an External Factors category covering macro and systemic risk for each industry. Strategic Insights teams identify macro and industry risks, captured in Industry Risk registers overseen by Industry Groups and considered in Industry Plans.
  - The capital section of the SRI model requires supervisors to consider results of recent stress tests when determining capital ratings. Stress testing inputs are used for annual ICAAP reviews, capital reductions, dividend considerations and broader capital settings. A stress testing handbook provides guidance for supervisors. Supervisors engage directly with entities on stress testing.
  - APRA increased stress testing activities across regulated industries and analysed results under a range of scenarios to identify potential vulnerabilities, including institutions at heightened risk of failure. Collaboration with the RBA in modeling scenarios and comparing results increased. Ongoing development of scenarios to reflect contemporary macro risk, such as high inflation, is incorporated into regular practice.
  - APRA has transitioned to an annual stress testing program for the banking industry and continued to develop internal stress testing models across banking, insurance and superannuation to inform supervisory and policy priorities.
  - APRA is developing a cross industry stress testing framework and systemic risk framework as the next enhancement phase.

- Recommendation: Encourage further maturity extension and lower use of overseas wholesale funding (APRA). Time Frame: I. Developments and Implementation: In process.
  - Banks’ offshore funding is kept under close scrutiny by CFR agencies; vulnerabilities are mitigated because a sizeable portion of foreign funding is swapped into Australian dollars and used to acquire Australian dollar assets.
  - Australian banks’ overseas wholesale funding is currently lower than in recent history due to their use of the RBA’s Term Funding Facility (TFF). The TFF closed to new drawdowns in June 2021, and banks’ overseas issuance is expected to pick up as they refinance maturing TFF debt through to June 2024. The refinancing task is assessed to be sizeable but manageable. So far, TFF has been mainly replaced by a combination of customer deposits   and long-term debt.

### Financial Stability Analysis
- Recommendation: Commission and implement results of a comprehensive forward-looking review of potential data needs. Improve the quantity, quality, granularity and consistency of data available to the CFR agencies to support financial supervision, systemic risk oversight and policy formulation (CFR agencies). Time Frame: MT. Developments and Implementation: In process.
  - A Multi-Agency Data Collection Committee has been established including APRA, ASIC, RBA, Treasury, the Australian Taxation Office, and the Australian Bureau of Statistics.
  - Inter-agency data projects are discussed on a needs basis at the Multi-Agency Data Committee to create a unified strategic approach to data across agencies. APRA released discussion papers on APRA’s Direction for data collections in 2022, providing a vision for data collections that are multi-use, deeper and broader, with greater capacity to be shared with other agencies.
  - APRA has identified several challenges and new technologies required to implement this approach. APRA is reviewing the pace, sequencing, and priorities of new collections and conducting a review to ensure data and technology capabilities are aligned with goals. APRA intends to provide further information on the outcome of the review in early 2024.
  - While the review is underway, APRA continues to implement a pipeline of new and amended data collections across industries including: updated collections capturing relevant data for Liquidity risk and Interest Rate Risk in the Banking Book, and enhancing existing data collections to reflect forthcoming changes in the capital framework for insurers.
  - ASIC has built an advanced data collection portal to improve recurrent, consistent, safe, and secure data collection. A pilot was conducted in November 2021 with limited entities. Tranche 1 of the Internal Dispute Resolution (IDR) submission was successfully conducted in January 2023 and Tranche 2 successfully completed in August 2023, involving approx. 260 licensees. The next IDR submission period commences in January 2024.

- Recommendation: Enhance the authorities’ monitoring, modeling, and stress testing framework for assessing solvency, liquidity and contagion risk. Draw on the results to inform policy formulation and evaluation (CFR agencies). Time Frame: ST. Developments and Implementation: Complete.
  - APRA undertakes stress tests based on a range of scenarios emphasizing severe downside risks; industry stress tests include both solvency and liquidity risk components. APRA is engaging with superannuation funds on liquidity stress testing methods.
  - APRA has enhanced internal stress testing modeling to challenge industry submissions and to nimbly stress test outputs to internally generated scenarios. APRA and RBA stress testing teams engage directly to share and build capabilities.
  - APRA transitioned to annual stress testing of large banks and is developing a cross industry stress testing framework and systemic risk framework to explore contagion risk between industries.
  - APRA undertakes stress testing of resilience to broader scenarios and a broader range of risks, including operational and climate change financial risks. APRA undertook a Climate Vulnerability Assessment (CVA) of Australia’s five largest banks in 2021-22, with results published in November 2022. This was a joint CFR initiative led by APRA.
  - APRA is leading (on behalf of the CFR) a new insurance-focused CVA initiative which commenced in July 2023 and focuses on physical and transition climate risks driving changes in general insurance affordability, specifically home building insurance affordability. The initiative is expected to be completed in FY24-25.
  - APRA is pursuing an internal initiative focused on concentrated physical climate risks impacting smaller banks with regionally specific lending patterns. APRA has carried out analysis of physical risk and likely lending patterns to identify smaller entities that may face potential climate concentration risks and has commenced engaging with those entities.

### Systemic Risk Oversight and Macroprudential Policy
- Recommendation: Raise formalization and transparency of the CFR and accountability of its member agencies through publishing meeting records as well as publication and presentation of an Annual Report to Parliament by CFR agency Heads (CFR agencies). Time Frame: I. Developments and Implementation: Complete.
  - The CFR has increased transparency by: (i) publishing a statement following regular CFR meetings since December 2018; (ii) increasing coverage of CFR work in the RBA’s Financial Stability Review (released bi-annually); and (iii) updating the CFR website to be more informative about the role and work of CFR.
  - The Government established the Financial Regulator Assessment Authority (FRAA) as an oversight body reporting on the effectiveness and capability of ASIC and APRA. The FRAA completed inaugural reviews of ASIC and APRA in August 2022 and June 2023, respectively. The FRAA does not have power to direct regulators, assess single cases or decisions, or deal with complaints about the regulators.
  - In 2023, a Government-appointed Review of the Reserve Bank considered macroprudential governance arrangements and included recommendations relating to transparency and clarifying responsibilities in the CFR MoU.
  - APRA consults other CFR agencies on macroprudential settings and considers their feedback when determining macroprudential policy.

- Recommendation: Undertake a CFR review of the readiness to apply an expanded set of policies to address systemic risks, including data and legal/regulatory requirements; and address impediments to their deployment (CFR agencies). Time Frame: I. Developments and Implementation: In process.
  - The Housing Market Risks Working Group under the CFR actively considers risks to the financial system and appropriate policies to address potential risks, working on available tools, circumstances for suitability, and any restrictions on their use (e.g., data availability).
  - November 2021: APRA published an information paper setting out its macroprudential policy framework, outlining objectives, toolkit and approach including the role of the CFR. APRA made changes to require banks to be operationally positioned to implement specified macroprudential measures (e.g., limit higher risk lending) if needed. These changes came into effect from September 2022.
  - February 2023: APRA published an information paper updating APRA’s macroprudential policy settings across APRA regulated industries, explaining key factors informing decision-making and noting consultation with CFR agencies.
  - The RBA Review released in April 2023 recommended measures to enhance cooperation between monetary and macroprudential policies; CFR agencies are developing new arrangements to implement this recommendation.

- Recommendation: Commission analysis by the CFR member agencies on relevant financial stability policy issues, including: policies affecting household leverage; as well as factors affecting international investment flows and their implications for real estate markets (CFR agencies). Time Frame: MT. Developments and Implementation: In process.
  - The CFR actively considers the impact of policy changes on financial stability. The Housing Market Risks Working Group frequently reports to the CFR on housing market risks.
  - The RBA participated in a Committee on the Global Financial System (CGFS) working group studying property price dynamics and the influence of international investors; its report was released in February 2020.
  - The RBA is participating in a new CGFS study group on policies to mitigate housing-related risks. The group commenced work in October 2022 and will submit its report in September 2023.

### Financial Crisis Management and Safety Nets
- Recommendation: Complete the resolution policy framework and expedite development of resolution plans for large and mid-sized banks and financial conglomerates, and subject them to annual supervisory review (APRA, Treasury). Time Frame: ST. Developments and Implementation: In process.
  - May 2023: APRA finalized prudential requirements and guidance for resolution planning with the release of prudential standard CPS 900 Resolution Planning (CPS 900) & prudential practice guide CPG 900 Resolution Planning. The prudential standard commences on 1 January 2024.
  - June 2023: The FRAA completed its first review of APRA, assessing APRA’s effectiveness and capability of its supervision and resolution functions, focusing on superannuation.

- 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. Developments and Implementation: Complete.
  - November 2018: APRA released a discussion paper outlining proposed changes to the capital adequacy framework for banks, increasing loss-absorbing capacity (LAC) to support orderly resolution.
  - July 2019: APRA finalized its approach to LAC for banks, including requiring the D-SIBs to lift Total Capital by three percentage points of RWA by January 1, 2024. In 2021, APRA finalized the requirement for the D-SIBs increasing Total Capital by 4.5 percentage points in aggregate. Requirements for other entities, including mid-sized banks, will be determined as part of resolution planning.

- Recommendation: Advance mutual understanding between the Australia and New Zealand resolution authorities on cross-border bank resolution modalities, through the Trans-Tasman Banking Council (TTBC) (CFR agencies). Time Frame: ST. Developments and Implementation: Complete.
  - APRA has progressed cross-border components of bank-specific resolution planning with New Zealand authorities.
  - APRA and RBNZ established the first entity-specific Crisis Management Group (CMG) for a trans-Tasman bank at end-2019. The CMG comprises APRA, RBNZ, ASIC, FMA and RBA. The ANZ CMG met in October 2023.
  - Engagement with New Zealand authorities via CMGs is part of APRA’s regular resolution planning activities. Once CPS 900 is in force, APRA will undertake resolution planning with a broader cohort over time, including detailed planning for other trans-Tasman banks.

### Financial Market Infrastructure
- Recommendation: Strengthen independence of RBA and ASIC for supervisory oversight, enhance enforcement powers and promote compliance with regulatory requirements. Time Frame: I. Developments and Implementation: In process.
  - The CFR provided advice to government in July 2020 recommending enhancements to Australia’s FMI regulatory regime, including:
    - enhanced powers for ASIC and the RBA to support supervision of FMIs and ability to take action to address identified deficiencies; and
    - transfer of a range of licensing and supervisory powers from the Minister to ASIC and the RBA.
  - The government announced support for these reforms in December 2022 and is aiming to consult on draft legislation in coming months.

- Recommendation: Finalize the resolution regime for FMIs in line with the FSB Key Attributes (RBA, ASIC, Treasury). Time Frame: ST. Developments and Implementation: In process.
  - The CFR’s July 2020 advice included a proposal to establish a resolution regime for clearing and settlement facilities operating in Australia.
  - The government announced support for these reforms in December 2022 and is aiming to consult on draft legislation in coming months.

### 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). Time Frame: I. Developments and Implementation: In process.
  - 20 April 2023: The Australian Government announced public consultation on major reforms to Australia’s AML/CTF regime to extend coverage to certain high-risk services provided by DNFBPs, including lawyers, accountants, trust and company service providers, real estate agents and dealers in precious metals and stones.

- Undertaking supervision (AUSTRAC):
  - AUSTRAC oversees compliance of more than 17,000 Australian regulated businesses (reporting entities) including banks, credit unions, non-bank lenders, 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 reporting entities as the first line of defence and creates a risk-based approach placing onus on reporting entities to identify, mitigate and manage money laundering/terrorism financing risk.
  - AUSTRAC adopts a risk-based approach to supervision. Frontline supervision teams conduct targeted assessments and campaigns on entities of most concern, make findings of non-compliance, monitor remediation, and refer matters to enforcement.
  - AUSTRAC has a Monitoring and Triage team responsible for identification and assessment of instances of non-compliance with the AML/CTF Act, AML/CTF Rules and other regulatory risks, referring matters to supervisory teams.
  - AUSTRAC supervisory teams initiated 19 supervisory activities involving compliance assessments and supervisory campaigns in 2022-23, focusing on banking, foreign exchange services, virtual assets, remittance services and casino and gaming businesses.
  - AUSTRAC’s supervisory teams managed 25 remediation activities during 2022-23 that were open from a previous period or initiated and continuing into future years. 323 reporting entities are impacted through those remediation engagements.
  - AUSTRAC has longstanding engagements with multiple reporting entities undertaking remediation.

- Improving data collection and building a picture of compliance risk (AUSTRAC):
  - 2021: AUSTRAC delivered its first strategic assessment of compliance risk, providing a consolidated picture of key compliance concerns across Australia’s regulated population; this assessment strengthened AUSTRAC’s understanding of compliance risk and feeds education campaigns.
  - AUSTRAC is harnessing emerging technology to expand regulatory capabilities and introduced a data modelling capability to optimise strategic use of data, harnessing several data inputs to build an understanding of compliance risk.
  - April 2019: AUSTRAC implemented a program of regulatory monitoring and alerting which analyses extensive data holdings to generate alerts that may indicate non-compliance, enabling swift engagement with reporting entities.
  - AUSTRAC piloted an enhanced registration model for remitters and digital currency exchanges (DCE) from 01 April 2021 - 30 June 2021. Following the success of the pilot, the new model was formally adopted in September.

*Annex VIII  . Financial Sector Assessment Program (FSAP) Update — Australia (excerpt).*

### 2021. The new model has allowed AUSTRAC to make

### 1ausea2024001 - 2021. The new model has allowed AUSTRAC to make

### AUSTRAC: Registration, Compliance Reporting, and Risk Identification
- The new model has allowed AUSTRAC to make substantial progress in its ability to identify risk within the registration process, and allows AUSTRAC to understand:
  - the nature, size and complexities of a business,
  - assess an entity’s capability to comply with AML/CTF obligations; and
  - identify if there are any criminally complicit individuals seeking registration.
- AUSTRAC receives annual reports from regulated (REs) relating to the RE’s compliance with the AML/CTF Act, the regulations and the AML/CTF Rules during the reporting period.
  - Compliance reports (CR) provide AUSTRAC with a contemporaneous understanding of the compliance maturity of the regulated population.
  - Information from CRs informs potential regulatory activity and contributes to risk modelling as a vital component of AUSTRAC’s data inputs.
  - CRs support industry education and outreach that improves and supports reporting entities compliance with obligations.
- During the 2020-21 financial year, AUSTRAC finalized 31 compliance assessments across a range of sectors, including in the banking sector.

### Strategic Intelligence and Risk Assessments
- AUSTRAC established a strategic intelligence capability in late 2021 to further enhance capacity to identify current and emerging AML/CTF threats and build upon AUSTRAC’s established risk assessment program.
- The strategic intelligence capability has completed 21 strategic assessments on a diverse range of current and emerging issues affecting Australia’s AML/CTF environment. Topics examined include:
  - cash hoarding (2 assessments),
  - casinos (3 assessments),
  - Central Bank Digital Currencies,
  - cryptocurrencies/DCEs (4 assessments),
  - labour hire,
  - online payment service providers,
  - corrupt providers of immigration assistance, and
  - sanctions evasion.
- The strategic intelligence capability has taken responsibility for producing Australia’s national risk assessments of proliferation financing, terrorism financing and money laundering.
  - Australia’s first national risk assessment of proliferation financing was published in December 2022.
  - The national risk assessments of terrorism financing and money laundering are in progress and are expected to be finalised in the second half of 2023-24.

### Education and Guidance Activities (2022/23)
- AUSTRAC supports reporting entities through a comprehensive education and guidance program tailored to needs and capabilities.
- 2022/23 activity highlights:
  - responded to over 11,000 enquiries via the Contact Centre,
  - published 10 downloadable guidance products,
  - undertook 22 induction workshops to over 850 participants,
  - completed numerous education visits, including 26 education sessions to the corporate bookmaker sector and 99 visits to the remitter sector,
  - delivered 17 presentations to industry.

### Enforcement Actions (updated to Sep 23)
- AUSTRAC has continued formal enforcement actions for breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).
- Major civil penalty proceedings and outcomes:
  - 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).
    - On 30 May 2023, AUSTRAC and Crown filed joint submissions proposing a $450 million penalty.
    - On 11 July 2023 the Federal Court of Australia ordered Crown to pay the $450 million penalty for its breaches of the Act.
  - On 30 November 2022, AUSTRAC applied for civil penalty orders against The Star Pty Limited and The Star Entertainment QLD Limited (the Star Entities).
  - On 7 December 2022, AUSTRAC applied for civil penalty orders against SkyCity Adelaide Pty Ltd (Skycity).
- Enforceable undertakings accepted (remedial actions required) from:
  - ING Bank (Australia) Pty Ltd on 23 November 2022;
  - Cash Converters on 17 February 2023;
  - PayPal Australia Pty Ltd on 16 March 2023;
  - Bank of Queensland Ltd on 30 March 2023.

### Annex IX — Transnational Aspects of Corruption: Supply-Side of Corruption (Summary)
- OECD Phase 4 evaluation context:
  - In 2017, the OECD found Australia had taken substantial steps to improve detecting and investigating foreign bribery cases; additional reforms have been implemented since.
  - 2019: introduction of new protections to the Corporations Act 2001 (Cth) for private sector whistleblowers noted as a significant development.
  - 2020: establishment of the Bribery Prevention Network (public-private partnership) to support businesses to prevent, detect and address bribery.
  - 2023: commencement of the Public Interest Disclosure Amendment (Review) Act 2023 on 1 July 2023 to improve protections for public sector whistleblowers and align public and private frameworks where appropriate.
  - 2017 Best Practice Guideline on Self-Reporting of Foreign Bribery and Related Offending by Corporations: first foreign bribery matter involving this Guideline resolved in 2023.
  - National Anti-Corruption Commission established on 1 July 2023, with power to investigate corrupt conduct by Commonwealth contracted service providers.
  - 2023: introduction of standard Notification of Significant Events clauses into Commonwealth procurement contracts requiring immediate notification of adverse findings about providers (including foreign bribery convictions).
- OECD WGB recommendations and evaluation:
  - OECD WGB noted low level of foreign bribery enforcement given Australia’s economy size and risk exposures.
  - Areas recommended for additional steps:
    - enhance enforcement against foreign bribery,
    - publish guidelines clarifying procurement agencies’ discretion re: debarment of companies or individuals convicted of foreign bribery offences,
    - ensure broad mutual legal assistance to countries applying civil or administrative liability to legal persons for foreign bribery,
    - pursue confiscation of bribe payments and benefits derived in foreign bribery cases where appropriate,
    - proactively pursue criminal charges against legal persons.
- Legislative development:
  - Crimes Legislation Amendment (Combatting Foreign Bribery) Bill 2023 introduced in 2023.
    - Reported to strengthen the existing offence for foreign bribery (individuals and companies can be liable) and introduce a new ‘failure to prevent’ foreign bribery offence for companies.
    - Bill is largely the same as Schedule 1 of the now-lapsed Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2019 (Cth).
  - Authorities are encouraged to take additional measures to address OECD WGB Phase 4 recommendations.

### Fund Relations and Statistical Issues (Selected Points)
- Fund relations (as of October 31, 2023):
  - Quota: 6,572.40 SDR Million (100.00 percent)
  - Fund holdings of currency (exchange rate): 4,729.47 SDR Million (71.96 percent)
  - Reserve tranche position: 1,843.18 SDR Million (28.04 percent)
  - Net cumulative allocation (SDR Department): 9,382.52 SDR Million (100.00 percent)
  - Holdings (SDR Department): 9,842.96 SDR Million (104.91 percent)
- Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Charges/interest: 2023 0.00; 2024 0.12; 2025 0.12; 2026 0.12; 2027 0.12
  - Total: 2023 0.00; 2024 0.12; 2025 0.12; 2026 0.12; 2027 0.12
- Exchange Rate Arrangement:
  - Australia has accepted obligations of Article VIII, Sections 2, 3, and 4; de jure and de facto arrangements classified as free floating; Reserve Bank of Australia retains discretionary power to intervene.
- Data provision and statistical adequacy:
  - Australia subscribes to the SDDS since April 1996.
  - Australia implemented all recommendations of the first phase of the G-20 Data Gaps Initiative (DGI) except semi-annual reporting of CPIS data.
  - ABS initiatives include seasonal adjustment improvements and a monthly CPI indicator commenced in 2022 (reflecting updated prices between 62 and 73 percent of the weight of the quarterly CPI basket).
  - GDP compiled quarterly in current prices and chained volume terms; quarterly CPI published in the month following quarter end.
  - RBA publishes monthly and quarterly data on financial variables; reports monthly monetary and financial statistics to IMF.
  - RBA reports all core financial soundness indicators (FSI) for deposit takers except for the FSIs on the “net open position in foreign exchange to capital” and 21 of the 28 encouraged FSIs for other sectors on a quarterly basis.
- Table of Common Indicators Required for Surveillance (As of November 14, 2023) — selected latest observations and dates received:
  - Exchange Rates: Latest observation 11/13/23; Date received 11/13/23; Frequency D
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest observation 11/23; Date received 11/07/23; Frequency M
  - Consumer Price Index: Latest observation Q3 2023; Date received 10/26/23; Frequency Q
  - GDP/GNP: Latest observation Q2/23; Date received 09/06/23; Frequency Q
  - External Current Account Balance: Latest observation Q2/23; Date received 09/05/23; Frequency Q

### Outlook and Risks (Selected excerpts)
- Australia’s economic context:
  - 28 consecutive years of economic growth prior to the pandemic and a strong recovery since.
  - Return of migration inflows combined with elevated commodity prices supported stronger fiscal and economic outcomes in the second half of 2022-23 than previously forecast.
  - Domestic growth expected to slow in the near-term due to cost-of-living pressures and higher interest rates.
- Treasury forecasts (as presented):
  - Growth observed in 2022-23: 3.1 percent.
  - Forecast growth: 1¾ percent in 2023-24; 2¼ percent in 2024-25.
- Near-term drivers:
  - Strong public infrastructure and private investment; to a lesser extent net exports, including bulk commodity mining exports and recovery in tourism and international education exports.
  - Household consumption expected to soften in 2023-24 due to higher interest rates and high inflation, then lift in 2024-25 when inflation is expected to return to the RBA’s 2-3 percent target band.
- Labor market note:
  - “Australia’s labor market remains tight and real wage growth is forecast to return from” (text continues beyond supplied content).

*Source: IMF staff report and annex material as provided in the supplied content unit.*

### 2024. Rates of unemployment, underemployment and underutilization remain close to the

### 1ausea2024001 - 2024. Rates of unemployment, underemployment and underutilization remain close to the

### Labor market conditions and outlook
- Rates of unemployment, underemployment and underutilization remain close to the lowest levels observed in decades.
- Labor force participation rate is around an all-time high, supported by the strongest rate of female labor force participation on record.
- Treasury forecasts:
  - A return to annual real wage growth from early 2024.
  - Nominal wage growth forecast to remain around 4 percent until the end of 2023-24.
  - Unemployment will rise from current lows to 4¼ percent by the end of 2023-24 and again to 4½ percent by the end of 2024-25.
- Authorities broadly agree with staff’s assessment of the outlook and the main risks.

### Risks to the outlook
- Balance of risks remains weighted to the downside across domestic and external considerations.
- Domestic downside risks:
  - Weaker or subdued demand if households are adversely affected.
  - Unwinding of currently strong business investment.
  - Natural disasters and extreme climate events.
- External downside risks:
  - Full impact of rapid, synchronized tightening of monetary policies around the world may be yet to be felt.
  - Vulnerability to deepening geoeconomic fragmentation.
  - Slower growth in major trading partners.
  - Uncertain duration and magnitude of impacts from conflicts.

### Fiscal policy and public finances
- Federal Government fiscal management produced the first cash balance surplus in over 15 years for 2022-23.
- Economic and Fiscal Strategy: allow automatic stabilizers to operate, direct majority of improvements in tax receipts to budget repair, and limit spending until gross debt to GDP is on a downward trajectory.
- Mid-Year Economic and Fiscal Outlook (MYEFO) reports that 92 percent of the substantial upgrade in estimated tax receipts since the May 2023 Budget will be saved.
- Revenue upgrades driven by revised forecasts for higher company and personal income tax receipts reflecting near-term strength in commodity export prices and higher non-mining corporate profits, and strong employment growth.
- Cost-of-living support better targeted through childcare subsidies, rent assistance and electricity rebates; Treasury estimates this will reduce headline inflation by ¾ of a percentage point through the year to June 2024.
- MYEFO cash balance forecasts:
  - 2023-24 cash balance rounds to 0 percent of GDP (compared to -0.5 percent of GDP at Budget).
  - 2024-25 cash balance forecast is -0.7 percent of GDP (compared to -1.3 percent of GDP at Budget).
- By restraining spending and returning most tax upgrades to the budget, the Economic and Fiscal Strategy aims to align fiscal and monetary policy settings and help ease inflationary pressures.

### Federal-state coordination and infrastructure delivery
- Federal and state governments continue to coordinate on major expenditure items and priority areas including public infrastructure projects, social housing, health services, and delivery of care and support to people with disabilities and the aged.
- Ongoing labor market tightness and strong private and public demand for construction requires coordination to ensure alignment with priorities, ameliorate cost pressures and deliver value for taxpayers.
- Federal Government made changes to the Infrastructure Investment Program to ensure deliverability, ease capacity constraints, and refocus on nationally significant infrastructure.

### Housing affordability and supply measures
- Housing affordability remains a concern as house prices have started to climb and rents have increased.
- National Housing Accord target: deliver 1.2 million new, well-located homes over five years from 1 July 2024.
- Federal commitments:
  - Additional funding for new and refurbished social housing through the Social Housing Accelerator and the National Housing Infrastructure Facility.
  - Establishment of a competitive grants program open to subnational governments to support ancillary infrastructure to increase housing supply.

### Health services and NDIS funding
- At December 2023 National Cabinet meeting, Federal and state government leaders undertook to strengthen health services, secure the future of the National Disability Insurance Scheme (NDIS) and improve the certainty of Federal funding to the states.
- NDIS is one of the fastest growing expenditure items for the Federal Government.
- National Cabinet agreed to:
  - Rebalance the relative contribution of the Federal and state governments to the NDIS.
  - Transition the NDIS as part of a broader ecosystem of supports that better connect participants with mainstream services like childcare and schools.
- Governments will consider other recommendations from the NDIS Review and the Federal Government will release its full response in 2024.

### Monetary policy and transmission
- Monetary policy tightening is working to dampen domestic demand and slow the rate of inflation.
- RBA Board has undertaken a cumulative 425 basis point increase in the cash rate over the current cycle of tightening but held rates steady at its most recent meeting.
- Estimates of medium-term inflation expectations remain well-anchored and consistent with the RBA’s target.
- Transmission of monetary policy affected by:
  - Households’ savings buffers built up during the pandemic.
  - Significant share of households still on low fixed-rate mortgages.
- RBA notes further monetary tightening may be needed and will monitor developments carefully.

### Financial sector resilience
- Ongoing implementation of prior FSAP recommendations and continued strength in the banking sector have largely contained financial sector risks.
- Non-performing loans remain near decade lows given the strong labor market.
- Corporate insolvencies have increased back to roughly pre-pandemic levels, consistent with withdrawal of stimulus; personal insolvencies remain low and below pre-pandemic levels.
- RBA’s Term Funding Facility continues to wind down and banks are smoothly switching back to alternative sources of funding.
- Commercial real estate segments are experiencing headwinds, but systemic risks are judged low due to modest Australian banks’ exposures and generally low loan-to-value ratios.

### Structural reforms and productivity agenda
- Authorities committed to reforms to support strong, sustainable and inclusive growth.
- Federal Government actions:
  - Two-year review of competition policy.
  - First statement of expectations for the independent Productivity Commission to better align its work with the Federal Government’s productivity agenda.
  - Council on Federal Financial Relations developing a policy agenda to increase productivity through Federal-state cooperation.
- Reviews completed since last AIV consultation: RBA, labor market, and migration policy settings; Federal Government is considering and responding to recommendations.
- Statement on the Conduct of Monetary Policy reaffirmed commitment to an independent RBA, clarified inflation and employment goals, and committed to conducting and publishing a formal review of the monetary policy framework and tools every five years.
- RBA Review (released April 2023) in-principle agreement to all recommendations; key recommendations include establishment of separate boards for monetary policy and governance, establishment of a Chief Operating Officer, changes to RBA Board meeting frequency, internal processes, and communications.
- Legislative amendments to formalize the RBA’s dual mandate, reinforce independence, and facilitate modernization of its structure have been introduced in Parliament and are expected to pass with bipartisan support.
- Employment White Paper Roadmap commitments:
  - Improve labor mobility and recognition of skills.
  - Partner with state governments to fund vocational centers of excellence.
  - Incentivize higher take-up of apprenticeships in key areas of demand.
  - Improve incentives to work for income support recipients by allowing them to keep more of their support for longer.
  - Help social enterprises identify and address areas of persistent labor market disadvantage.
- Migration Strategy commitments:
  - Strengthen overall integrity and lift international education standards.
  - End policy settings that lead to long-term temporary migration.
  - Tackle exploitation of the visa system.
  - Target skilled migration to genuine shortages.

### Climate policy and emissions reduction
- Australia committed to the Paris Agreement and is taking action to reduce global emissions.
- Safeguard Mechanism (market-based baseline and credits scheme) reformed in 2023 to gradually and predictably reduce each year so covered facilities contribute to reducing overall emissions in line with Australia’s targets.
- Plans:
  - Establish an interim target for 2035.
  - Achieve net zero emissions by 2050.
  - Develop detailed sectoral emission reduction plans for electricity and energy, transport, industry and waste, agriculture and land, resources, and the built environment.
- Renewable energy and grid transformation:
  - Roadmap to transform Australia into a renewable energy exporter.
  - Investing heavily to modernize the electricity grid, support electrification and meet the national target of 82 percent renewable energy by 2030.
- International and regional climate finance commitments:
  - Rejoin and contribute AUD$50 million to the Green Climate Fund.
  - Provide a foundational AUD$100 million to the Pacific Resilience Facility.

*IMF staff report content as provided in the source PDF.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1ausea2024001.pdf_