## 1ausea2024003-print-pdf ## Source details **Canonical URL:** [1ausea2024003-print-pdf](https://www.imf.org/-/media/files/publications/cr/2024/english/1ausea2024003-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1ausea2024003-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1ausea2024003-print-pdf.pdf.json) --- ### Economic stabilization and structural strengths - Australia has experienced only two technical recessions in the past 35 years and none between 1992 and 2019. - Structural contributors to resilience: - Inbuilt stabilizers including in the mining sector. - Agile macroeconomic policy toolkit, institutional strength, flexible factor and product markets. - Immigration: population growth averaged 1.3 percent a year between 1990 and 2022. - Robust growth in trading partners supporting external demand. ### Recent developments — growth, demand, and labor market - Growth and demand: - GDP growth: 1.0 percent (y/y) in 2024Q2 (down from 1.9 percent (y/y) in 2023Q2 and 3.7 percent (y/y) in 2022Q2). - Private consumption: 0.5 percent (y/y) by 2024Q2. - Private business investment: 1.6 percent (y/y) in 2024Q2. - Private dwelling investment: continued contraction. - Labor market: - Unemployment: 4.1 percent in September 2024 (inched up but below pre-pandemic levels). - Nominal wage growth: peaked at 4.2 percent (y/y) in 2023Q4; remains elevated in some service sectors. - Vacancies have continued to decline; labor supply supported by migration and record-high participation. - Distributional effects: - Households, especially younger cohorts (renters and mortgage holders), bore much of the adjustment from high inflation and elevated interest rates. - Strong public demand buoyed economic activity. ### Inflation, prices, and underlying pressures - Inflation levels: - Headline inflation: 3.8 percent (y/y) in 2024Q2; dropped to 2.8 percent in 2024Q3 (reflecting new electricity rebates). - Trimmed mean inflation: 3.5 percent (elevated). - Underlying pressures concentrated in non-tradable sectors: insurance, education, health, and housing. - Drivers of persistence: indexed prices lagging, passthrough of global reinsurance costs, immigration-driven demand, labor and housing market imbalances, and fiscal policies. ### Housing market, supply, and affordability - Key metrics: - National housing prices: rose by 6.7 percent (y/y) in September 2024. - Rents: increased by 6.7 percent (y/y) in the September quarter; contributed about 0.4 percentage points to CPI inflation. - Vacancy rates: at historic lows. - Housing supply indicator: 420 dwellings per 1,000 people (2022), about 90 percent of the OECD average. - New dwellings added in FY2023/24: about 176,000 (below the 240,000 a year needed for the authorities’ 1.2 million target over 5 years). - Policy notes: - Several Capital Flows Management (CFM) measures tightened for foreign investment in housing; assessed by staff as inconsistent with the Fund’s Institutional View and authorities are encouraged to reverse them. - Recommended near-term priorities: training initiatives and skilled migration for construction workers; incentives to states/local authorities for infrastructure and land release; support built-to-rent sector; expand public and affordable housing; review property tax concessions and consider replacing stamp duty with recurring property tax. ### Fiscal position and public balance sheet - Recent outcomes: - Commonwealth government recorded a budget surplus for the second consecutive year in FY2023/24. - Consolidated government fiscal deficit widened by 0.1 percent of GDP in FY2023/24. - Public debt: - Net public debt: 28.5 percent of GDP in FY2023/24. - Gross public debt: 50.5 percent of GDP in FY2023/24. - FY2024/25 Commonwealth Budget: - Expected fiscal deficit: 1.2 percent of GDP in FY2024/25. - Measures include AU$300 per household energy rebate (and wider electricity bill rebates of AU$3.5 billion) and preannounced personal income tax adjustments. - Staff estimate a positive fiscal impulse of 0.9 percent of potential GDP from the FY24/25 budget. - Fiscal framework advice: - Supplement current principle-based strategy with clearer fiscal anchors (examples: medium-term debt target paired with an operational rule on fiscal balance), calibrated to country circumstances and with circumscribed escape clauses. - Medium-term consolidation via removal of temporary welfare measures and normalization of infrastructure spending. ### External sector and current account - Current account developments: - CA surplus: 0.3 percent of GDP in 2023 (declined from 1.1 percent in 2022); shifted back into deficit in early 2024. - Merchandise trade balance: moderated from 6.5 percent of GDP in 2022 to 4.8 percent of GDP in 2023. - Primary income balance: deficit of 3.5 percent of GDP in 2023. - Services deficit: 0.9 percent of GDP in 2023. - External position indicators (2023): - NIIP: -32.0 percent of GDP (text also reports -31.9 percent of GDP at end-2023). - Gross Assets: 148.7 percent of GDP. - Gross Liabilities: 180.8 percent of GDP. - Model-based CA gap range: -0.7 to +0.5 percent of GDP. ### Monetary policy and financial conditions - Policy stance: - RBA policy rate: 4.35 percent (raised in November 2023 and held since). - Cumulative RBA hikes since May 2022: 425 basis points. - Financial conditions: - Scheduled mortgage payments (principal and interest): reached a record 10 percent of household disposable income in 2024Q2. - Credit growth: around 5⅔ percent (y/y) in August. - Credit-to-GDP gap: moderated slightly but remains significantly negative. - Delinquency / NPLs: mortgage arrears at 1.6 percent in March 2024. - Financial sector resilience: high capital, strong liquidity, normalized CDS spreads. - Operational reforms: - Transition toward an ample reserves system announced April 2024; should be coordinated with ongoing quantitative tightening. ### Outlook (baseline projections) - Growth: - Projected to reach 1.2 percent for the year and 2.1 percent in 2025. - Converge to medium-term potential of 2.3 percent in 2026. - Labor market: - Unemployment expected to modestly increase to about 4.5 percent through 2026; wage pressures to abate. - Inflation: - Trimmed mean inflation forecast to remain above the RBA’s target range until end-2025 and move toward the mid-point in 2026. - Headline CPI expected to be more volatile due to electricity rebates and their subsequent exhaustion. - Fiscal path: - Consolidated fiscal deficit expected to widen near-term then gradually reduce; staff baseline commodity price projections are more optimistic than Commonwealth Treasury’s. ### Risks and vulnerabilities - Downside tilt in balance of risks including: - Slower-than-anticipated descent of inflation due to labor market tightness, persistent services inflation, stronger fiscal impulses, or weaker productivity. - Prolonged higher interest rates harming employment, consumption, and investment. - Household precautionary saving keeping consumption weak and raising unemployment. - Disorderly housing market adjustment (assessed as very unlikely) could increase NPLs and pose financial stability risks. - External shocks: escalation in Middle East conflict, Russia’s war in Ukraine, sharper contraction in China’s property sector, large-scale climate events. - Geoeconomic fragmentation (GEF): - High likelihood, high expected impact risk noted; recommends strengthening multilateral trade rules and regional cooperation. - Risk Assessment Matrix (selected entries): - Deepening geoeconomic fragmentation — Likelihood: High; Expected Impact: High. - Stalled disinflation — Likelihood: Medium; Expected Impact: High. - Insufficient housing supply — Likelihood: Medium; Expected Impact: Medium. - A disorderly housing market adjustment — Likelihood: Low; Expected Impact: Medium. ### Policy implications and recommendations - Monetary policy: - Maintain data-dependent approach; RBA should remain resolute in navigating the last mile toward the inflation objective and stand ready to tighten further if disinflation stalls. - Improve communication and scenario analysis; consider a Central Bank Transparency review by the Fund. - Fiscal policy: - Adopt a prudent medium-term stance; avoid adding to excess demand; better target transfers and rationalize expenditure to support disinflation if needed. - Prioritize infrastructure projects to avoid aggravating capacity constraints; consider block pricing as an alternative to universal energy rebates if targeting is infeasible. - Medium-term tax reforms: rebalance away from direct taxes, consider GST changes offset by CIT reforms, phase out superannuation concessions starting July 2025, phase out capital gains tax discount, and replace stamp duties with recurring property taxes at state level. - Housing and macroprudential: - Reverse tightened CFM measures inconsistent with Fund Institutional View. - Maintain stringent macroprudential stance; monitor lending standards and prepare borrower-based limits (DTI, LVR) if price acceleration resumes. - Implement comprehensive supply-side housing package (labor, zoning, approvals, incentives for built-to-rent, expand public and affordable housing). - Structural policies: - Promote business dynamism, innovation, digitalization, and net-zero transition investment. - Upgrade competition policies, revisit migration and education to reduce skills gaps. - Support AI-related upskilling and labor mobility reforms to capture productivity gains while protecting displaced workers. - Climate and energy transition: - Most efficient option: broad-based carbon price; alternatively, strong sectoral policies and expanding safeguard mechanism. - Future Made in Australia (FMiA): confine green industrial policy to narrow objectives, apply guardrails, and align with WTO obligations; FMiA amounts to AU$23 billion over a decade (0.07 percent of annual GDP). - Energy transition staff estimates (relative to baseline) for coal sector: Labor demand: -250 to -8800 jobs; Capital stock: -4 to -22 percent; Export revenues: -4 to -12 percent. - Anti-corruption and AML/CFT: - Accelerate establishment of a publicly accessible beneficial ownership register. - Extend AML/CTF coverage to DNFBPs and prioritize foreign bribery enforcement. ### Financial sector assessment and FSAP updates - Banking and insurance supervision: - APRA and ASIC reforms: enhanced powers, funding increases, and focus on governance and risk management. - APRA tightened mortgage serviceability buffers to 3 percent and retains a 1 percent countercyclical capital buffer. - Stress testing and systemic oversight: - APRA transitioned to an annual stress testing program; implementing cross-industry stress testing and climate-focused assessments. - Non-bank financial institutions (NBFIs): - NBFI sector relatively small; recent credit growth pickup could signal leakages from banking sector; data gaps remain and are being addressed. - Sovereign risk and debt-sustainability indicators (selected preserved figures): - Public debt (Percent of GDP): 2023: 49.0; 2024: 48.5; 2025: 48.6; 2026: 47.8; 2027: 46.7; 2028: 45.6; 2029: 44.5; 2030: 43.4; 2031: 42.5; 2032: 41.7; 2033: 41.2. - Change in public debt (Percent of GDP): 2023: -1.2; 2024: -0.5; 2025: 0.1; 2026: -0.8; 2027: -1.1; 2028: -1.1; 2029: -1.1; 2030: -1.0; 2031: -0.9; 2032: -0.8; 2033: -0.6. - Gross financing needs (GFN) (Percent of GDP): 2023: 7.5; 2024: 7.7; 2025: 7.0; 2026: 7.5; 2027: 6.9; 2028: 6.9; 2029: 7.1; 2030: 7.2; 2031: 7.5; 2032: 7.9; 2033: 8.4. - Debt fanchart index (DFI): 0.8 (Risk signal: Low). - GFN financeability index (GFI): 4.3 (Risk signal: Low). - Baseline commentary: - Rising debt servicing costs and primary deficits largely offset by near-term growth; medium-term tapering of debt toward pre-pandemic levels under baseline. ### Labor market, productivity, and remote work - Labor market post-pandemic: - Vacancies: peaked over 473,000 in June 2022; about just under 330,000 in August 2024. - Unemployment: fell to 3.5 percent by 2022Q4; rose to 4.1 percent in April 2024 and stabilized around 4.1 percent. - Employment-to-population ratio: 64.4 percent. - Retraining/retention: annual retrenchment rate 1.7 percent as of February 2024. - Productivity and AI exposure: - Around 60 percent of occupations are highly exposed to AI; professionals most exposed, elementary occupations least. - Policy measures: training/upskilling, labor mobility, safety nets for displaced workers, public consultations in exposed sectors. - Remote and flexible work: - Share working from home regularly: 37 percent in 2023 (5 percentage points higher than 2019); desired days: 2.3; actual days: 1.3. - Surveys suggest average worker willing to forego 4–8 percent of annual wages for remote work flexibility; one fifth willing to forgo 16-33 percent. ### Climate adaptation, insurance, and transition policy - Emissions and targets: - Australia emitted around 1 percent of global GHG emissions in 2022. - 2030 goals: 43 percent reduction in GHG emissions from 2005 levels and 82 percent renewables electricity share; Net Zero 2050 target. - IMF staff expect a gap to the NDC under current policies; increasing renewables to 82 percent would align emissions with the 2030 NDC target. - Adaptation and resilience: - National Adaptation Plan scheduled for release in 2025. - Recommended measures: property-level mitigation, climate-stress testing of financial system, data enhancements for location-based risks, resilient infrastructure investment, strategic zoning. - Green industrial policy guidance: - FMiA: AU$23 billion over a decade (0.07 percent of annual GDP); staff advise confining green IP to narrow objectives with guardrails and WTO consistency. ### Fiscal multipliers, energy rebates, and PIT cuts (model findings) - Energy rebates: - Modeled impact: small boost to GDP and small impact on inflation; estimated impacts on real GDP and inflation range from 0.3-0.16 percent and 0.01-0.03 percentage points, respectively (model ranges preserved as presented). - Commonwealth Treasury predicts Commonwealth policy alone will lower headline inflation by at least ½ of a percentage point in FY2024/25. - PIT cuts: - Two-year average model effects on real GDP and inflation projected to range between 0.37-0.42 percent and 0.00-0.01 percentage points, respectively. - Policy implication: - Cost-of-living measures mechanically lower headline CPI but may inject stimulus; if disinflation stalls, tighter fiscal stance warranted. ### Anti-money laundering, corruption, and beneficial ownership - Legal reforms: - Crimes Legislation Amendment (Combatting Foreign Bribery) Act 2024 received Royal Assent in March 2024; introduces “failure to prevent” foreign bribery offence (commences 8 September 2024). - Beneficial ownership: - Authorities committed to establishing a public beneficial ownership register; staff encourage acceleration. - AML/CTF coverage: - Government consulting on extending AML/CTF to high-risk DNFBPs; legislation introduced on 11 September 2024. *Source: 1. Economic Stabilization is Underway; Chapter 2; Annexes (content unit from provided IMF chapter).* ### 1. Economic Stabilization is Underway ___________________________________________________________ 31 ### 1. Economic Stabilization is Underway ### Context and Structural Strengths - Australia has achieved stronger and more resilient growth than peer advanced economies (AEs) in recent decades, experiencing only two technical recessions in the past 35 years and none between 1992 and 2019. - Key contributors to resilience: - Inbuilt stabilizers, including in the mining sector (losses absorbed through lower equity outflows to overseas owners). - An agile macroeconomic policy toolkit, institutional strength, and flexible factor and product markets. - Immigration boosted population growth (which averaged 1.3 percent a year between 1990 and 2022, the highest of any OECD economy) and consumption, and helped resolve skill mismatches. - Robust growth in trading partners supported external demand. ### Recent Developments — Growth and Demand - Growth dynamics: - GDP growth slowed to 1.0 percent (y/y) in 2024Q2, from 1.9 percent (y/y) in 2023Q2 and 3.7 percent (y/y) in 2022Q2. - Private consumption grew only 0.5 percent (y/y) by 2024Q2. - Private business investment grew at 1.6 percent (y/y) in 2024Q2. - Private dwelling investment continued to contract. - Distributional effects: - Households bore the brunt of adjustment due to high inflation, elevated interest rates, and bracket creep; younger cohorts (predominantly renters and mortgage holders) were disproportionately affected. - Strong public demand buoyed economic activity. ### Recent Developments — Inflation and Prices - Inflation and disinflation: - Headline inflation in 2024Q2 was 3.8 percent (y/y), above the RBA’s target range of 2-3 percent. - Headline inflation dropped to 2.8 percent in 2024Q3 (reflecting the impact of new electricity rebates). - Trimmed mean inflation remains elevated at 3.5 percent. - Underlying pressures concentrated in non-tradable sectors: insurance, education, health, and housing. - Drivers of persistent price pressures include lagged adjustment of indexed prices, passthrough of global reinsurance costs, additional demand from immigration, demand-supply imbalances in labor and housing markets, and fiscal policies. ### Labor Market and Wages - Labor market tightness: - Unemployment inched up to 4.1 percent in September 2024, still well below pre-pandemic levels. - Nominal wage growth peaked in 2023Q4 at 4.2 percent (y/y) and remains elevated in some service sectors. - Labor supply was bolstered by migration inflows and record-high labor force participation; vacancies have continued to decline. ### Housing Market - Acute imbalances persist: - National housing prices rose by 6.7 percent (y/y) in September 2024, surpassing pandemic-era peaks in nominal terms. - Rents increased by 6.7 percent (y/y) in the September quarter, directly contributing about 0.4 percentage points to CPI inflation. - Vacancy rates are at historic lows; low housing approvals and completions constrain supply while population growth and smaller household size bolster demand. - Policy note: - Several existing Capital Flows Management (CFM) measures have been tightened with the aim of ensuring foreign investment in housing is consistent with the government’s agenda to boost housing supply. This tightening has been assessed as inconsistent with the Fund’s Institutional View and the authorities are encouraged to reverse it. ### Fiscal Position and Public Balance Sheet - Fiscal outcomes: - The Commonwealth government achieved a budget surplus for the second consecutive year in FY2023/24 by saving revenue windfalls and reprioritizing expenditures. - The consolidated government fiscal deficit widened by 0.1 percent of GDP in FY2023/24, largely due to more gradual fiscal consolidation at the state level and slowing commodity prices. - Public debt: - Public debt remains low and sustainable at 28.5 and 50.5 percent of GDP in FY2023/24 on net and gross terms, respectively. ### External Sector and Current Account - Current account developments: - The current account surplus declined to 0.3 percent of GDP in 2023 as coal and LNG prices normalized and Australian spending abroad recovered. - The current account shifted back into deficit in early 2024, the first time since 2019. - The external position in 2023 is assessed to be broadly in line with the level implied by medium-term fundamentals and desirable policies (Annex III). - Despite worsening terms of trade, the Australian dollar has remained broadly stable over the past year. ### Monetary Policy and Financial Conditions - Policy stance and financial conditions: - The RBA raised the policy rate in November 2023 to 4.35 percent (estimated to be above neutral) and has held steady since then. - Scheduled mortgage payments (principal and interest) reached a record 10 percent of household disposable income in 2024Q2. - Growth of credit to the private non-financial sector recovered slightly to around 5⅔ percent y/y in August. - The credit-to-GDP gap has moderated slightly but remains significantly negative. - Financial sector resilience: delinquency rates low and credit default swap spreads normalized. - Monetary policy approach: - The RBA remains data dependent and resolute in navigating the last mile toward its inflation objective in line with staff advice. ### Outlook (Baseline Projections) - Growth and activity: - Growth is projected to pick up, reaching 1.2 percent for the year, and 2.1 percent in 2025. - Growth is forecast to converge to its medium-term potential rate of 2.3 percent in 2026. - Tax cuts and real wage growth may boost private consumption starting 2024Q3, though part of the rise in real disposable income is expected to be saved (including against mortgage debt). - Expansionary State and Commonwealth FY24/25 budgets will fuel strong public demand and support consumption through transfers and tax cuts. - Private demand is expected to benefit from gradual monetary easing starting in 2025 and a rebound in dwelling construction after bottlenecks resolve. - Labor market: - Unemployment is expected to modestly increase to about 4.5 percent (around the NAIRU) through 2026 as labor market tightness gradually unwinds; wage pressures are expected to abate. - Inflation: - Trimmed mean inflation is forecast to remain above the RBA’s target range until end-2025 and move toward the mid-point in 2026. - Headline CPI expected to be more volatile due to electricity rebates and later pickup as rebates are exhausted. - Fiscal outlook: - The consolidated government fiscal deficit is expected to widen in the near-term and then gradually reduce over the medium-term. - Staff baseline commodity price projections are more optimistic than Commonwealth Treasury projections, leading to stronger revenue forecasts; staff also anticipate higher expenditure growth driven by pressures identified in the 2023 Intergenerational Report (NDIS, health, and aged care). - States and territories’ fiscal stances expected to remain relatively loose in FY2024/25. - Medium-term consolidation is expected via removal of temporary welfare measures and normalization of infrastructure spending. ### Risks and Vulnerabilities - Downside tilt in the balance of risks (Annex IV): - A slower-than-anticipated descent of inflation to target—due to continued labor market tightness, stronger persistence in services inflation, less spare capacity than currently assessed, stronger-than-expected fiscal impulses, and/or more persistent weakness in productivity growth—could push inflation expectations higher and require a longer period of monetary tightening. - A prolonged period of higher interest rates would drag on employment, consumption, and investment. - Household saving of disposable income increases could keep consumption weak, raising unemployment faster than expected and prompting earlier monetary loosening. - A disorderly housing market adjustment—though assessed as very unlikely—could increase NPLs and pose financial stability risks given high household debt levels and large banking sector exposures. - External shocks: disruptions to trade and global supply chains from escalation of the conflict in the Middle East, Russia’s war in Ukraine, or other regional conflicts; a sharper-than-expected contraction in the property sector in China; and large-scale climate events (wildfires, floods, droughts). - Geoeconomic fragmentation (GEF) risks: - GEF poses significant risks through reduced external demand and increased volatility in global commodities prices due to trade realignment. - Australia’s strategic economic partnerships, foreign investment, and aid programs in the Pacific region bolster regional capacity and can help counterbalance GEF impacts. ### Policy Implications and Recommendations (from text) - Monetary policy: - Continue data-dependent approach; RBA should remain resolute in navigating the last mile toward the inflation objective. - Fiscal policy: - Pursue prudent medium-term fiscal policy objectives; achieve fiscal consolidation over the medium-term through removal of temporary measures and normalization of infrastructure spending. - Housing and capital flows: - Authorities are encouraged to reverse recent tightenings of Capital Flows Management measures on foreign investment in housing, which have been assessed as inconsistent with the Fund’s Institutional View. - Structural policies: - Strengthen economic resilience and growth prospects by promoting business dynamism, innovation, digitalization, and the transition to a net-zero emissions economy; attract investment in key industries; invest in digital technologies, science, and innovation; upgrade competition policies; and revisit migration and education policies to reduce labor market skills gaps. *Source: 1. Economic Stabilization is Underway (content unit from provided IMF chapter).* ### 12. The authorities, like staff, view Australia’s economy as being on a narrow path toward ### 12. The authorities, like staff, view Australia’s economy as being on a narrow path toward ### Economic outlook and risks - Authorities and staff view Australia’s economy as being on a narrow path toward a soft landing whereby inflation returns to target without a sharp rise in unemployment. - Uncertainties: timing of the pick-up in household spending; extent to which tax cuts will be spent or saved to rebuild buffers and reduce interest costs. - Expectations: - Growth in private business investment to slow from recent highs. - Growth in dwelling investment projected to pick up gradually. - Inflationary pressures expected to continue to ease due to soft demand, though supply constraints and structural issues may keep them elevated in the housing, construction, and insurance sectors. - Labor market conditions expected to ease gradually, preserving most of the gains since the pre-pandemic period. - Adjustment has occurred primarily on hours thus far; authorities expect unemployment to gradually rise towards its natural rate. - Risks: - Significant domestic risks: a deeper growth slowdown and a sharper increase in unemployment. - Key external risk: economic weakness in trading partners. ### POLICIES TO ENSURE PRICE STABILITY, REBUILD BUFFERS, JUMPSTART PRODUCTIVITY, AND ADDRESS CLIMATE CHANGE - Near-term objective: Steering inflation to target should remain Australia’s key policy objective. - Macro policy guidance: - Maintain a tightening bias and closely coordinate fiscal and monetary authorities. - Housing affordability has worsened; a holistic plan is imperative. - Use macro-prudential policy toolkit to preempt excessive buildup in household indebtedness and safeguard financial stability. - Medium-term priorities: - Structural reforms to reverse the trend decline in productivity growth, including through innovation. - Proactively address long-term spending pressures related to aging and health. - Support a smooth transition to a low-carbon economy. ### A. Near-Term Policy Mix: A Tightening Stance Across All the Policy Levers - Objective: Manage the final phase of returning inflation to target while nurturing growth; ensure price and financial stability. - Recommended stance: - Maintain current restrictive monetary policy stance to address risks of prolonged inflation. - Fiscal policy should avoid adding to excess demand amid supply capacity constraints. - Macroprudential policies should maintain a stringent stance to mitigate excessive household balance sheet vulnerabilities, particularly with rising housing prices. - Contingencies: - If disinflation stalls: monetary policy should be the first line of defense and may need to be further tightened, supported by tighter fiscal policy while preserving targeted support to vulnerable households. - If downside risks to growth materialize: Australia has substantial fiscal space to deploy further policy support targeting affected sectors and households. - Flexible exchange rate allows monetary policy to focus on domestic objectives in the face of external shocks. - Authorities’ views: - Broad concurrence with staff recommendations for near-term baseline policy mix. - Noted fiscal and monetary policy may need prudent recalibration if disinflation stalls or growth falters. - Work under way to respond to the RBA Review recommendation to promote a better understanding of relative roles of fiscal and monetary policy. ### B. Monetary Policy and Managing the Last Mile of Disinflation - Rationale for continued restraint: - Need for a longer period of higher rates remains necessary due to persistent inflation and emerging upside risks. - Monetary policy tightening since May 2022 has transmitted via tighter financial conditions, notably for households and more leveraged firms. - Significant upside inflation risks persist (¶10). - Maintaining the current restrictive stance is warranted until clear signs emerge of easing labor market tightness and wage pressures consistent with inflation sustainably falling toward the target range. - Staff projections indicate this may not occur until the first half of 2025. - Soft-landing vs. risks: - Soft-landing scenario plausible: labor demand (reflected in job vacancies) gradually returns to pre-pandemic levels without a sharp increase in unemployment. - This path is narrowing; prolonged inflation above target risks expectations becoming de-anchored. - RBA should stand ready to tighten policy further if signs emerge that the disinflation process is stalling. - Communication and framework reforms: - Importance of monetary policy communication for anchoring market expectations amid elevated global policy uncertainty. - RBA has adapted meeting schedule and format and started regular press conferences; press statements and quarterly SMP now provide greater clarity. - Suggested option: augment scenario analysis in SMP risks section with qualitative discussion of potential monetary policy responses in each alternative scenario. - Operational and institutional reforms: - Transition toward an ample reserves system announced in April 2024 to ensure banks can access enough liquid assets without relying heavily on central bank funding. - Transition should be coordinated closely with RBA’s ongoing quantitative tightening (QT), through close monitoring, assessing reserves demand to inform QT strategy and pace. - Regular communication with the market and developments in the repo market will strengthen liquidity management infrastructure. - RBA reform priorities: - Strengthen and clarify mandate, bolster operational independence, reinforce governance and accountability, and enhance monetary-fiscal policy coordination. - Statement on the Conduct of Monetary Policy updated to confirm dual mandate of price stability and full employment and clarify responsibility in safeguarding financial stability. - Most independent RBA review recommendations not requiring legislative changes have been implemented or are in process. - Proposed bill to repeal Treasurer’s power to overrule RBA monetary policy decisions and establish a new Monetary Policy Board (MPB) remains under legislative review. - Importance of transparent and merit-based process for appointing MPB external members. - Treasury Secretary as ex officio MPB member should be clearly defined to act in an individual capacity, not at direction of the Treasurer. - Strengthen institutional framework for monetary-fiscal interactions through continued information sharing, joint scenario analysis, shared research agenda, and a framework for use of additional monetary policy tools. - RBA could benefit from a Central Bank Transparency review by the Fund (2023 IMF staff report). - Authorities’ Views: - Reiterated commitment to reducing inflation while preserving employment gains. - RBA has kept the cash rate unchanged since it was last raised in November 2023 to maintain a tight monetary policy. - RBA remains data-driven, agile, and prepared to tighten policy as necessary if upside inflation risks materialize. - Emphasized potential downside risks to inflation from quicker-than-expected labor market adjustment, especially if strength proves localized and margin of adjustment shifts from hours to employment. - RBA enhancing policy communication and exploring more detailed scenario analysis. - Authorities remain dedicated to executing RBA review recommendations; several require new legislation not yet passed. - Acknowledged positive impact of Treasury Secretary's role on RBA board. ### C. Fiscal Policy, Supporting Disinflation and Safeguarding Long-term Sustainability - FY2024/25 Commonwealth Budget: - Expected to record a fiscal deficit of 1.2 percent of GDP in FY2024/25, following two consecutive surpluses. - Includes implemented changes to personal income tax brackets and expanded near-term cost-of-living relief measures. - Preannounced PIT cuts adjusted in a revenue-neutral way to provide greater tax relief to low- and middle-income earners. - AU$300 per household energy rebate: if spent, has potential to boost aggregate demand and may mitigate its direct effect on reducing energy prices (with subsidies captured in headline inflation). - Staff analysis: untargeted cost-of-living support will mechanically lower the CPI temporarily but inject additional stimulus into broader economy; together with permanent PIT cuts, will stimulate aggregate demand (Annex VI). - Uncertainty remains on extent to which measures will be saved or spent and timing of impulse to demand. - Projected increase in public infrastructure spending in FY2024/25 will bolster public demand in already-tight labor markets, which may contribute to wage pressures and complicate disinflation, could further worsen construction bottlenecks and crowd out residential construction projects (particularly high-density developments). - Commonwealth and state fiscal positions: - Consolidated government fiscal balance remains in deficit as states' budget repair lagged the Commonwealth. - States constitute 39 percent of total government expenditure and 24 percent of net debt in 2023/24. - States experienced slower budget repair with fiscal deficits of 1.6 and 1.4 percent of GDP in 2022/23 and 2023/24, respectively. - Net debt levels escalated from 1.4 percent of GDP in 2018/19 to 6.9 percent of GDP in 2023/24. - Divergent state outcomes: some ran large budget deficits during the pandemic contributing toward credit rating downgrades (VCT, NSW); others benefited from robust commodity prices and migration inflows (WA, QLD, ACT). - For FY2024/25, states adopted relatively loose fiscal policy with new spending commitments on cost-of-living relief, subsidies and tax breaks for new housing, and continued strong infrastructure investments. - Significant fiscal consolidation projected for FY2025/26 due to removal of temporary measures and normalization of infrastructure spending. - Policy guidance if disinflation stalls: - Tighter fiscal stance warranted. - Better targeting of transfers could more efficiently support vulnerable households. - Expenditure rationalization at all government levels could help lower aggregate demand and support return of inflation to target without large output losses. - Infrastructure spending should be carefully prioritized to avoid aggravating capacity constraints. - If targeted transfers not feasible, an alternative to universal energy rebates would be block pricing for electricity. - Medium-term tax and expenditure reform recommendations: - Tax policy reforms to improve efficiency, equity, and sustainability: - Australia’s heavy reliance on direct taxes and relatively high effective cost of capital hinders investment and productivity growth. - Stamp duty on housing transactions has failed to fully capture capital gains, hinders mobility, and exacerbates housing affordability. - Commonwealth could consider a revenue neutral increase in Goods and Services Tax (GST) offset by Corporate Income Tax (CIT) reforms aimed at promoting investment and productivity growth. - Options: implement an allowance for corporate equity and/or lower the CIT rate, possibly alongside compensatory measures (e.g., adjustments to resource rent taxes). - Phase out tax breaks including superannuation concessions (to be scaled back starting July 2025) and capital gains tax discount to generate a more equitable and efficient tax system. - State and territory-level reform: implement recurring property taxes in lieu of stamp duty to promote housing affordability, more efficient use of housing stock, labor mobility, and a more stable tax base. - Expenditure policy reforms to improve spending efficiency and sustainability: - Focus on implementation of policies outlined in the national disability insurance scheme (NDIS) review and aged care reforms to help contain expenditure growth. - Adopt similar approaches for other large and growing items identified in the 2023 Intergenerational Report including health and climate related spending. - Improve infrastructure governance and intergovernmental coordination to heighten spending efficiency and avoid overlap. *Source: IMF staff report excerpt.* ### 23. As long-term spending pressures rise, the authorities can consider bolstering their ### As long-term spending pressures rise, the authorities can consider bolstering their fiscal policy framework with clearer anchors. ### Fiscal policy framework and long-term spending pressures - Government debt levels are low and sustainable but remain well above pre-pandemic levels. - Climate-change spending and demographic shifts are upcoming headwinds. - The 2023 Intergenerational Report forecast increasing expenditure needs in health, aged care, NDIS, defense, and debt interest payments, expected to grow by 5.6 percent of GDP by 2062/63 and account for half of the Commonwealth budget. - Recommendation: supplement the Commonwealth government’s existing principle-based fiscal strategy (“to limit growth in spending until gross debt as a share of GDP is on a downward trajectory, while growth prospects are sound, and unemployment is low”) with clearer fiscal anchors. - Examples from peers: a medium-term debt target, often paired with an operational rule on fiscal balance to guide the annual budget process. - Design considerations: calibrate anchors to country-specific circumstances; provide flexibility for business cycle fluctuations; include clearly circumscribed ex ante escape clauses for exceptional circumstances. ### Authorities’ views on fiscal settings - Authorities’ assessment: - Current fiscal policy settings are consistent with a sustainable return to the inflation target. - The second consecutive Commonwealth surplus has helped monetary policy in bringing inflation down and lowered debt. - Cost-of-living relief is helpful for vulnerable households and not sufficient in scale to influence aggregate demand. - Infrastructure bottlenecks could lead to cost pressures; infrastructure pipeline under continuous review. - Fiscal policy is not the optimal tool for fine tuning demand to short-term macroeconomic fluctuations. - Much recent increased infrastructure spending is aimed at facilitating the energy transition or boosting productivity. - Growing expenditure pressures from demographic headwinds and climate change necessitate careful fiscal reforms, but the existing system-wide fiscal framework has served them well. - Fiscal framework benefits cited by authorities: - Guided the saving of revenue upgrades. - Intergenerational Report informed medium-term structural reforms (including NDIS and aged care). - Fiscal institutions provide transparency and clear guidance. - Tax reforms noted by authorities: changes to superannuation system, petroleum resources rent tax, and reprofiling of the PIT cuts are argued to address equity and efficiency. ### Financial stability: overview and banking system indicators - Overall assessment: Australian financial system generally robust; systemic financial risks contained but localized vulnerabilities exist. - Banking system strengths: high capital levels, strong liquidity positions, healthy profits. - Mortgage arrears: have risen to 1.6 percent in March 2024, around pre-pandemic levels. - Vulnerable sectors: low-income households (especially those with mortgages originated during low interest periods not yet refixed) and small-medium enterprises. - CRE sector: not currently systemic but exposed to possible withdrawal of foreign lenders and investors amid international market uncertainties. - Selected Financial Soundness Indicators of the Banking Sector (Year-end unless otherwise noted, in percent) — preserved as in source: - Regulatory capital to risk-weighted assets17.820.020.4 - Regulatory Tier 1 capital to risk-weighted assets 13.414.714.7 - Nonperforming loans to total gross loans 0.70.90.9 - Return on assets1.31.0... - Return on equity14.111.3... - Liquid assets to short-term liabilities41.242.841.6 ### Supervisory reforms and systemic risk management - Council of Financial Regulators adopted a revised framework to identify systemic vulnerabilities, focusing on hidden leverage, cyber-attacks, geopolitical events, climate change impacts, and new technologies. - A new post-pandemic system-wide stress test design is expected to improve corporate sector surveillance. - Recommendation: strengthen systemic risk analysis of China-related exposures (both direct and indirect) and credit risks. - APRA is consulting on targeted adjustments to liquidity and capital requirements to bolster banking sector resilience. - Legislation mandating climate disclosures passed by Parliament; requirements phased in starting in 2025. - Continued implementation progress on 2019 FSAP recommendations in financial sector risk monitoring and management, macroprudential policy analysis, resolution policy framework, financial market infrastructure regulations, and the AML/CFT regime. ### Non-Bank Financial Institutions (NBFIs) - NBFI sector (excluding prudentially regulated superannuation funds) is relatively small and interconnections with banks are diminishing. - Recent pick-up in NBFI credit growth signals potential leakages from the banking sector during monetary policy tightening. - Competition with banks has led some non-bank lenders to relax lending standards, favoring riskier borrowers and resulting in deteriorating asset quality. - Significant data gaps hinder timely identification of vulnerabilities, including NBFI exposure to CRE. - Regulatory agencies are actively addressing these data gaps to enhance visibility into less-regulated NBFIs. ### Housing supply, affordability, and policy priorities - Housing supply: 420 dwellings per 1,000 people (2022), about 90 percent of the OECD average. - Building activity: currently at its lowest in a decade; delays and approval difficulties persist. - Constraints: planning, zoning, building restrictions, high land costs, infrastructure gaps, high interest rates, rising costs, labor shortages. - Output gap: about 176,000 new dwellings were added in FY2023/2 4, significantly below the 240,000 a year needed to meet the authorities’ target of 1.2 million new homes (over 5 years) announced in 2023. - Affordability risks: price-to-income ratio nearing historical highs and surpassing many comparable economies; growing concerns about overvaluation. - Key near-term policy priorities recommended: - Ensure adequate supply of construction workers through training initiatives and skilled migration. - Provide effective financial incentives to state governments and local authorities to support infrastructure, relax zoning and building restrictions, and expedite approvals and land release processes (drawing from successful practices in Canada and Auckland). - Support the built-to-rent sector by incentivizing investment, including from superannuation funds and foreign institutional investors. - Expand public and affordable housing, which have declined as a share of total housing stock, to support low-income families. - Review tax concessions for property investors (such as capital gains tax discounts) to curb property speculation, improve affordability, and reorient potential fiscal savings to support new housing supply. - Consider replacing stamp duty levied by state governments with a recurring property tax to promote more efficient land use. ### Macroprudential stance and recommendations - Current stance: APRA tightened mortgage serviceability buffers from 2.5 to 3 percentage points in October 2021 and has kept it, along with the 1 percent countercyclical capital buffer, unchanged since then. - These measures and higher mortgage rates reduced the proportion of mortgages with high DTI and high LVR. - Recent housing price rebound appears driven more by supply-and-demand imbalances than excessive leverage. - Risks: continued house price increases may encourage borrowers to take on unsustainable debt levels or borrow excessively against property values. - Recommendation: continue close monitoring of mortgage lending standards and prepare to activate additional borrowers-based limits (DTI, LVR) to guard against price acceleration and rising high-risk mortgage lending, especially if monetary policy transitions to an easing cycle. - Consider phasing out existing CFM measures (¶5) with due regard to market conditions and replace them with non-discriminatory measures to support new housing supply. ### Authorities’ views on financial sector risks and housing - Authorities view financial sector risks as contained despite tightened conditions and global uncertainty. - Financial Stability Review (FSR) and APRA stress tests indicate banks are well-positioned to withstand severe downside scenarios, including significant declines in housing prices. - Priority areas: strengthening operational resilience amid digital economy complexities; increased frequency of public communications on macroprudential assessments; monitoring nonbank lending and NBFI data gaps; addressing geopolitical, climate change, and digitalization risks; progress on sustainable finance and climate data disclosures. - On housing, authorities concurred with staff’s assessment and policy recommendations; recognize subnational heterogeneity complicates implementation. - Commonwealth engagement with states: bilateral discussions, exploring financial incentives to relax zoning and expedite approvals, training and skilled migration to address construction labor shortages. - Commonwealth Government’s $32 billion housing investment aims to address underlying capacity constraints and includes significant new investment in public and affordable housing. - Authorities acknowledged need to tackle labor productivity issues in construction to improve efficiency. ### Productivity reforms and AI exposure - Productivity decline drivers: slow labor productivity growth, weakening business dynamism, waning reallocation of capital. - Reforms underway along five pillars identified by the 2023 Productivity Inquiry; steady progress needed on incentivizing innovation, leveling the playing field for firms, and boosting human capital. - Leveraging AI and innovation: - Around 60 percent of occupations are highly exposed to AI; professionals face highest exposure, elementary occupations the least, with variation within categories. - Policy measures: training/upskilling, improving labor mobility, strengthening safety net for displaced workers, public awareness and consultations in most-exposed sectors. - Boosting competition and dynamism: - Establishment of a task force to identify priority competition-policy reforms. - Move to a mandatory suspensory merger reporting regime recommended. - Reforms to reduce barriers to labor mobility (over-use of non-compete clauses, differential occupational licensing) suggested. - Labor market and migration: - High labor force participation including women; continued skill shortages expected. - Authorities’ efforts: harmonize skill recognition for qualified migrants, dynamically update skills lists and requirements. - Alignment of education/training and immigration with medium-term structural changes linked to net zero transition and aging population; Jobs and Skills Australia to provide independent advice. ### Climate change mitigation and energy transition risks - Emissions and targets: - Australia emitted around 1 percent of global GHG emissions in 2022. - 2030 goals: a 43 percent reduction in GHG emissions from 2005 levels and 82 percent renewables electricity share. - Net Zero 2050 target. - IMF Staff expect a gap to the NDC under current policies. - Increasing renewables share to the 82 percent target would align Australia’s GHG emissions with its 2030 NDC target (SIP: Chapter 2). - Bottlenecks and risks: construction bottlenecks, grid upgrading and expansion needs, community engagement issues; reforms identified in the December 2023 Community Engagement Review recommended. - Policy options: - Most efficient: a broad-based carbon price to bridge remaining gaps. - If politically challenging, strong sectoral policies using price signals could be effective (e.g., expand the safeguard mechanism by lowering the threshold, including more sectors and tightening the emissions decline rate). - Additional sectoral policies should prioritize addressing market failures identified in forthcoming sector pathways. - International engagement: Australia committed AU$3 billion over 2020-25 in climate finance focused on the Pacific region and is active in multiple international mitigation initiatives including the Global Methane Pledge. - Energy transition impacts on coal sector (staff analysis, relative to baseline): - Labor demand: -250 to -8800 jobs - Capital stock: -4 to -22 percent - Export revenues: -4 to -12 percent - Note: low extraction costs and high-quality coal increase sector resilience; natural gas exports could increase as a transitional fuel; essential minerals (copper, lithium, nickel) support electrification amid technological uncertainties. *Source: IMF staff report excerpt.* ### Chapter 2). ### Chapter 2) ### Transition incentives, resource taxes, and social measures - A resource rent tax could incentivize a faster phase-out of fossil fuels and provide revenues needed in the transition. - Reforms identified in the Critical Minerals Strategy 2023-2030 and the related areas of the 2023 Intergenerational Report can help create an attractive investment environment alongside narrowly targeted green industrial policy that aims to address market failures and externalities (¶35). - Clearly communicated and consistent government policy can help investors to make informed investment decisions, especially in the renewable electricity sector. - Further strategies could include social assistance to impacted households and active labor market policies, including addressing any sub-national impacts. - Monitoring financial sector vulnerabilities in impacted sectors is crucial for bolstering resilience in this transition. - Footnotes and modeling notes: - This SIP uses a dynamic CGE model to simulate multiple global climate scenarios in order to quantify the scale of transition risks for Australia from different global actions. - The safeguard mechanism sets an emission reduction trajectory for all firms emitting more than 100,000 tonnes of carbon dioxide equivalent a year at an annual GHG reduction rate of 4.9 percent or an equivalent purchase of carbon credits. ### Adaptation, insurance, and resilience measures - Rising temperatures, wildfires, and other natural disasters have contributed to a rapid rise in insurance premiums over recent years. - Climate stress tests show limited direct effects of climate risks on the financial system as a whole, but geographically localized and sector-specific risks create a need for close monitoring and measures to build resilience. - The National Adaptation Plan, scheduled for release in 2025, will help guide policy. - Options for adaptation and resilience include: - property-level mitigation measures, - climate-stress testing of the financial system, - data enhancement for location-based risks, - investment in resilient infrastructure including flood defenses and forest firefighting sources, - strategic residential zoning in flood plains. ### Green industrial policy, multilateral considerations, and FMiA - Staff advised that the "Future Made in Australia (FMiA)"—Australia’s approach to green industrial policy (IP)—should be confined to narrow objectives where externalities or market failures prevent effective market solutions and be consistent with the country’s international obligations, including to the WTO. - FMiA amounts to AU$23 billion over a decade (0.07 percent of annual GDP) and aims to enhance economic resilience and facilitate the net-zero transition (Annex IX). - Risks if not carefully designed with appropriate guardrails: - Marking an important deviation from Australia’s long-standing policy of preserving market-based principles, - Implied effects of "picking winners" and providing a competitive advantage to domestic producers, - Enormous administrative challenges beyond the capacity of the Treasury to manage. - Staff recommendation: confine green IP to narrow objectives, consistent with multilateral obligations, and include appropriate guardrails. ### Corruption, AML/CFT, and beneficial ownership - Australia continues to address transnational aspects of corruption, but further efforts are needed to mitigate risk (Annex XI). - On the supply side, amendments to the criminal law strengthen the foreign bribery offence (in particular, penalizing the failure to prevent foreign bribery and removing impediments to foreign bribery enforcement). - However, foreign bribery enforcement remains low and should be prioritized. - The latest national risk assessment finalized in July 2024 provides updates on understanding of risks for laundering of foreign corrupt proceeds. - Staff encourages the Treasury to accelerate the establishment of a publicly accessible beneficial ownership register to improve transparency of legal persons. - Recommendation: proceed with passing the recently introduced legislation that expands Australia’s AML/CFT framework to Designated Non-Financial Businesses and Professions (DNFBPs), especially high-risk ones such as accountants, lawyers, and real estate professionals. ### Data provision and statistical improvements - Australia’s data provision is adequate for surveillance based on the Fund’s new data adequacy assessment (Annex XII). - Australia has subscribed to the Special Data Dissemination Standard (SDDS) since April 1996. - The Australian Bureau of Statistics (ABS) has taken several initiatives to further improve the quality of the data, including further progress in finalizing the compilation and dissemination of monthly inflation data; adding monthly inflation data to the suite of statistics would further strengthen data adequacy for surveillance purposes. ### Authorities’ views on productivity, transition, and FMiA - Authorities emphasize a critical need to enhance productivity, including through competition policy and labor market reforms, and prefer a gradual approach to implementing changes. - They regard the findings of the 2023 Productivity Commission’s Advancing Prosperity Five Year Productivity Inquiry as helpful for guiding policy reforms. - Authorities highlighted reforms to reduce barriers to competition, including across states (such as from occupation licensing), and policies expected to improve business dynamism: - moving to a mandatory suspensory merger reporting regime, - reforming the use of non-competes, - revitalizing the National Competition Policy. - On labor markets and technology: - Authorities are aware of costs of persistent skill mismatches and note recent reforms including greater investment in domestic skills training and the reformed Temporary Skill Shortage visa. - They acknowledge potential productivity enhancement and labor displacement effects of AI and consider that such a global technological transition warrants close monitoring, including its safe and responsible use. - On climate targets and industrial strategy: - Authorities are committed to achieving their 2030 emissions reduction target and net zero goal by 2050. - They agreed with staff on the value of market-based solutions where possible and point to the success of the safeguard mechanism in mitigating emissions in the industrial sector. - They are adopting a sectoral approach to decarbonization including the electricity and energy sector plan. - They view FMiA as a way to establish an enabling environment for domestic green sectors and technologies and state it will focus on areas where Australia may have a future competitive advantage and where market failures exist. - They noted the National Interest Framework will provide guardrails for time-bound and narrowly targeted interventions while minimizing fiscal costs and ensuring alignment with WTO obligations. - The establishment of the Net Zero Economy Authority is intended to promote an orderly and positive economic transformation. ### Staff appraisal, risks, and policy recommendations - Macro outlook and risks: - Australia remains on a narrow path to a soft landing, but risks are tilted to the downside. - Growth slowed in the first half of the year, with household consumption weak as real incomes remained soft. - Despite rising unemployment, the labor market remains resilient. - Growth is expected to pick up over the following quarters, supported by a gradual recovery in private demand and robust public demand. - Downside risks to growth include persistent weakness in private demand or a further slowdown in key trading partners. - Near-term policy focus: - Manage the final descent of inflation to target while nurturing growth. - Inflation is anticipated to sustainably return to the RBA’s target range only by the end of 2025, while a potential stall in disinflation poses a significant risk. - The current restrictive monetary stance is appropriate and needs to be supported by fiscal policy that avoids an expansionary stance and complements monetary policy’s disinflation objective. - Reforms aimed at further bolstering the RBA's independence and supporting the coordination of monetary and fiscal policies are important. - Contingent policy actions if disinflation stalls: - Tighter monetary and fiscal policies may be necessary. - Monetary policy should be prepared to tighten further if upside inflation risks materialize. - Expenditure rationalization at all levels of government could help reduce aggregate demand. - Reprofiling public infrastructure investments and improving targeting of transfer programs can help mitigate excess demand while better supporting the most vulnerable. - Medium-term fiscal and structural reforms: - Broader tax and expenditure policy reforms should reduce structural deficits, promote economic efficiency, and safeguard long-term fiscal sustainability. - Tax reforms should focus on efficiency and fairness, reducing dependence on direct taxes and high capital costs, and phasing out tax breaks like capital gains tax discounts. - Expenditure reforms should aim at enhancing efficiency and containing structural spending growth at all levels of government given long-term pressures from demographics and climate change. - Further strengthening fiscal policy frameworks with a clearer medium-term anchor is recommended to guide buffer rebuilding for future challenges. - Financial sector and housing policies: - Financial sector policies should focus on preserving stability while addressing localized vulnerabilities arising from tightened conditions. - Macroprudential policies should remain stringent to protect household balance sheets, especially in the context of rising housing prices. - Authorities are encouraged to proactively adapt macroprudential tools to preempt excessive buildup in household indebtedness, including when monetary policy easing becomes appropriate. - A comprehensive policy package is essential to tackle Australia’s housing affordability crisis, focusing on increasing the construction workforce, relaxing zoning regulations, advancing initiatives to boost new housing supply, and reevaluating property taxes and stamp duty. - Productivity and innovation: - Efforts to rejuvenate Australia’s productivity growth should be prioritized, focusing on competition policy, reforms in capital and labor markets, and opportunities presented by AI technologies. - Enhancing innovation by promoting R&D, supporting intellectual property rights, and ensuring policy certainty is vital. - Improving the competition landscape, assessing the impact of non-compete clauses, and reforming merger rules are crucial for productivity. - Public awareness, access to training, and upskilling for affected workers are essential to maximize AI's productivity-enhancing benefits while mitigating job displacement risks. - Climate and green policy guidance: - Green industrial policy initiatives should be confined to narrow objectives—where externalities or market failures prevent effective market solutions—and be consistent with the country’s international obligations. - Achieving Australia’s ambitious emission reduction goals depends on addressing construction bottlenecks and community engagement, with potential solutions like an economy-wide carbon price or targeted sectoral policies. - Australia's voluntary participation in reviewing transnational corruption sends a positive signal that could inspire improvements in global governance. *Source: Chapter 2 (1ausea2024003-print-pdf - Chapter 2).* ### 47. It is recommended that the next Article IV consultation be held on the standard 12- ### Australia: Economic Stabilization, Sectoral Developments, and Policy Recommendations ### Economic stabilization and labor market - Growth is slowing as tighter financial conditions dampen private consumption. - Inflation is decelerating but price pressures in the service sector remain persistent. - The labor market is easing, but still tight by historical norms, with migration bolstering labor supply. - Unemployment is inching up only gradually, and still below pre-pandemic levels. - Productivity is stabilizing, while unit labor costs continue to rise as wages grow. ### External position - The current account has returned to deficit as the trade surplus continues to shrink on the back of the normalization in commodity prices. - The exchange rate remains stable, despite the further deterioration in terms of trade over the last year. - Total arrivals and departures flows have returned to around pre-pandemic levels. - Recent current account surpluses have contributed to an improvement in the net investment position, bringing net external liabilities closer in line with peers. ### Housing market and household balance sheets - The housing market has recovered rapidly, with nominal prices now above pandemic era peaks. - Home sales have recovered amid robust housing demand while supply has yet to adjust up; construction activities remain subdued. - The rental market remains very tight, with vacancy rate at historical lows. - Household debt continues to be among the highest in OECD countries, even as higher interest rates prompted households to reduce leverage; offset accounts offer additional buffers. ### Monetary policy and financial conditions - The RBA has held its cash rate at 4.35 percent since it was last hiked in November 2023. - Bond yields remain at high levels, supporting monetary policy transmission. - Under higher lending rates, private credit growth has slowed, while business credit remains robust. - There remains ample liquidity despite policy tightening, and the size of the Reserve Bank’s balance sheet continued to normalize. - RBA has hiked the policy rate cumulatively by 425 basis points since May 2022 (Annex I). ### Public finances and fiscal outlook - Following a period of fiscal consolidation, expenditures are forecast to outgrow revenues in 2024/25; fiscal deficits are forecast into the medium term. - The consolidated government fiscal stance is expected to be broadly neutral over the medium term, prolonging the period of budget deficits. - Net public debt has come down with fiscal consolidation, and is projected to stabilize over the medium term and remains low compared to other advanced economies. - The Commonwealth Government achieved two consecutive surpluses in FY2022/23 and FY2023/24 by saving additional tax receipts generated by favorable terms-of-trade and strong labor market developments. - The cyclically adjusted primary balance is getting closer to its pre-pandemic levels. ### Banking sector and financial stability - The NPL ratio remains low despite a recent increase in insolvencies; banks remain profitable. - Funding costs have increased rapidly with domestic and global financial tightening, but there remains ample liquidity reflected in banks’ still high reserves balances at the RBA. - Business-related personal bankruptcies have remained low overall when compared with the Global Financial Crisis, and market-perceived bank default risk is contained. - Banks’ cash-rate–related metrics and funding-cost time series (3-month BBSW, 6-month BBSW, 3-year government bond yield, 1-year deposit rate) show shifts consistent with tighter financial conditions. ### Financial markets - Australian equity prices have fluctuated but overall remain robust, following global markets. - The yield curve has shifted up significantly following the monetary policy tightening, with longer-term yields broadly tracking global developments. - Corporate bond spreads have normalized but have been slowly rising of late. - The exchange rate remained largely stable against the US dollar and in trade-weighted terms (TWI). ### Macro-structural position and productivity - Labor productivity growth in Australia slowed significantly pre-pandemic, driven by lower TFP growth and a smaller contribution from capital deepening. - R&D and ICT investment declined, potentially contributing to the productivity slowdown. - Australia’s trade environment remains open and conducive to growth. - The OECD flags the current regulatory framework as resulting in higher barriers to entry in Australia relative to peers, primarily reflecting administrative and regulatory burdens. ### Climate progress and transition indicators - Australia is one of the top global emitters on both a per capita and absolute basis. - Australia contributes with nearly 1% of global GHG emissions. - Over 60% of the country’s emissions come from electricity, transportation, and agriculture; agriculture and mining are significant contributors. - M3: Comparison to peers and distance from BAU are heavily influenced by BAU assumptions. - T1: Australia is a major coal producer and a net exporter of coal and natural gas; renewable energies continue to play a small role in the overall energy mix. - A3: Average temperatures have already risen 1 degree since a baseline of 1951-198. - T2: Despite renewable energy’s impressive growth, achieving the 2030 target of 82 percent necessitates an acceleration. - A4: Agricultural water withdrawal is similar to the region while water use efficiency is lower. - T3: Consumer prices are well above supply costs for most fuels, but natural gas subsidies are estimated at 0.3% of GDP. - M5: Effective carbon rates are low compared to other large emitters. The 2023 reforms to the Australian Safeguard Mechanism introduced tradeable permits and aligned the baseline and decline rate with Australia’s 2030 targets (ICAP 2024). ### Key fiscal, monetary, and financial datasets referenced - The report contains detailed tabular data in: - Table 1. Australia: Main Economic Indicators, 2019-2029 (Annual percent change, unless otherwise indicated) - Table 2. Australia: Fiscal Accounts, 2018/19-2028/29 (In percent of GDP, unless otherwise indicated) - Table 3. Australia: Balance of Payments, 2019-2029 (In percent of GDP, unless otherwise indicated) - Table 4. Australia: Monetary and Financial Sector, 2019-2029 (Year-end, unless otherwise noted) — includes balance sheet series such as Total assets and Loans with year-by-year levels (2019–2029) expressed in billions of A$ and percent changes. - Table 5. Australia: Selected Financial Soundness Indicators of the Banking Sector (Year-end, unless otherwise noted, in percent) — includes metrics such as Regulatory capital to risk-weighted assets, Nonperforming loans to total gross loans, Return on assets, Liquid assets to total assets, etc. ### Annex I — Previous IMF policy recommendations (summary) - Sound macroeconomic policies contributed to further progress toward a soft landing; policies have been broadly consistent with staff’s advice. - All levels of government have consolidated their fiscal positions, albeit at different paces, and the RBA has significantly raised its policy rate and maintained a restrictive stance; as a result, the output gap has narrowed, and inflation has fallen significantly from its peak. - Fiscal policy: Calibrate the fiscal stance to support the disinflation process and continue budget repair; the Commonwealth achieved two consecutive surpluses in FY2022/23 and FY2023/24 by saving additional tax receipts driven by favorable terms-of-trade and a strong labor market. - Monetary policy: The RBA maintained a restrictive stance, hiking the policy rate cumulatively by 425 basis points since May 2022, which moderated credit growth and tightened financial conditions, transmitting to weaker private consumption and dwelling investment. - Institutional reforms: The RBA review concluded in 2023 proposed further reforms to strengthen the Reserve Bank’s independence and its collaboration with the fiscal authority; these reforms are being implemented. *Source: IMF staff report figures, tables, and Annex I as presented in the content unit.* ### 3. Financial sector reforms have focused on building resilience, while the housing market ### 3. Financial sector reforms have focused on building resilience, while the housing market ### Financial sector resilience and macroprudential policy - The Australian financial system remains stable, bolstered by strong capital positions and lower leverages. - APRA has kept its minimum serviceability buffer requirement at 3 percent following the recent increase, including to curb excessive buildup of household debt, which remains at high levels. - APRA continues to closely monitor lending standards and has increased the frequency of its public communications regarding macroprudential policy reviews to more aptly adapt its toolkit based on the evolvement of risks and vulnerabilities. - Progress is being made in addressing climate and cyber risks, which is essential to ensure financial resilience in a changing environment. ### Housing market - The housing market staged a strong rebound. (No additional numeric details provided in the excerpt.) ### Structural policies and tax policy scope - Progress has been made on structural policies, especially in climate change mitigation: - Fuel efficiency standards were legislated for the first time. - The Capital Investment Scheme has been expanded to encourage new investment in renewable energy. - The 2024/25 Commonwealth budget’s focus on the Future Made in Australia on Net Zero industries can help lower the cost of renewable energy production. - The roll out of the reformed Safeguard mechanism has gone smoothly. - The government’s focus on education and female labor force participation is consistent with previous staff recommendations. - The longstanding staff policy advice of rebalancing the tax structure away from direct taxes to indirect taxes has yet to be implemented. ### Sovereign risk and debt sustainability — overview assessment - Overall risk of sovereign stress: Low. - Australia is at a low overall risk of sovereign stress, and debt is sustainable with an AAA sovereign credit rating. - Drivers of fiscal strength: - A strong post-pandemic recovery. - Favorable commodity prices. - Commonwealth government fiscal discipline. - Near-term outlook: - The deficit is expected to widen in the near term, as new expenditure commitments combine with cuts to personal income tax brackets. - Medium-term outlook: - Over the medium-term debt is expected to gradually decline to pre-pandemic levels and debt levels remains low relative to other AEs. - Liquidity and long-term risks: - Australia’s deep and liquid financial system and relatively modest GFN needs suggest liquidity risks are low. - Although long-term challenges exist from demographics and climate-change, Australia’s strong fiscal position means that long-term risks are also assessed to be low. ### Debt coverage, structure, and projections (selected figures preserved exactly) - Debt coverage in the DSA: central and subnational components included (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). - Public debt (Percent of GDP) — Actual and projections: - 2023: 49.0 - 2024: 48.5 - 2025: 48.6 - 2026: 47.8 - 2027: 46.7 - 2028: 45.6 - 2029: 44.5 - 2030: 43.4 - 2031: 42.5 - 2032: 41.7 - 2033: 41.2 - Change in public debt (Percent of GDP): - 2023: -1.2 - 2024: -0.5 - 2025: 0.1 - 2026: -0.8 - 2027: -1.1 - 2028: -1.1 - 2029: -1.1 - 2030: -1.0 - 2031: -0.9 - 2032: -0.8 - 2033: -0.6 - Contribution of identified flows (Percent of GDP): mirrors Change in public debt series (2023: -1.8; 2024: -0.5; 2025: 0.1; 2026: -0.8; 2027: -1.1; 2028: -1.1; 2029: -1.1; 2030: -1.0; 2031: -0.9; 2032: -0.8; 2033: -0.6). - Primary deficit (Percent of GDP): - 2023: 0.0 - 2024: 0.5 - 2025: 0.8 - 2026: 0.0 - 2027: -0.4 - 2028: -0.4 - 2029: -0.3 - 2030: -0.1 - 2031: 0.1 - 2032: 0.3 - 2033: 0.5 - Noninterest revenues (Percent of GDP): 2023: 35.6; 2024: 35.5; 2025: 35.1; 2026: 35.2; 2027: 35.3; 2028: 35.4; 2029: 35.4; 2030: 35.4; 2031: 35.5; 2032: 35.5; 2033: 35.6. - Noninterest expenditures (Percent of GDP): 2023: 35.6; 2024: 36.0; 2025: 35.9; 2026: 35.2; 2027: 35.0; 2028: 35.0; 2029: 35.1; 2030: 35.3; 2031: 35.5; 2032: 35.8; 2033: 36.1. - Automatic debt dynamics — Real interest rate and relative inflation (Percent): - 2023: -0.1 - 2024: 0.4 - 2025: 0.9 - 2026: 1.0 - 2027: 1.0 - 2028: 1.0 - 2029: 0.9 - 2030: 0.8 - 2031: 0.7 - 2032: 0.6 - 2033: 0.6 - Real growth rate (Percent): 2023: -1.0; 2024: -0.7; 2025: -0.9; 2026: -1.0; 2027: -1.1; 2028: -1.1; 2029: -1.0; 2030: -1.0; 2031: -1.0; 2032: -0.9. - Other identified flows (Percent of GDP): -0.7 each year from 2023 through 2033. - (minus) Interest Revenues (Percent of GDP): -0.7 each year 2023–2033. - Contribution of residual: 2023: 0.5; 2024–2033: 0.0. - Gross financing needs (GFN) (Percent of GDP): - 2023: 7.5 - 2024: 7.7 - 2025: 7.0 - 2026: 7.5 - 2027: 6.9 - 2028: 6.9 - 2029: 7.1 - 2030: 7.2 - 2031: 7.5 - 2032: 7.9 - 2033: 8.4 - Of which: debt service (Percent of GDP): - 2023: 8.2 - 2024: 7.9 - 2025: 6.9 - 2026: 6.9 - 2027: 8.1 - 2028: 8.0 - 2029: 8.0 - 2030: 8.1 - 2031: 8.1 - 2032: 8.4 - 2033: 8.6 - Local currency financing (Percent of GDP): 2023: 8.2; 2024: 7.8; 2025: 6.7; 2026: 7.9; 2027: 7.7; 2028: 7.7; 2029: 7.7; 2030: 7.6; 2031: 7.7; 2032: 7.8; 2033: 8.0. - Foreign currency financing (Percent of GDP): 0.00 for 2023–2033. ### Baseline scenario commentary - Rising debt servicing costs and primary deficits are largely offset by growth in the near term. - Over the medium-term, stabilized primary deficits and steady-state growth path allow for a gradual tapering of debt towards pre-pandemic levels. ### Medium-term risk assessment and indicators (selected values) - Debt fanchart index (DFI): 0.8 (Risk signal: Low). - Gross Financing Needs (GFN) module: - Average baseline GFN: 7.2 (percent of GDP). - Initial Banks' claims on the general government (pct bank assets): 5.8. - Change in banks' claims in stress (pct banks' assets): 0.0. - GFN financeability index (GFI): 4.3 (Risk signal: Low). - Medium-term index: Low (Final assessment: Prob. of missed crisis, 2024-2029, if stress not predicted: 0.0 pct.; Prob. of false alarms, 2024-2029, if stress predicted: 75.0 pct.). - Commentary: Medium-term tools indicate a low level of risk. The fan chart indicates debt is stable while gross financing needs are relatively small as a fraction of GDP. Australia’s high quality institutions, strong track record and liquid domestic banking sector provides reassurance that risks are contained. ### Long-term risks and triggered modules - The large amortization module is triggered given the larger-than-historical amortizations projected in the long term. - Long-run projection charts indicate scenarios for: - Medium-term extrapolation with debt stabilizing primary balance. - Large amortizations. - Climate change: Adaptation and Mitigation. - Natural resources. ### External sector assessment — 2023 and medium-term outlook - Overall Assessment: The external position in 2023 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - Current account (CA) balance: - CA surplus declined from 1.1 percent of GDP in 2022 to 0.3 percent of GDP in 2023. - The current account returned to deficit in the first quarter of 2024, with the deficit projected to widen in the medium term. - Drivers of CA changes in 2023: - Merchandise trade balance moderated from 6.5 percent of GDP in 2022 to 4.8 percent of GDP in 2023. - Primary income balance: deficit of 3.5 percent of GDP in 2023 (due to dividend payments on Australia’s equity liabilities, especially in the mining sector). - Services deficit of 0.9 percent of GDP in 2023 (post-pandemic recovery in tourism and education exports partially offset by rising Australian spending abroad). - Decline in the savings rate from pandemic-era highs, and strong public investment reduced the surplus. - Foreign asset and liability position (2023, percent of GDP): - NIIP: -32.0 (the text also reports -31.9 percent of GDP at end-2023 in a sentence). - Gross Assets: 148.7 - Debt Assets: 37.2 - Gross Liab.: 180.8 - Debt Liab.: 80.1 - Assessment of NIIP and structure: - NIIP level and trajectory are sustainable. - 61 percent of Australia’s external gross liabilities are debt obligations; more than half of the debt liabilities are denominated in domestic currency, while assets are largely denominated in foreign currency. - Foreign liabilities composition: about one-quarter FDI, one-half portfolio investment, and one-quarter other investments and derivatives. - 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. - External balance models (2023, percent of GDP): - CA: 0.3 - Cycl. Adj. CA: -0.7 - EBA Norm: -0.6 - EBA Gap: -0.1 - Staff Adj and Staff Gap: -0.1 - Model-based CA gap range: -0.7 to +0.5 percent of GDP (based on a 0.6 percent of GDP standard error). - Real exchange rate (REER) and gaps: - In 2023 the Australian dollar depreciated slightly against the US dollar; REER was broadly stable and slightly higher than the average level of the past 5 years. - As of end-July 2024, the REER was 2.5 percent above the 2023 average. - Staff’s CA gap implies a REER gap of -0.6 (with a range of 2.9 to –4.1, applying an estimated elasticity of 0.17). - The EBA REER level model points to an overvaluation of 20.1 percent, while the index model points to an undervaluation of 10.8 percent. - Consistent with the CA gap, staff assesses the REER gap to be in a range of 2.9 to –4.1 percent, with a midpoint of - (text ends mid-sentence in the excerpt). ### Potential policy responses (external sector) - Given the positive output gap and still elevated inflation, fiscal and monetary restraint remains warranted for Australia. - While the closing of the output gap may push the current account balance up, this is expected to be offset by: - Execution of planned infrastructure projects. - Structural policies that boost private investment (rebalancing taxes from direct to indirect taxes, streamlining product market regulation, and promoting R&D and innovation). - Australia’s commitment to a floating exchange rate should help keep the external position in line with fundamentals going forward. - Australia should continue to support an open trade environment, including in regional and multilateral trade agreements. *Source: IMF staff (excerpt from the chapter titled "3. Financial sector reforms have focused on building resilience, while the housing market", 1ausea2024003-print-pdf).* ### 0.6 percent. ### 1ausea2024003-print-pdf - 0.6 percent ### Capital and Financial Accounts - Background: - The financial account recorded net outflows in 2023, driven by a net outflow in financial derivatives and portfolio investment. - Net FDI and other investment inflows turned positive in 2023. - 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. - The value of reserve assets recorded a slight increase in 2023 to A$94 billion, from A$85 billion at end-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. ### Annex IV — Risk Assessment Matrix (Selected risks, likelihood, expected impact, and policy recommendations) - External Risks - Deepening geoeconomic fragmentation - Likelihood: High - Expected Impact: High - Key policy recommendation: Strengthen the rules-based multilateral trading system and deepen international and regional economic cooperation. - Intensification of regional conflicts - Likelihood: High - Expected Impact: Medium - Key policy recommendation: If disruptions to trade impact inflation expectations, further monetary tightening may be appropriate. - Commodity price volatility - Likelihood: High - Expected Impact: Medium - Key policy recommendation: If volatility impacts inflation expectations, further monetary tightening may be appropriate. - Global growth surprises: Slowdown - Likelihood: Medium - Expected Impact: Medium - Key policy recommendations: - Combined monetary and fiscal policy easing may be needed to respond to a global recession. - Policy reactions should factor in inflation developments. If inflation remains elevated, fiscal stimulus measures should be time-bound and well-targeted (e.g., low-income tax offsets). - Systemic financial instability - Likelihood: Medium - Expected Impact: Medium - Key policy recommendations: - Continue to monitor banks and NBFI’s balance sheets. - Be ready to step up liquidity support in case funding stress arises. - Maintain agile macroprudential policy. - Climate change - Likelihood: Medium - Expected Impact: Medium - Key policy recommendations: - Explicitly build in buffers for climate risks in the medium-term fiscal framework. - Incentivize faster drawdown of fossil fuel extraction and target support to critical mineral hubs as outlined in the Future Made in Australia. - Cyberthreats - Likelihood: Medium - Expected Impact: Medium - Key policy recommendations: - Invest preventatively in strengthening defenses and infrastructure. - Ensure mechanisms for timely liquidity support in case of financial market disruptions. - Domestic Risks - Stalled disinflation - Likelihood: Medium - Expected Impact: High - Key policy recommendations: - Policies should remain nimble and data dependent. - Monetary policy should focus on the domestic outlook, while fiscal policy should complement monetary policy in containing price pressures. - Slower-than-expected domestic recovery amid persistent price pressures - Likelihood: Medium - Expected Impact: High - Key policy recommendations: - Monetary policy should continue to be data dependent. - Fiscal support measures should be time-bound and well-targeted to avoid fueling additional price pressures. - Insufficient housing supply - Likelihood: Medium - Expected Impact: Medium - Key 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. - Maintain agile macroprudential policies to prevent excessive household indebtedness. - A disorderly housing market adjustment - Likelihood: Low - Expected Impact: Medium - Key policy recommendations: - Maintain strong banking system capital buffers and agile macroprudential policy to adapt to evolving risks. ### Annex V — Housing Market Developments and Implications for Inflation - Summary findings: - Acute imbalance between supply and demand in the housing market driven by: - A strong rebound in net immigration following border reopening, driving population growth to a peak of 2.6 percent (y/y) in 2023Q3. - Demographic shifts and changing household composition increasing housing demand. - Housing supply has lagged due to constrained construction activities, including labor shortages, high material costs, and rising financing expenses; a significant number of partially completed dwellings remain and approvals for new projects continue to be subdued. - Price and rental dynamics: - These imbalances have driven a sharp rebound in housing prices and high rent growth, contributing directly to CPI inflation, primarily through higher rents. - Supply is expected to improve as construction backlogs are cleared and profit margins start to enhance, but near-term upside pressures on housing prices are expected to remain strong, especially in capital cities with high interstate immigration and lower-than-average listings. - New rentals entering the market as capital gains prospects remain attractive should help address historically low rental vacancies, but adjustments will take time and rent inflation continues to exceed historical averages and remain a persistent component of the CPI. - Wealth effects and consumption: - Housing assets represent around two-thirds of household net worth, which has been rising for several consecutive quarters. - The surge in house prices has boosted household wealth accumulation and, ceteris paribus, may lead to higher consumption (wealth effect), partially offsetting the negative demand impact of monetary policy tightening through higher mortgage payments. - Recent modest rebound in household credit growth suggests households’ financial conditions might not be as restrictive as anticipated. ### Annex VI — GDP and Inflation Impacts of Announced Fiscal Policies - Budget measures and fiscal impulse: - The FY2024/25 Commonwealth budget includes cost-of-living relief measures: - AU$3.5 billion package for electricity bill rebates. - AU$1.9 billion of rent assistance. - Commonwealth and state governments will contribute between AU$300 to AU$1300 to each household’s annual electricity bill, depending on state or territory. - The Treasury estimates the electricity bill relief will reduce headline inflation by ½ of a percentage point in 2024/25 given the subsidies are included in CPI calculations. - Staff estimate a positive fiscal impulse of 0.9 percent of potential GDP from the FY24/25 budget. - Conceptual considerations: - Cost-of-living relief measures lower headline inflation mechanically via CPI measurement but do not directly address the causes of underlying inflation, which has proved persistent. - The RBA’s August 2024 Statement on Monetary Policy assessed that these policy changes will "not materially affect underlying inflationary pressures." - Because measures are temporary (scheduled for removal in June 2025), the effect on the price level is expected to be reversed when removed; the Reserve Bank is likely to look through this transitory effect in monetary policy considerations. - However, these measures and permanent PIT cuts may increase aggregate demand and contribute to underlying inflationary pressures; the extent and timing of demand impacts are uncertain. - Modeling approach and scenarios: - Analysis uses fiscal multipliers from ANZIMF (a variant of the IMF’s Global Integrated Monetary and Fiscal model, GIMF). - Two fiscal instruments modeled: - Fiscal Instrument 1: Temporary transfers to households to simulate the wealth effect from energy rebates (distinguishing liquidity constrained households from savers). - Fiscal Instrument 2: Permanent PIT cut modeled directly and analyzed under two financing approaches for higher interest costs: (a) gradual reduction of the PIT cuts towards zero (adjusting instrument), and (b) gradual reduction in general transfers to households (adjusting transfers). - Monetary policy is assumed to respond by changing interest rates through an inflation targeting rule. An alternative scenario holds interest rates constant for two years to isolate the pure impact of fiscal stimulus. *Source: 1ausea2024003-print-pdf - 0.6 percent* ### 3. The model’s fiscal multipliers for transfers suggest that the additional wealth from ### 1ausea2024003-print-pdf - 3. The model’s fiscal multipliers for transfers suggest that the additional wealth from ### Fiscal multipliers and energy rebates - Findings: - Energy rebates provide a small boost to GDP and have a small impact on inflation according to the model’s fiscal multipliers for transfers. - When households have a lower marginal propensity for saving, the GDP and inflation multipliers are three times larger. - If interest rates do not respond to the fiscal impulse, the multipliers are approximately twice as large again. - Due to the policy’s relatively small size, the impact on real GDP and inflation is expected to be modest, ranging from 0.3-0.16 percent and 0.01-0.03 percentage points, respectively. - Estimates do not include the direct impact on measured inflation from the energy rebates. - Commonwealth Treasury work predicts the Commonwealth policy alone will lower headline inflation by at least ½ a percentage points in FY2024/25. - This suggests the wealth effect estimated here will be smaller than the direct effect, resulting in a temporary net disinflationary impulse in the next 12 months. ### PIT cuts (personal income tax cuts) - Findings: - Model multipliers from PIT cuts suggest the policy will boost growth. - Anticipated two-year average effects on real GDP and inflation, contingent upon financing mechanisms, are projected to range between 0.37-0.42 percent and 0.00-0.01 percentage points, respectively. - Higher disposable income raises demand, but decreased PIT encourages greater labor supply, allowing firms to reduce wages somewhat. - The model finds the inflationary demand impact and the disinflationary labor supply impact broadly offset each other. ### Cost-of-living measures and risks to underlying inflation - Findings: - Cost-of-living measures will notionally lower the price level in 2024/25 but have direct and indirect impacts on underlying inflation via aggregate demand and other macro channels. - Cost-of-living subsidies do not target temporary price surges; their direct impact on electricity prices is expected to be reversed when measures are removed. - Cost-of-living support, together with tax cuts, may add to demand in the context of persistent inflation. - Staff baseline analysis based on ANZIMF estimates does not find large impacts on underlying price pressures, but substantial unmodelled uncertainty remains. - Scenarios and upside risks: - Inflation could be higher if households spend more of the funds than anticipated, if more funds are spent domestically than assumed, or if the fiscal impulse raises the level or persistence of inflation expectations more than the model assumes. - Inflation could also be higher if the fiscal impulse interacts with tighter-than-assumed labor markets to generate a wage-price spiral, especially with projected increases in public infrastructure spending bolstering public-sector labor demand. - Policy recommendation: - Given potential underestimation of budget measures’ total impact on underlying price pressures, should disinflation stall, a tighter fiscal stance would be warranted to help bring inflation to target. - The uncertainty around the likelihood and magnitude of overall effects justifies a prudent approach to fiscal policy. ### Annex VII — Key takeaways: The Australian labor market in the post-pandemic era - Overview: - Labor market tightness rose to record levels post-pandemic as constrained supply met booming demand. - Vacancies spiked to over twice their pre-pandemic maximum (reaching over 473,000 in June 2022 vs. 230,500 at end-2019). - Over half of firms in the NAB survey reported labor as a severe constraint by June 2022, up from an average of 17 percent pre-pandemic. - Unemployment rate declined to 3.5 percent by 2022Q4 — 0.6 percentage points below the lowest level recorded since 1972. - Youth unemployment reached 7.1 percent; underemployment declined to 5.9 percent in early 2023. - Recent developments and statistics: - Labor demand is slowing: vacancies at just under 330,000 in August 2024, around 45 percent higher than pre-pandemic. - Labor supply has been robust due in large part to resumed migration inflows; labor force participation at historic highs. - Underemployment rose from 5.9 percent in February 2023 to 6.7 percent by January 2024, then dropped back to around 6.3 percent. - Hours per worker declined five percent between July 2023 and January 2024, then picked up slightly in Q1 2024 and stabilized. - Unemployment rose 0.6 percentage points from a record-low 3.5 percent in June 2023 to 4.1 percent in April 2024, then stabilized around 4.1 percent. - Vacancy-to-unemployment ratio has declined steeply but remains well above historical levels. - Employment growth remained resilient: growth in employment is back up to around 3 percent y/y as of September. - Employment-to-population ratio at 64.4 percent, two percentage points above 2019 levels. - Annual retrenchment rate at 1.7 percent as of February 2024 — still well below pre-pandemic levels. - Wages and sectoral pressures: - Real wage growth returned to positive territory in 2024 Q1 after award and collective agreement adjustments in late 2023. - Nominal wage growth is expected to have peaked; recent award and enterprise wage adjustments softer than expected. - Wage growth is highest in select service sectors: health, education, accommodation and food, retail, and administrative services — sectors with a high share of award-linked wages. - Strong public demand may contribute to labor market tightness: as of August 2024, public sector vacancies (one tenth of total vacancies) were 56 percent higher than 2019 levels, while private sector vacancies were 43 percent above 2019 levels. - Cross-country context: - Australia’s gradual labor market softening is similar to peers, but Australia has preserved more post-pandemic gains: unemployment remains substantially below pre-pandemic levels in Australia and the euro area. - Labor supply gains in Australia over the past five years are the largest among peers; decline in vacancies toward pre-pandemic levels is more advanced in peers than in Australia. ### Post-pandemic shifts toward remote and flexible work - Aggregate measures: - Share of employees working from home on a regular basis in Australia: 37 percent in 2023, five percentage points higher than in 2019; peaked at 40 percent in 2021. - Among those working from home, 39 percent in 2023 cited flexible working arrangements as the primary motive, up from 19 percent in 2019. - GSWA cross-country: average days worked from home declined to 0.9 days per week in 2023, from 1.5 days per week mid-2021. - In Australia, desired number of days to work from home: 2.3; actual number of days worked from home: 1.3. - Drivers of preferences: - Education level, gender, and family status are key determinants of the value placed on working from home. - Individuals with a graduate degree place higher value on working from home; men place lower value than women. - In Australia, living with children significantly increases desirability to work from home for men; desirability is higher for women living with children than for those without (not significant). - Once industry and personal characteristics are controlled for, commute time no longer drives preferences, suggesting cross-industry correlations reflect other factors such as digitalization and urban agglomeration. - Productivity surprises during COVID are positively associated with desire to work from home. - Sectoral heterogeneity: - Amenity value of working from home is highest in more digitized sectors: IT, finance, real estate, professional and business services, and government. - Amenity value is lowest in sectors where work from home is less productive: arts and recreation, education, agriculture, hospitality and food services. - Working-from-home desirability and productivity implications vary by family living situation and gender. *International Monetary Fund — Excerpt from 1ausea2024003-print-pdf* ### 12. The judicious use of flexible and remote work arrangements amid shifting worker ### 12. The judicious use of flexible and remote work arrangements amid shifting worker ### Channels through which flexible and remote work could affect labor market outcomes and productivity - Increased flexible work arrangements could improve the reallocation of labor and support productivity: - Remote work may allow workers and firms to broaden searches geographically and access a larger pool of opportunities, reducing search and matching frictions in a geographically dispersed economy such as Australia (with long distances between cities and long commute distances within some metropolitan areas). - A more efficient reallocation of productive labor to the most productive firms could help boost aggregate productivity. - Shifting preferences may provide opportunities for Pareto improvements in wage setting: - Surveys suggest that the average Australian worker is willing to forego 4–8 percent of annual wages for remote work flexibility, with significant heterogeneity in preferences: one fifth of workers appear willing to forgo as much as 16-33 percent wages for remote work flexibility (Vij et al, 2023). - Differing worker preferences for remote work could allow employers and employees in sectors where remote or hybrid models are feasible to negotiate Pareto-improving contracts (starting from a one-size fits all baseline). - Increased flexibility could help retain vulnerable groups and improve average labor productivity: - Female labor force participation in Australia saw a level shift up during the pandemic; within this, labor force participation for mothers of young children improved steeply from 2019 to 2023 – which may in part reflect the growing prevalence of flexible work arrangements, in addition to reforms to childcare. - The participation of workers with long-term health conditions also increased slightly after the pandemic. - Retention of these workers could help avoid loss of human capital acquired on the job and with work experience, thus helping improve average worker productivity. - Increased flexibility and ability to work remotely may improve productivity for some workers: - Evidence on productivity gains or losses from remote work is scarce; employees report higher productivity, but employers do not necessarily share these impressions (Barrero, Bloom, & Davis, 2021). - Continued digitalization and innovation are associated with higher labor productivity growth (Kinda, 2021) and could help boost productivity in the long run while appealing to workers’ desires for greater flexibility. - Equity implications: - Stronger preference for remote work for men with young children in Australia suggests flexible or hybrid arrangements can affect the distribution of unpaid work. - Women take on a disproportionate amount of unpaid work in Australia relative to men – most notably domestic duties and childcare. Work arrangements reducing commute time and allowing more flexible timing for men could enable a more even distribution of unpaid tasks and allow women to increase participation or hours in paid work. - Potential costs: - Remote work arrangements could slow the transfer of knowledge to new employees and introduce frictions in communication, with potentially negative implications for productivity, especially in collaborative settings. - The extent to which these costs could be mitigated by hybrid arrangements or digital communication technologies remains uncertain. ### Evidence gaps and recommended approach - In-depth analyses of the productivity impact of flexible work models are only in their incipient stages. - It remains critical that any policies regulating remote work are appropriately updated as more data becomes available, and working arrangements continue to be adjusted as needed. ### Summary conclusions and policy-relevant implications - While the likelihood of post-pandemic gains to employment being preserved amid a soft landing is rising, vigilance is warranted: - Localized demand and wage pressures in select service and nonmarket sectors could translate to persistent inflation, requiring the RBA to keep policy rates high for longer, with potentially negative implications for other segments of the labor market via lower aggregate demand. - The adjustment in the labor market may accelerate as the impact of monetary tightening continues to pass through the economy, with unemployment picking up more quickly. - Flexible and remote work arrangements present opportunities for Australia’s economy: - The judicious and tailored use of hybrid or flexible arrangements where they do not compromise productivity could help facilitate more efficient search and matching, pareto-improved contracts, improved human capital retention, and reduced gender inequities. - These benefits, the scale and scope of which is yet to be quantified, may be lost under blanket ‘return to office’ policies. - Structural shifts will also alter the composition of labor supply: - Given an aging population and later retirement, the share of older workers in the workforce is expected to continue expanding. - Labor force participation for women has risen in recent decades, in part reflecting improvements in childcare provision. - Higher labor supply could help address persistent labor shortages, but ensuring training and education programs are adequately geared to help match labor supply with demand will remain critical. - The skill-based labor migration system should remain sufficiently dynamic to pivot towards addressing remaining imbalances. *Source: IMF country report content provided in the supplied PDF excerpt.* ### Annex X. Financial Sector Assessment Program Update ### Annex X. Financial Sector Assessment Program Update ### Banking and Insurance Supervision - Recommendation: Strengthen the independence of APRA and ASIC, remove constraints on policy making powers, provide greater budgetary and funding autonomy; strengthen ASIC’s enforcement powers and expand their use to mitigate misconduct (Treasury, APRA, ASIC). Time frame: ST. Status: Complete. - The Government sets ASIC’s total budget; ASIC recovers the majority through its industry funding model (IFM) established in 2017. ASIC determines allocation within this total budget. - June 2023: Government released a report on review of the ASIC IFM and agreed to the recommendations. - ASIC has been provided with significant additional funding since 2019-20 to support implementation of the Financial Services Royal Commission and other measures. - Changes to ASIC’s enforcement powers: - April 6, 2019: ASIC granted a product intervention power; used in short-term credit, continuing credit contract, binary options, and CFDs. - February 18, 2019: Parliament passed legislation to significantly increase penalties for corporate and financial sector misconduct. - February 6, 2020: Parliament passed legislation to strengthen ASIC’s licensing and banning powers and enhance investigatory capability. - December 10, 2020: Parliament passed legislation to: - enable ASIC to designate enforceable code provisions in approved codes of conduct (regime effective January 1, 2021); - strengthen breach reporting requirements for financial service and credit licensees (regime commenced October 1, 2021). - September 5, 2023: Parliament passed legislation establishing the Financial Accountability Regime; ASIC and APRA will have joint responsibilities. - The Government sets APRA’s total budget; APRA recovers the majority through Financial Institutions Supervisory Levies (FISLs). APRA determines allocation within its total budget. - APRA was provided A$67.3 million in additional funding in the 2021-22 MYEFO to maintain capacity to respond to risks. - Recommendation: Enhance APRA’s supervisory approach by carrying out periodic in-depth reviews of governance and risk management (APRA). Time frame: ST. Status: In process. - APRA has built supervisor and risk specialist capability to undertake in-depth reviews and conducts entity-specific and thematic reviews regularly. - Since November 2019 information paper Transforming Governance, Culture, Remuneration and Accountability: APRA’s Approach, APRA focused on remediation plans from 2018 self-assessments; first remediations complete, leading to removal of capital overlays. - APRA developed a risk transformation framework to support oversight of entity risk transformation programs. - APRA reviewing governance standards (including 510 Governance, 520 Fit and Proper, 521 Conflicts of Interest) — discussion paper to be released in late 2024; draft changes to standards will follow in 2025. - Prudential Standard CPS 230 Operational Risk Management updated in July 2023 to expand expectations of Enterprise Risk Management including to conduct risk. - CPS 230 comes into effect on 1 July 2025; APRA supervisors are working with regulated entities to comply. - APRA’s Supervision Risk and Intensity (SRI) model includes detailed guidance on governance, risk culture, remuneration and accountability (GCRA); weaknesses drive escalation and supervisory action. - APRA strengthened requirements and increased supervision of remuneration, developed tools to sharpen supervision of risk culture, and embedded these in the Financial Accountability Regime. Transforming GCRA is no longer a headline item in APRA’s Corporate Plan. - Recommendation: Strengthen the integration of systemic risk analysis and stress testing into supervisory processes (APRA, RBA). Time frame: I. Status: Complete. - APRA’s SRI model incorporates an External Factors category covering macro and systemic risk. Strategic Insights teams capture macro and industry risks in Industry Risk registers. - Capital section of SRI requires supervisors to consider recent stress test results when rating capital. Stress testing is input to ICAAP reviews, capital reductions, dividend considerations and broader capital settings. A stress testing handbook provides guidance. - APRA increased stress testing activities across regulated industries, analysed results under a range of scenarios to identify vulnerabilities and collaborated with the Reserve Bank of Australia in modeling scenarios and comparing results. - APRA transitioned to an annual stress testing program for the banking industry and developed internal stress testing models across banking, insurance and superannuation. - APRA is developing a cross industry stress testing framework and systemic risk framework as the next phase. ### 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 (CFR agencies). Time frame: MT. Status: In process. - A Multi-Agency Data Collection (MADC) Committee established including APRA, ASIC, RBA, Treasury, the Australian Taxation Office, and the Australian Bureau of Statistics. - Inter-agency data projects are discussed at MADC to create a unified strategic approach. - Through MADC, APRA collected data of improved quantity, quality, granularity and consistency across superannuation, banking and insurance, designed with partner agencies. Superannuation data is shared with ASIC, the ATO and the ABS. - APRA implementing a pipeline of new and amended data collections including updated collections for Liquidity Risk and Interest Rate Risk in the Banking Book, and collections for investments, company structure and financial data for pension funds. - APRA focusing on transitioning data collections from legacy system to APRA’s new collection platform to reduce complexity for APRA and submitters. - APRA planned the pace, sequencing, and priorities of new collections alongside migration and an uplift of data and technology capabilities including a new data platform and improved enterprise data governance over the next 4 years. - ASIC built an advanced data collection portal; pilot in November 2021 with limited entities. Tranche 1 of Internal Dispute Resolution (IDR) submission conducted January 2023; Tranche 2 completed August 2023 (approx. 260 licensees). Most recent IDR submission completed January 2024. - Recommendation: Enhance monitoring, modeling, and stress testing framework for solvency, liquidity and contagion risk; draw on results for policy (CFR agencies). Time frame: ST. Status: Complete. - APRA undertakes stress tests with solvency and liquidity components and engages superannuation funds on liquidity stress testing methods. - APRA built internal stress testing functionality to challenge industry submissions and perform internally generated scenarios. APRA and RBA stress testing teams engage directly. - APRA transitioned to an annual stress testing program of large banks. - APRA developing cross industry stress testing and systemic risk frameworks to explore contagion risk between industries. - APRA undertakes stress testing of operational and climate change financial risks: - Climate Vulnerability Assessment (CVA) of Australia’s five largest banks in 2021-22; results published November 2022 (joint CFR initiative led by APRA). - Insurance-focused CVA commenced July 2023, focusing on physical and transition climate risks and home building insurance affordability; expected completion in FY24-25. - ASIC conducts six monthly review of ASX 200 Distressed Entities. - Recommendation: Encourage further maturity extension and lower use of overseas wholesale funding (APRA). Time frame: I. Status: Complete. - Offshore funding is important to Australian banks; CFR agreed that lengthening maturity of offshore borrowing would reduce rollover risks. - Foreign funding vulnerabilities are mitigated because a sizeable portion is swapped into Australian dollars and used to acquire Australian dollar assets. - Focus on ensuring banks prudently fund repayment of the RBA’s Term Funding Facility (TFF) using more stable sources, including long-term wholesale funding. The TFF has now been fully repaid and Australian banks are more deposit funded with lower reliance in wholesale funding. - Offshore funding as % of total funding have slightly picked up, albeit still at lower level than pre-COVID. - Banks encouraged to strengthen funding profile, including lengthening maturity of offshore borrowing. ### Systemic Risk Oversight and Macroprudential Policy - Recommendation: Raise formalization and transparency of the CFR and accountability of its member agencies through publishing meeting records and publication/presentation of an Annual Report to Parliament by CFR agency Heads (CFR agencies). Time frame: I. Status: Complete. - CFR publishes a statement following regular CFR meetings since December 2018 and updated its website to be more informative about CFR role and work. - Government established the Financial Regulator Assessment Authority (FRAA) to report on effectiveness and capability of ASIC and APRA. FRAA completed inaugural reviews of ASIC and APRA in August 2022 and June 2023 respectively. FRAA cannot direct regulators, assess single cases/decisions, or deal with complaints about regulators. - 2023 Government-appointed Review of the Reserve Bank included recommendations on macroprudential governance arrangements and transparency, including clarifying CFR agency MoU responsibilities. - APRA consults other CFR agencies on macroprudential settings and considers feedback when determining policy. - Recommendation: Undertake a CFR review of readiness to apply expanded policies to address systemic risks, including data and legal/regulatory requirements; address impediments to deployment (CFR agencies). Time frame: I. Status: In process. - CFR Working Groups actively consider systemic risks associated with the housing sector and implications for supervisory and policy response. - Macroprudential Policy Advisory Group considers risks and appropriate macroprudential tools, suitability circumstances, and restrictions (e.g., data availability). - November 2021: APRA published an information paper on its macroprudential policy framework (objectives, toolkit, approach, and role of CFR). APRA made prudential framework changes to require banks to be operationally positioned to implement specified macroprudential measures (e.g., limit higher risk lending) — changes came into effect from September 2022. - APRA progressed to more regular public updates on macroprudential policy settings; consults CFR agencies ahead of annual updates and prior to changes. - December 2023: APRA published an information paper updating macroprudential policy settings across APRA regulated industries and published its annual update explaining why settings remained appropriate. - July 2024: APRA published a brief media release assessing that macroprudential policy settings remained appropriate. - RBA Review (April 2023) recommended measures to enhance cooperation between monetary and macroprudential policies; CFR agencies developing new arrangements. A staff-level macroprudential policy advisory forum established. - December 2023: CFR adopted a revised framework for identification of systemic vulnerabilities, focusing on vulnerabilities that could cause or amplify instability rather than potential shocks or risk scenarios. - Recommendation: Commission analysis by CFR member agencies on relevant financial stability policy issues, including policies affecting household leverage and factors affecting international investment flows and implications for real estate markets (CFR agencies). Time frame: MT. Status: In process. - CFR actively considers impact of policy changes on financial stability; CFR agencies and Working Groups frequently report on housing market risks. - RBA participated in CGFS working group on property price dynamics and influence of international investors — report released February 2020. - RBA participated in CGFS study group on policies to mitigate housing-related risks — report released December 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, subject them to annual supervisory review (APRA, Treasury). Time frame: ST. Status: In process. - May 2023: APRA finalised prudential requirements and guidance for resolution planning with CPS 900 Resolution Planning & CPG 900 Resolution Planning. CPS 900 commences on 1 January 2024. - CPS 900 specifies three yearly reviews of resolution plans (rather than annual); APRA does not expect the frequency to change. - Further work planned on resolution testing as part of a Trans-Tasman Banking Council crisis simulation in September 2024. - June 2023: FRAA completed first review of APRA, focusing on superannuation. FRAA recommended uplift to APRA capabilities and industry awareness of resolution planning. APRA responded with industry communication, continued pilot resolution planning, wider roll out, and engagement with Treasury on enhancements to APRA’s statutory resolution toolkit in 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. Status: Complete. - November 2018: APRA released discussion paper proposing changes to capital adequacy framework to increase loss-absorbing capacity (LAC) to support orderly resolution. - July 2019: APRA finalised approach to LAC for banks, including requiring D-SIBs to lift Total Capital by three percentage points of RWA by January 1, 2024. - 2021: APRA finalised requirement for the D-SIBs increasing Total Capital by 4.5 percentage points in aggregate. - Requirements for other entities, including mid-sized banks, to be determined as part of resolution planning. - Recommendation: Advance mutual understanding between Australia and New Zealand resolution authorities on cross-border bank resolution modalities through the Trans-Tasman Banking Council (TTBC) (CFR agencies). Time frame: ST. Status: Complete. - APRA progressed cross-border components of bank-specific resolution planning with New Zealand authorities. - End-2019: APRA and RBNZ established the first entity-specific Crisis Management Group (CMG) for a trans-Tasman bank, comprising APRA, RBNZ, ASIC, FMA and RBA. The CMG is an effective forum for developing and evaluating detailed resolution strategies. 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 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. Status: In process. - 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 FMI supervision and action on deficiencies; - transfer of licensing and supervisory powers from the Minister to ASIC and the RBA. - Government announced support for these reforms in December 2022. - 2023/early 2024: Treasury drafted FMI regulatory reforms to enhance and streamline ASIC and RBA supervisory powers and introduce RBA powers to manage and resolve a domestic clearing and settlement facility crisis. RBA and ASIC consulted; reforms currently before Parliament. - Recommendation: Finalize the resolution regime for FMIs in line with the FSB Key Attributes (RBA, ASIC, Treasury). Time frame: ST. Status: In process. - CFR advice (July 2020) included proposal to establish a resolution regime for clearing and settlement facilities operating in Australia. - Government announced support for these reforms in December 2022. - Regulators consulted on draft legislation for FMI regulatory reforms in late 2023/early 2024; reforms include enhancements to supervisory and crisis management powers. ### 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 (Attorney-General’s Department, Treasury, AUSTRAC). Time frame: I. Status: In process. - 20 April 2023: Government announced public consultation on major reforms to Australia’s AML/CTF regime to extend coverage to certain high-risk DNFBP services (lawyers, accountants, trust and company service providers, real estate professionals, dealers in precious metals and stones), simplify obligations, and modernise digital currency and payments technology-related regulation. - 13 June 2024: Government concluded a second round of public consultation; stakeholder feedback is being considered to inform legislation design and further engagement is ongoing. - Legislation was introduced on 11 September 2024. Government intends to allow industry time to prepare ahead of Australia’s next Mutual Evaluation by the Financial Action Task Force in 2026-27. - Improving data collection and risk analysis: - AUSTRAC published risk assessments during 2022-24: - Bullion dealers risk assessment (Sep 2022) - Superannuation sector threat update (Sep 2022) - Remittance network providers & their affiliates risk assessment (Sep 2022) - Independent remittance dealers risk assessment (Sep 2022) - Proliferation financing national risk assessment (Dec 2022) - AUSTRAC commenced Australia’s latest national risk assessments (NRAs), published in 2024: - Money laundering in Australia NRA (July 2024) - Terrorism financing in Australia NRA (July 2024) - NRAs incorporate insights from law enforcement, intelligence, regulatory agencies, private sector stakeholders and international financial intelligence units; the money laundering NRA includes analysis of DNFBPs. - Increasing oversight of controls and compliance: - 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. - AML/CTF Act (2006) adopts a risk-based approach placing onus on reporting entities to identify, mitigate and manage risk. - AUSTRAC adopts a risk-based supervision approach: frontline supervision teams conduct targeted assessments and campaigns, monitor remediation and refer enforcement matters. - AUSTRAC has a centralised capability for identification, triage and assessment of non-compliance and refers matters to supervisory teams. - Supervisory activity and remediation: - AUSTRAC supervisory teams initiated 19 supervisory activities involving more than 500 reporting entities (2022-23), focusing on banking, foreign exchange services, virtual assets, remittance services and casino and gaming businesses. - AUSTRAC monitored 25 remediation activities during 2022-23 affecting over 300 reporting entities; longstanding remediation engagements continue. - Education and guidance: - During 2022-23 AUSTRAC responded to over 11,000 enquiries via the Contact Centre, published 20 downloadable guidance products, undertook 22 induction workshops to over 850 participants, completed numerous education visits (including 26 to corporate bookmaker sector and 99 visits to the remitter sector), and delivered 17 industry presentations. - Enforcement action: - AUSTRAC continued formal enforcement actions under the AML/CTF Act. Notable matters: 1. Crown Casino: - 1 March 2022: AUSTRAC commenced civil penalty proceedings against Crown Melbourne Limited and Burswood Nominees Limited (Crown) for alleged serious and systemic non-compliance. - 30 May 2023: AUSTRAC and Crown filed joint submissions that a $450 million penalty is appropriate. - 11 July 2023: FCA ordered Crown to pay the $450 million penalty plus costs of $3.4 million. 2. Star Entities: - 30 November 2022: AUSTRAC commenced civil penalty proceedings against The Star Pty Limited and The Star Entertainment QLD Limited; matter remains ongoing in the FCA. 3. SkyCity: - 7 December 2022: AUSTRAC commenced civil penalty proceedings against SkyCity Adelaide Pty Ltd; matter remains ongoing in the FCA. 4. Enforceable undertakings accepted requiring remedial actions: - Bank of Queensland Ltd (30 March 2023) - PayPal Australia Pty Ltd (16 March 2023) - Cash Converters (17 February 2023) - ING Bank (Australia) Pty Ltd (23 November 2022) - Enforceable undertakings remain ongoing for: - Sportsbet Pty Ltd (commenced 2024) - Gold Corporation (commenced 2023) - Bank of Queensland Ltd (commenced 2023) - PayPal Australia Pty Ltd (commenced 2023) - National Australia Bank Limited (commenced 2022) *Annex X. Financial Sector Assessment Program Update — content as provided in the source PDF chapter.* ### Annex XI . Transnational Aspects of Corruption: Updates ### Annex XI . Transnational Aspects of Corruption: Updates ### Overview and Staff Assessment - This annex summarizes the latest state of play on Australia’s efforts to address transnational aspects of corruption and notes that further efforts are needed to mitigate risk. - On the supply side, amendments to the criminal law strengthen the foreign bribery offence; however, foreign bribery enforcement remains low and should be prioritized. - Staff encourages Treasury to accelerate the establishment of a publicly accessible beneficial ownership register to improve transparency of legal persons. - Information relating to supply-side corruption in this annex draws on the WGB’s Phase 4 Report of Australia. The IMF staff and Australia have provided additional views and information whose accuracy have not been verified by the WGB or the OECD Secretariat, and which do not prejudice the WGB’s monitoring of the implementation of the OECD Anti-Bribery Convention. ### Supply Side of Corruption — Criminalization and Prosecution of Foreign Bribery - Strengthening the foreign bribery framework: - The Crimes Legislation Amendment (Combatting Foreign Bribery) Act 2024 (the Act) received Royal Assent in March 2024. - The Act introduces a new “failure to prevent” foreign bribery offence for companies, which commences on 8 September 2024. - Enhancing foreign bribery enforcement: - The Act includes reforms to remove undue impediments to the investigation and prosecution of foreign bribery (such as enhancing the definition of foreign public official and scope of the foreign bribery offence). - The Attorney-General's Department published its Guidance on adequate procedures to prevent the commission of foreign bribery, to assist corporations to implement an effective anti-bribery compliance program. - Other prior recommendations: - Clarifying procurement agencies’ discretion in debarment cases: Staff encourages the authorities to continue efforts to address this recommendation. - Providing mutual legal assistance in foreign bribery cases: Staff encourages the authorities to continue to consider this recommendation in the future. ### Facilitation of Corruption — Preventing the Concealment of Foreign Corruption Proceeds - Expanding AML/CTF regulation to DNFBPs: - The Government is consulting on introduced reforms to Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Reforms that would extend regulation to certain high-risk services provided by tranche two entities (including accountants, lawyers, real estate professionals and dealers in precious metals and precious stones), which will harden Australia’s financial system against criminal exploitation. - Beneficial ownership transparency: - The Government is committed to implement a public beneficial ownership register to improve multinational tax integrity. - Key milestones in its action plan include: - i) a second round of public consultation in 2024 on extending the BO disclosure requirements to all Corporations Act legal persons, and - ii) consideration and stakeholder consultations in 2025 on establishing a centralized registry. - Staff encourages Treasury to accelerate the establishment of a publicly accessible beneficial ownership register to improve transparency of legal persons. - National risk assessment: - On 9 July 2024, AUSTRAC released the latest national risk assessment on money laundering. It provides a collective understanding of the scale, sophistication and threat of money laundering in Australia, including the risks of laundering proceeds of foreign corruption. *Source: Annex XI . Transnational Aspects of Corruption: Updates (from the provided IMF chapter content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1ausea2024003-print-pdf.pdf_