## 1. Economic Imbalances Narrowing as Recovery Commences ## Source details **Canonical URL:** [1. Economic Imbalances Narrowing as Recovery Commences](https://www.imf.org/-/media/files/publications/cr/2026/english/1ausea2026001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2026/english/1ausea2026001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2026/english/1ausea2026001-source-pdf.pdf.json) --- ### Context and reform agenda - Post-May 2025 federal election: authorities signaled renewed focus on domestic structural challenges amid lower inflation and narrowing imbalances. - Key structural challenges: stagnant productivity growth and rising structural spending pressures. - August 2025 Economic Reform Roundtable goals and suggested reforms: - Boost productivity, maintain fiscal sustainability, ensure economic resilience. - Reform areas: regulation, housing, AI adoption, skilling, public service modernization, competition policy, net zero transition. - Government commitments (as described): reduce labor taxes, support first-time home buyers, increase health care funding, review R&D, reform competition policy, invest in the net zero transition. - Authorities pursuing trade and economic diversification via free trade agreements and domestic productivity improvements. ### Recent developments — macro and labor markets - Real GDP growth: - Reached 2.1 percent y/y in 2025Q3 after modest increase in 2024. - Private consumption: - 2.5 percent y/y in 2025Q3, supported by stronger real disposable income (in part due to real wage growth and Stage 3 tax cuts). - Dwelling investment: - Surged to 6.5 percent y/y by 2025Q3. - Housing prices, supply and affordability: - National dwelling prices: increased by 1.1 percent in November (7.4 percent y/y rise). - Annualized completions: around 180,000 (below peak 2016 levels and below target pace needed for 1.2 million new homes over five years starting in 2024). - Housing affordability: requires 47 percent of median household income for new mortgages and 24 percent for rent. - Time to save for a 20 percent down payment: 11 years. - Labor market: - Unemployment rate: rose gradually to 4.3 percent by October 2025. - Private sector wage growth: slowed to 3.4 percent in 2025Q3. - Pockets of labor shortages persist, including in construction. - Inflation and monetary policy: - Underlying (trimmed mean) inflation fell below 3 percent y/y in 2025Q1, slowed further in 2025Q2, then rose to 3.2 percent y/y by November 2025. - Headline CPI: 2.1 percent in 2025Q2, rising to 3.4 percent y/y by November 2025 (above RBA’s 2 to 3 percent target band). - RBA policy rate reductions: total of 75 basis points through August, to 3.6 percent; RBA kept policy rates on hold at the last three MPB meetings of 2025. - Financial conditions: - Lower interest rates passed to borrowers; credit growth rebounded in business and housing sectors. - 90+ day arrears rate: below 1 percent. - Banks: capital and liquid assets well above regulatory requirements; profitability robust; lending standards sound. - Superannuation funds navigated April 2025 market volatility with large temporary valuation fluctuations in overseas investments. - Fiscal and external positions: - Consolidated government fiscal stance: broadly neutral in FY2025/26 after countercyclical loosening in FY2024/25. - Cyclically adjusted primary balance: estimated broadly stable between FY2024/25 and FY2025/26. - Current account: deficit widened to 2.2 percent of GDP in 2024, largely stabilized through 2025Q3. - NIIP: improved by 6 percent of GDP since end-2023 due to valuation effects (primarily US equities). - External liability/asset composition: most AUD-denominated or hedged (liabilities) and most FX denominated (assets), limiting depreciation vulnerability. - Data and institutional progress: - ABS finalized monthly CPI data launched in November 2025. - Progress implementing FSAP recommendations: AML/CFT, systemic risk analysis, supervisory and resolution frameworks; commitments on beneficial ownership registry and procurement bribery risk assessment. ### Outlook and key projections - Growth: - Staff project growth to rise to 2.1 percent in 2026 (from 1.9 percent annual average in 2025). - Potential output growth estimate: stabilize around 2.1-2.2 percent in the near term. - Structural reforms could augment TFP and raise potential output growth toward the end of the decade. - Inflation: - Expected to gradually converge toward midpoint of RBA’s 2-3 percent target band by 2027H2. - Headline inflation to remain temporarily above underlying inflation due to expiration of electricity rebates and other one-offs. - Wage growth expected to ease further given low productivity growth and easing pressures from backward-looking pay setting methods. - Current account and external trade: - Expected to remain in deficit into the medium term. - Slight recovery in commodity prices forecast in 2026; softening demand in key trading partners to contain export growth. - Medium-term headwinds: slowing and greening steel production (especially in China) weighing on coal trade. - Offsetting trends: reshoring, rising global defense spending, data center boom supporting demand for steel and critical minerals. - Fiscal outlook: - Consolidated government fiscal deficit projected to gradually narrow over the medium-term. - Fiscal impulse from the consolidated government: expected to be -0.2 and -0.9 percent of potential GDP in FY2025/26 and FY2026/27, respectively. - General government public debt remains low; sovereign stress risk assessed as low. ### Risks and scenario analysis - Overall risk orientation: - Risks to growth: tilted to the downside. - Risks to inflation: upside risks dominate. - External risks: - Global trade tensions, prolonged trade policy uncertainty, global financial turmoil could weigh on demand and employment. - Commodity price volatility poses fiscal, external, and inflationary risks. - Upside scenarios: deeper regional integration and new trade deals could diversify exports and boost resilience. - Domestic risks: - Inflationary pressures may prove more persistent if job market drives stronger labor cost growth. - Supply capacity constraints could raise price pressures as private demand accelerates. - Slower-than-expected private demand recovery could lead to a sharp rise in unemployment. - Illustrative adverse global scenarios (GIMF/WEO-based): - Tariff layer alone: real GDP level effect of -0.1 to 0.2 percent relative to baseline by end of year 2. - Tariff + higher policy uncertainty: reduce real GDP by 0.4 percent relative to baseline. - Combined shock adding tighter global financial conditions: could lower real GDP by -0.6 percent in next two years (or more under alternative assumptions). - Labor market effect under tariff shocks: estimated 0.9 percent decline in total labor hours → 0.9 percentage-point increase in unemployment if jobs margin used. - Inflation impact in 2025-26: relatively benign, staying within inflation target range due to monetary policy offset. ### Policy guidance — near-term and medium-term - Near-term macro mix: - Monetary policy: support descent of inflation toward midpoint of target band; remain data-driven. - Fiscal policy: focus on rebuilding buffers and gradual consolidation; begin medium-term consolidation in FY2026/27. - Macroprudential policy: manage financial stability risks, especially given a strong housing market and easing monetary conditions. - Medium-term priorities: - Deliver structural reforms to close productivity gap and build long-term resilience. - Prioritize reforms in housing, AI adoption, skilling, public service modernization, competition policy, and net zero transition to boost TFP and potential growth. - Contingent policies for adverse shocks: - Exchange rate adjustments as shock absorber. - Accommodative monetary policy to offset negative output and employment impacts (weighing price stability). - Fiscal automatic stabilizers and targeted, temporary sectoral support; timely assistance and reskilling for displaced workers. - Financial sector: consider tightening and broadening macroprudential tools amid monetary easing. ### Calibrating monetary policy normalization - Recent RBA actions: - Easing cycle: three 25 bps reductions in the cash rate target set several months apart from February 2025 to August 2025. - Cash rate target at 3.6 percent by end-2025; RBA later raised the cash rate target by 25 basis points to 3.85 percent on February 3, 2026 (as reported in data standards initiatives). - Staff assessments: - Staff-assessed neutral interest rate range: 2.9-3.4 percent. - Staff assess the NAIRU around 4.2 percent (range 3.9 to 4.5 depending on assumptions). - Policy guidance contingent on incoming data: hold, tighten, or ease depending on signals of residual tightness, strengthening price pressures, or softening conditions. ### Macroprudential and financial stability - Current settings and measures: - 3-percentage-point mortgage serviceability buffer requirement maintained. - New 20-percent limit on new high DTI (>6x) mortgage lending introduced in November 2025; to take effect in February 2026. - APRA kept countercyclical capital buffer at 1 percent and is conducting system-wide stress tests (inaugural stress test with final results expected in 2026). - Financial sector vulnerabilities: - High DTI and investor lending driving housing credit momentum. - Growing share and interconnectedness of non-bank lenders rising from pre-GFC levels warrants monitoring. - Large superannuation funds and their strong links with domestic banks pose amplification risks in extreme liquidity or liquidation scenarios. - Staff recommendations: - Vigilant monitoring of evolving vulnerabilities (real estate, NBFIs, global policy uncertainty). - Maintain agile macroprudential approach with option to expand/tighten borrower-based limits. - Leverage Financial Stability Board deliberations to tighten NBFI regulation and close data gaps. - APRA to continue stress testing and supervisory intensity. ### Housing supply, affordability, and tax recommendations - Current dynamics: - Long-standing demand-supply imbalance despite easing cyclical conditions. - 5% Deposit Scheme supports first-home buyers but may pull forward purchases and contribute to near-term price pressures. - Commonwealth commitments and initiatives: - AU$10 billion over eight years to provide 100,000 new homes for first-home buyers; expanded 5% Deposit Scheme. - Commonwealth Government’s $45 billion Homes for Australia plan to support national target of 1.2 million new homes. - Restrictions: temporary ban on foreign purchases of existing dwellings April 1, 2025 to March 31, 2027 (staff assess as inconsistent with IMF Institutional View; recommend non-discriminatory measures that support supply). - Supply constraints: shortage of skilled workers, limited and costly land, low construction productivity, complex approvals. - Recommended holistic strategy: - Implement commitment to deliver 100,000 homes for first-home buyers or limit guarantee to new dwellings. - Boost construction productivity and workforce via training and skilled migration. - Incentivize build-to-rent and expand social and affordable housing. - Relax zoning and building restrictions; expedite approvals and land release. - As part of tax reform, consider replacing stamp duties with recurring property taxes and review tax arrangements affecting housing demand; redirect fiscal savings to support new supply. ### Sub-national fiscal developments and coordination - Recent trends: - New spending commitments (infrastructure and social protection) have led to rising sub-national debt and missed fiscal targets. - Sub-national share of consolidated government net debt: estimated 30 percent in FY2024/25. - Fiscal disparity increased: resource-rich states benefited from commodity prices; others faced weakening fiscal positions. - Largest state deficits in NSW and VCT; fastest debt growth relative to output in Northern Territory, Tasmania, South Australia. - Credit rating agencies increasingly differentiate risk at sub-national level; several downgrades noted. - Policy recommendations for nationwide coordination: - Strengthen fiscal coordination via Council on Federal Financial Relations (CFFR) and Infrastructure Australia to reduce inefficient spending risks. - Commonwealth to offer stronger guidance on state finances and borrowing; review spending and revenue policies (fiscal equalization, GST reform, land tax). - Expand Parliamentary Budget Office (PBO) mandate to assess subnational positions and monitor indicators at high frequency. - Consider risk-based monitoring framework and enhanced transparency in Budget documentation. ### Structural reforms and productivity agenda - Productivity challenges: - Weak productivity growth over past decade; slow technology adoption, fading business dynamism, inefficiency in capital reallocation. - Non-market sector average working hours rose faster than market sector since 2020, weighing on aggregate productivity. - Reform priorities and sequencing: - Prioritize regulatory compliance cost reduction, skills mismatch, and falling innovation. - Bundle cross-cutting measures into coherent packages with clear implementation plans. - Leverage AI and digital adoption: National AI Plan through 2030 with three pillars (competitive AI ecosystem; broadening benefits; ensuring safety). - R&D investment as share of GDP has fallen over last 15 years; strengthen innovation networks, finance access and knowledge transfer. - Competition and labor market reforms: - Mandatory suspensory merger reporting from 2026. - Bans on non-compete clauses for low- and middle-income workers and bans on wage-fixing/no-poach agreements starting 2027. - National Productivity Fund to disburse conditional one-off payments to states for reform delivery. - Climate transition and industrial policy: - 2030 target: renewable energy to reach 82 percent of electricity generation. - 2035 goal: 62–70 percent emissions cut from 2005 levels. - Future Made in Australia (FMiA) Bill: production tax incentives for renewable hydrogen and critical minerals processing effective 2027 through 2040; incentives accessible up to ten years per project. - Staff analysis: upgrading capital age and intangible share of bottom 50 percent firms to median industry levels could raise TFP by 1–2 percent and reduce emissions by 4–7 percent (Annex IX). - Authorities’ commitments: - National AI Plan released 2 December 2025. - Commitment to Net Zero 2050 and on track for 2030 target; indicated Australia to provide at least $1 billion for critical minerals projects by April 2026. ### External sector assessment — key indicators and policy implications - Overall assessment: - External position in 2025 preliminarily assessed as moderately weaker than level implied by medium-term fundamentals and desirable policies. - CA deficit stabilized in 2025; forecast CA at 1.9 percent of GDP for the year. - Key 2025 (% GDP) indicators: - NIIP: -23.5 - Gross Assets: 164.9 - Debt Assets: 38.2 - Gross Liabilities: 188.4 - Debt Liabilities: 86.7 - CA: -1.9 - Cycl. Adj. CA: -2.5 - EBA Norm: -0.5 - EBA Gap: -2.0 - Staff Gap: -2.0 - REER assessment: - REER weakened by about 3 percent through 2025Q3 relative to 2024Q4. - IMF staff-assessed REER gap: 11.1 percent (range 8.3 to 13.9 percent). - Policy implications: - Allow exchange rate to act as principal shock absorber. - Pursue medium-term fiscal consolidation to support external rebalancing. - Design structural and industrial policies narrowly to minimize trade and investment distortions. - Monitor balance sheet composition and growing exposure to foreign equities. - Maintain readiness to provide liquidity support and monitor banking and NBFI balance sheets. ### Superannuation funds — role, exposures, and systemic considerations - Sector size and role: - As of June 2025, superannuation sector manages approximately AU$4.3 trillion in assets (~160 percent of GDP), representing a quarter of total financial system assets. - Investment profile and vulnerabilities: - Significant offshore allocation: about two-thirds of offshore allocations invested in equities. - Estimated loss during Feb–Apr 2025 equity price decline: approximately $170 billion in local and global equities investments. - FX hedging practices use FX swaps; margin call risks can require liquidity or asset sales, creating potential market and bank counterparty stress. - Regulatory and policy context: - Most hedges contracted by super funds do not require margin payments (RBA October 2022 Financial Stability Review). - Super funds generally not eligible for RBA liquidity facilities unless prior counterparties before Sept 23, 2019. - APRA tightened investment governance standards in early 2023 and is conducting system-wide stress tests with results expected in 2026. - Fiscal and growth considerations: - Superannuation funds mitigate fiscal pension pressures as population ages. - Revenue forgone from superannuation tax concessions is large and expected to rise; government proposed modifying concessional tax treatment of large balances. - Funds could support productivity-enhancing investments subject to fiduciary duties under the Superannuation Industry (Supervision) Act 1993. ### APRA supervisory enhancements and regulatory timeline - APRA enhancements: - Built supervisor and risk-specialist capability; expanded Non-Financial Risk division (governance, operational, technology resilience, cyber, climate). - Introduced supervisory risk and intensity (SRI) model with non-financial risk categories and capital considerations linked to stress tests. - Issued/updated prudential standards: CPS 230 (Operational Risk Management, July 2025), CPS 234 (Information Security, 2019), CPS 511 (Remuneration, 2023); CPS 510 Governance under review for finalization in 2025/26. - Replaced BEAR with Financial Accountability Regime (FAR) in 2024; FAR applies to accountable persons from July 2025. - Commenced first system risk stress test in 2025. - Data, coordination, and timelines: - Expanded data collections (Interest Rate Risk in the Banking Book, pension fund investments) and migrating to new collection platform. - Multi-Agency Data Committee (MADC) established. - Key milestones: FAR effective July 2025; CPS 230 onsite reviews during 2025 and 2026; APRA’s new capital framework introduced September 2023; LAC and resolution planning progressing with monitoring phases to mid-2026. ### Data adequacy and recent data developments - Data adequacy: - Data provided to the Fund are adequate for surveillance, with some shortcomings (notably NBFI sector coverage). - ABS launched monthly CPI in November 2025. - Selected macro datapoints (December 2025 / recent): - CPI inflation: 3.8 percent y/y in December 2025 (up from 3.4 percent in November 2025). - Trimmed mean quarterly underlying inflation (December quarter): 3.4 percent y/y (up from 3.0 percent in September quarter). - Unemployment rate: 4.1 percent in December 2025 (from 4.3 percent in November 2025). - RBA cash rate: lowered to 3.6 percent by August 2025 then raised to 3.85 percent on February 3, 2026 (as reported). - Key projections excerpt (Table 1, selected): - Real GDP (annual percent change): 2025 1.9; 2026 2.1; 2027 2.2; 2028 2.2; 2029 2.3; 2030 2.3; 2031 2.3. - Unemployment (percent): 2025 4.3; 2026 4.4; 2027 4.4; 2028 4.4; 2029 4.4; 2030 4.5; 2031 4.5. - Consumer prices (avg): 2025 2.8; 2026 3.4; 2027 2.7; 2028 2.5; 2029 2.5; 2030 2.5; 2031 2.5. - Household debt (percent of disposable income): 2025 181; 2026 176; 2027 175; 2028 175; 2029 178; 2030 175; 2031 177. - Nominal GDP (bn A$): 2025 2,853; 2026 3,000; 2027 3,134; 2028 3,274; 2029 3,425; 2030 3,582; 2031 3,746. - Fiscal projections (selected): - General government net lending/borrowing (percent of GDP): 2025 -3.2; 2026 -2.9; 2027 -2.0; 2028 -1.9; 2029 -1.8; 2030 -1.5; 2031 -1.4. - Gross debt (percent of GDP): 2025 50.0; 2026 51.4; 2027 51.5; 2028 51.2; 2029 50.6; 2030 50.1; 2031 49.4. - NIIP (percent of GDP): 2025 -23.5; 2026 -24.4; 2027 -25.6; 2028 -26.8; 2029 -27.9; 2030 -29.1; 2031 -30.2. *Source: IMF staff report chapter — "1. Economic Imbalances Narrowing as Recovery Commences" (selected excerpts).* ### 1. Economic Imbalances Narrowing as Recovery Commences ___________________________________ 30 ### 1. Economic Imbalances Narrowing as Recovery Commences ### Context: embarking on a bold reform agenda - Following the federal election in May 2025, authorities signaled renewed focus on domestic structural challenges amid lower inflation and narrowing economic imbalances. - Underlying (trimmed mean) inflation declined – albeit unevenly – since 2024Q2; unemployment remained low and the output gap narrowed, prompting a gradual return of the macroeconomic policy mix toward neutral. - The RBA has gradually eased policy towards neutral after a period of tight monetary settings. - Counter-cyclical fiscal policy fueled growth in public demand during 2024; fiscal policy normalization, accompanied by monetary easing, is supporting a gradual handover from public to private demand. - Structural challenges highlighted: stagnant productivity growth and rising structural spending pressures. - August 2025 economic reform roundtable goals: boosting productivity, maintaining fiscal sustainability, ensuring economic resilience; suggested reforms to regulation, housing, AI adoption, skilling, public service modernization; fiscal reforms to boost productivity and tackle intergenerational inequity. - Government commitments (as described): reduce labor taxes, support first-time home buyers, increase health care funding, review R&D, reform competition policy, invest in the net zero transition. - Authorities pursuing trade and economic diversification, leveraging free trade agreements and boosting domestic productivity to mitigate global risks. ### Recent developments: a gradual return to balance - Real GDP growth: - Reached 2.1 percent y/y in 2025Q3 after modest increase in 2024. - Private consumption: - 2.5 percent y/y in 2025Q3, supported by stronger real disposable income (in part due to real wage growth and Stage 3 tax cuts). - Dwelling investment: - Surged to 6.5 percent y/y by 2025Q3. - Housing prices and supply: - National dwelling prices: increased by 1.1 percent in November (7.4 percent y/y rise). - Annualized completions: around 180,000, below peak 2016 levels and below the target pace needed for 1.2 million new homes over five years starting in 2024 under the National Housing Accord. - Housing affordability: requires 47 percent of median household income for new mortgages and 24 percent for rent. - Time to save for a 20 percent down payment: 11 years. - Labor market: - Unemployment rate: rose gradually to 4.3 percent by October 2025. - Private sector wage growth: slowed to 3.4 percent in 2025Q3. - Pockets of labor shortages persist, including in construction. - Inflation and monetary policy: - Underlying inflation fell below 3 percent y/y in 2025Q1 (first time since 2021), slowed further in 2025Q2. - RBA reduced policy rates by a total of 75 basis points through August, to 3.6 percent. - Underlying inflation rose to 3.2 percent y/y by November 2025; headline inflation volatile: - Headline CPI: 2.1 percent in 2025Q2, rising to 3.4 percent y/y by November 2025 (above RBA’s target band of 2 to 3 percent). - One-off factors and re-emergent service and new dwelling pressures contributed to the rise. - Financial conditions and sector resilience: - Lower interest rates passed to borrowers; credit growth rebounded in business and housing sectors. - 90+ day arrears rate: below 1 percent. - Banks: capital and liquid assets well above regulatory requirements; profitability robust; lending standards sound. - Superannuation funds navigated April 2025 market volatility; large temporary valuation fluctuations in overseas investments. - Fiscal position: - Consolidated government fiscal stance: broadly neutral in FY2025/26 following countercyclical loosening in FY2024/25. - Cyclically adjusted primary balance: estimated broadly stable between FY2024/25 and FY2025/26. - External position: - Current account: deficit widened to 2.2 percent of GDP in 2024, largely stabilized through 2025Q3. - NIIP: improved by 6 percent of GDP since end-2023 due to valuation effects, primarily from US equities. - Composition of external liabilities/assets: most AUD-denominated or hedged (liabilities) and most FX denominated (assets), limiting depreciation vulnerability. - Data and institutional progress: - ABS finalized monthly CPI data launched in November 2025. - Progress implementing FSAP recommendations, including AML/CFT, systemic risk analysis, supervisory and resolution frameworks. - Authorities tightened foreign bribery risk assessment in procurement, expanded AML/CFT obligations to DNFBPs, committed to a publicly accessible beneficial ownership registry. ### Outlook and projections - Growth: - Staff project growth to rise to 2.1 percent in 2026 (from 1.9 percent annual average in 2025). - Potential output growth estimate: stabilize around 2.1-2.2 percent in the near term. - Structural reforms could augment TFP and raise potential output growth toward the end of the decade. - Inflation: - Expected to gradually converge toward the midpoint of the RBA’s 2-3 percent target band by 2027H2. - Headline inflation to remain temporarily above underlying inflation due to expiration of electricity rebates and other one-offs. - Wage growth expected to ease further given low productivity growth and easing pressures from backward-looking pay setting methods. - Current account: - Expected to remain in deficit into the medium term. - Slight recovery in commodity prices forecast in 2026, but softening demand in key trading partners to contain export growth. - Medium-term headwinds: slowing and greening steel production (especially in China) weighing on metallurgical coal and seaborne thermal coal trade. - Offsetting trends: reshoring, rising global defense spending, data center boom supporting demand for steel and critical minerals. - Fiscal outlook: - Consolidated government fiscal deficit projected to gradually narrow over the medium-term. - Fiscal impulse from the consolidated government: expected to be -0.2 and -0.9 percent of potential GDP in FY2025/26 and FY2026/27, respectively. - General government public debt remains low; sovereign stress risk assessed as low. ### Risks - Overall assessment: - Risks to growth: tilted to the downside. - Risks to inflation: upside risks dominate. - External risks: - Global trade tensions, prolonged trade policy uncertainty, global financial turmoil could weigh on demand and employment. - Commodity price volatility poses fiscal, external, and inflationary risks. - Persistent trade diversion could generate disinflationary pressures. - Upside scenarios: deeper regional integration and new trade deals could diversify exports and boost resilience. - Medium-term climate exposure: large-scale climate events and declines in coal demand amid energy transition. - Domestic risks: - Inflationary pressures may prove more persistent if the job market drives stronger labor cost growth. - Supply capacity constraints could raise price pressures as private demand accelerates. - Slower-than-expected private demand recovery could lead to a sharp rise in unemployment. ### Policy guidance: managing normalization and delivering reforms - Near-term policy mix: - Monetary policy: support descent of inflation toward the midpoint of the target band. - Fiscal policy: focus on rebuilding buffers and gradual consolidation. - Macroprudential policy: manage financial stability risks, especially given a strong housing market, monetary adjustments, and heightened global uncertainties. - Medium-term priorities: - Turn structural reform ambition into action to close the productivity gap and build long-term resilience. - Prioritize reforms in housing, AI adoption, skilling, public service modernization, competition policy, and net zero transition to boost TFP and potential growth. *Source: IMF staff report chapter — "1. Economic Imbalances Narrowing as Recovery Commences" (selected excerpts).* ### 18. All policy levers are appropriately returning to near-neutral settings as the economy is ### 18. All policy levers are appropriately returning to near-neutral settings as the economy is closer to balance. ### Macroeconomic stance and near-term guidance - Monetary stance: expected to remain "just above or in neutral territory" as inflation gradually converges toward the midpoint of the target band and unemployment stabilizes. - Fiscal stance: starting in FY2026/27, a gradual fiscal consolidation is planned to: - facilitate a handover from public to private demand, - rebuild fiscal buffers, - support external stability, and - moderate pressure on the current account. - Staff support the planned pace of adjustment given: - recovery of private sector activity, - the need to unwind temporary cost-of-living measures and normalize elevated infrastructure spending, - importance of rebuilding fiscal buffers over the medium term. ### Scenario analysis and contingent policies for external shocks - Given high uncertainty, scenario analysis enhances countercyclical policy responses to external shocks. - Under staff’s illustrative adverse global scenarios underpinned by WEO-GIMF simulations (Annex I), a combined shock of higher tariffs, higher policy uncertainty and tighter global financial conditions would have a significant, yet broadly manageable, impact on Australia’s growth and inflation. - Key policy roles in downside scenarios: - Exchange rate adjustments to absorb external shocks. - Accommodative monetary policy to offset negative output and employment impacts; speed and scale of easing weigh price stability and employment under RBA’s dual mandate. - Fiscal automatic stabilizers to protect vulnerable households and provide counter-cyclical demand support. - Sectoral fiscal support should be timely, targeted and temporary; displaced workers assisted via unemployment benefits and reskilling. - Financial sector policy should consider global linkages and vulnerabilities in housing and household sectors; consider tightening and broadening macroprudential tools in the context of monetary easing. ### Authorities’ views on contingency and capacity - Authorities concurred with staff on contingent policies and emphasized preparedness due to: - ample fiscal and monetary space, - robust institutions, - a strong credit rating, - low unemployment. - Discretionary fiscal measures may be needed if conditions deteriorate beyond RBA’s capacity; authorities favor timely, targeted, temporary interventions (citing past crisis and pandemic examples). - RBA emphasized responses depend on shock nature and transmission channels (e.g., trade tensions: demand vs supply effects). - Financial regulators are using stress tests to assess transmission channels; RBA stands ready to meet higher liquidity demand through regular operations and other tools in severe stress. ### Calibrating monetary policy normalization under elevated uncertainty - Recent monetary actions and assessment: - RBA eased later and less aggressively than many peer AE central banks. - Easing cycle included three 25 bps reductions in the cash rate target set several months apart from February 2025 to August 2025. - RBA kept policy rates on hold at the last three MPB meetings of 2025, at 3.6 percent. - Staff assess the NAIRU at around 4.2 percent, but within a range of 3.9 to 4.5 depending on modeling assumptions. - Current stance and considerations: - Cash rate target at 3.6 percent by end-2025. - Staff-assessed neutral interest rate range: 2.9-3.4 percent. - Non-linearities in transmission mean pass-through of easing will continue into next year; implications for wages and prices. - Policy guidance depending on data: - If data signal slight residual tightness → maintain current settings. - If price pressures strengthen or private demand picks up faster → more restrictive policy warranted. - If conditions soften faster → slightly more accommodative stance may be warranted. ### Monetary transmission and labor-market interactions - Transmission observed: - Borrowing costs for households and businesses declined with cash rate cuts; credit growth has picked up. - Consumption growth for mortgage-holder households has outpaced non-mortgage holders since 2025Q2. - Rising household savings contained initial consumption response, possibly reflecting balance sheet rebuilding or mortgage payment frictions. - Dwelling investment benefiting from lower rates; non-dwelling investment reaction delayed despite strong credit growth—may reflect elevated uncertainty. - Medium-term (market-implied 2-year ahead) inflation expectations have remained well-anchored. - Research insights (IMF–RBA joint research): - Tight monetary policy and rising costs of living may have increased labor supply among credit-constrained households; this may unwind as conditions normalize. ### Communication, transparency, and framework reforms - Communication recommendations: - Publish detailed alternative scenarios in the Statement on Monetary Policy (SMP) responding to elevated global uncertainty. - Increase clarity around key judgements and the broad direction of policy. - Increase public engagements by MPB members to better anchor expectations between meetings. - Framework reforms and progress: - Transition toward an ‘ample reserves with full allotment’ system ongoing; related Open Market Operations changes took effect April 9. - Significant progress implementing recommendations from the 2023 RBA Review; remaining components to bolster operational independence include: - Establishment of the MPB separate from the Governance Board (established March 2025; RBA Act amended end-2024). - Clarification in amended RBA Act (Section 25AK) and the Statement on the Conduct of Monetary Policy that the Treasury Secretary acts in an individual capacity as ex-officio MPB member. - Work underway on monetary-fiscal engagement, development of economic models, joint scenario analyses, and a framework for future additional monetary tools; an Expert Advisor Group to be convened. - Repeal of Treasurer’s override power would further strengthen independence, though authorities do not view repeal as a current priority. - RBA’s stated stance: - Judicious, data-driven policy to bring inflation to midpoint of target band. - Some residual excess demand persists (particularly in labor market), so neutral or slightly tighter stance currently appropriate. - Future adjustments contingent on incoming data, including new complete monthly CPI. ### Fiscal position, priorities, and medium-term consolidation - Recent fiscal performance and pressures: - Commonwealth built a strong fiscal position with two fiscal surpluses post-pandemic before countercyclical loosening in FY2024/25. - Expenditure grown by 1.9 percent as a share of GDP in the last two years, driven by NDIS, debt interest, defense, health and aged care cost pressures. - Revenue growth exceeded Treasury forecasts due to higher receipts in corporation tax, income tax withholding, and superannuation funds—reflecting robust labor market and delayed commodity-price effects. - Net debt notably reduced; Australia remains one of ten countries with AAA ratings from all major agencies. - Long-term headwinds: spending on these items projected to rise by 5.6 percent of GDP by 2062/63 (Intergenerational report, 2023). - FY2025/26 budget and measures: - Broadly neutral fiscal stance in FY2025/26 as economy returns to internal balance. - Budget aims to rebuild fiscal buffers, tackle structural pressures (care and disability), protect vulnerable households, and enhance productivity. - Measures include extension of untargeted universal energy rebates until December 2025, and a tax cut lowering the minimum personal income tax rate from 16 percent to 15 percent in FY2026/27, and further to 14 percent in FY2027/28—disproportionately benefiting lower income workers. - Fiscal policy used to address low productivity via infrastructure, net-zero transition initiatives, and processing support for critical minerals. - Medium-term fiscal consolidation guidance (begin in FY2026/27): - Prioritize spending efficiency and rebuild buffers while promoting productivity growth. - Specific guidance: - Expenditure prioritization: protect infrastructure spending for productive capacity but prioritize and coordinate to avoid overruns; phase out residual cyclical discretionary support; move cost-of-living support toward fully targeted measures. - Revenue reform: address high reliance on direct taxes and relatively high effective cost of capital to support investment and productivity. Options include increasing GST rate and removing GST exemptions offset by Corporate Income Tax (CIT) adjustments (e.g., allowance for corporate equity and/or lowering CIT rate, coupled with adjustments to resource rent taxes). Productivity Commission’s cash flow tax plus CIT cut is an alternative but carries implementation risks. Phase out tax breaks including superannuation concessions and capital gains tax discount to improve equity and efficiency. - External imbalances: planned gradual medium-term consolidation could help moderate current account pressure. - Fiscal anchor: maintain or adopt clearer fiscal anchors if structural spending pressures intensify to safeguard sustainability. *International Monetary Fund — Australia: selected chapter content excerpt* ### 31. New spending commitments, including on infrastructure and social protection, have ### 1ausea2026001-source-pdf - 31. New spending commitments, including on infrastructure and social protection, have ### Sub-national fiscal developments - New spending commitments, including on infrastructure and social protection, have led to rising sub-national debt levels and missed fiscal targets. - Temporary cost-of-living support (such as energy rebates) have mostly ended, but some new social spending remain. - Infrastructure investment surged and is expected to remain elevated, backed by Commonwealth grants. - The sub-national share of consolidated government net debt has risen to an estimated 30 percent in FY2024/25. - Fiscal disparity has grown: robust commodity prices favor resource-rich states; elevated expenditures have weakened fiscal positions in other regions. - In level terms, the largest state fiscal deficits have occurred in large states (NSW, VCT), while smaller administrations (Northern Territory, Tasmania, South Australia) have experienced equally rapid debt growth relative to their output. - All states have some form of self-imposed fiscal targets, but compliance has been mixed, leading to target revisions in recent years. - Credit rating agencies are increasingly differentiating risk levels from sub-national debt, including several downgrades, despite currently strong credit ratings. - Although debt levels remain below many international peers and do not present a significant sovereign risk, the speed of accumulation is noteworthy and could lead to inefficiency from rising construction costs and additional credit rating downgrades that raise interest expenses. - As the Commonwealth is viewed as a de facto guarantor of state debt by some credit rating agencies, higher sub-national debt could eventually impact Commonwealth borrowing costs. - Footnote in text: "The government has announced plans to introduce an additional 15 percent tax on realized superannuation earnings that exceed AU$3 million, and a further 10 percent on earnings above AU$10 million." ### Nationwide fiscal coordination and oversight - Nationwide coordination of fiscal strategies and refinement and oversight of medium-term fiscal frameworks can improve efficiency and equity across the federation. - Climate governance example: Commonwealth holds significant fiscal, bureaucratic, and jurisdictional powers, whereas subnational governments largely bear responsibility for climate action (water management, transition in the electricity sector). - Many tax reforms (especially related to GST reform) necessitate agreements across the federation given diverse state circumstances. - The Council on Federal Financial Relations (CFFR) is identified as an appropriate venue for nationwide fiscal strategy discussions; Infrastructure Australia plays an overarching role to reduce inefficient spending risks. - Suggested measures to strengthen subnational frameworks: - Fiscal coordination: - Sub-national governments should set fiscal objectives transparently in partnership with the central government to achieve nationwide fiscal sustainability. - The Commonwealth could offer stronger guidance on state finances and borrowing while states can apply lessons from the Commonwealth’s focus on transparency, independent oversight, and robust budget processes. - A review of spending and revenue policies across the federation is warranted to support fiscal coordination, including fiscal equalization, GST reform, and land tax. - Example: Increasing GST revenue could be offset by reducing inefficient state taxes such as fees and stamp duty. - Improved coordination on infrastructure spending could address pressures on the construction sector and help control cost overruns. - Fiscal oversight: - Expand the Parliamentary Budget Office (PBO)’s mandate to assess subnational fiscal positions and monitor indicators at high frequency (subnational debt, debt servicing costs, structural deficits, vertical imbalances). - Strengthen ties between the PBO and state fiscal councils. - The Commonwealth could increase transparency by reporting aggregate and individual state fiscal positions in the Budget, possibly within the fiscal risks statement. - If states continue to miss targets, implement a risk-based monitoring framework by the Commonwealth. ### Authorities' views on fiscal policy - The authorities largely concurred with staff fiscal projections and the general direction of fiscal policy advice. - Commonwealth Treasury anticipates a broadly neutral near-term Commonwealth fiscal stance, followed by a period of rebuilding fiscal buffers. - Authorities emphasized recent tax system reforms: changes to income tax settings, production tax incentives, reformed offshore gas regimes, and superannuation tax changes. - Any future tax reform will target intergenerational equity, incentivizing investment, and simplification of the system. - Authorities highlighted significant reforms to aged-care and NDIS expected to pay off in the medium-term. - The Commonwealth regards the current principle-based fiscal strategy (constraining spending to ensure a downward trajectory on debt) as effective and continues to monitor subnational fiscal outcomes and collaborate with states and territories to align nationwide fiscal goals. ### Financial stability and macroprudential policy - The financial system remains sound with contained systemic risks but pockets of vulnerabilities from global uncertainties and market volatility (including trade tensions and geoeconomic fragmentation). - The 3-percentage-point mortgage serviceability buffer requirement, last tightened during the 2020-22 easing cycle, has helped uphold lending standards and keep risky loans relatively low. - High debt-to-income (DTI) and investor lending are driving current momentum in housing credit growth and historically react strongly to easing financial conditions. - Authorities introduced a 20-percent limit on new high DTI (>6x) mortgage lending to preempt further buildup of associated vulnerabilities. - The new DTI limit was introduced in November 2025 and will take effect in February 2026. - While not currently binding at the aggregate level, the limit can be more relevant in the near-term for investors, for whom the share of high DTI lending is higher compared to owner-occupiers. - The large and growing size of superannuation funds and their strong connections with domestic banks pose potential risks of amplifying financial stresses, especially in extreme scenarios involving liquidity drains or rapid liquidation of large holdings of bank equity and debt. - The share and interconnectedness of non-bank lenders remain lower than pre-GFC levels but are rising and should be closely monitored, particularly for mortgages and commercial real estate. - Staff view current macroprudential settings as broadly appropriate given negative credit-to-GDP gap, sound bank lending standards, low NPLs, and declining household debt as share of disposable income, but note increased lending in riskier forms. - Recommendations: - Continue vigilant monitoring of evolving financial sector vulnerabilities (real estate markets, global policy uncertainty, market volatility, growth slowdown among trading partners). - Maintain an agile macroprudential policy approach with the option to expand or tighten borrower-based limits when necessary. - Leverage Financial Stability Board deliberations to tighten regulation and supervision of NBFI leverage and liquidity imbalances and close remaining data gaps. - APRA is conducting its inaugural financial system stress test (focusing on superannuation sector liquidity stress) with final results expected in 2026. ### Housing supply and affordability - Long-standing imbalance between housing demand and supply persists despite easing cyclical conditions. - Demand-side notes: - Growth in underlying housing demand has eased somewhat with slower population growth and a slight increase in average household size. - The 5% Deposit Scheme aims to support first-home buyers but may pull forward purchases and contribute to near-term price pressures. - Supply-side constraints: - Structural barriers include shortage of skilled workers, limited and costly land for development, low productivity and innovation in construction, and complex regulations and approval processes. - New housing supply started to pick up as material and financing cost constraints began to alleviate. - Commonwealth commitments and actions: - Committed AU$10 billion over eight years to provide 100,000 new homes for first-home buyers and expanded the existing 5% Deposit Scheme. - Maintaining funding support for state and territory governments to deliver essential housing infrastructure and new social and affordable homes. - Investing in advanced manufacturing for prefabricated and modular construction to enhance productivity and reduce building times. - Prioritized clearing approvals backlog for homes following the Economic Reform Roundtable in August. - Restricted foreign purchases of existing dwellings by instituting a temporary ban for at least 2 years from April 1, 2025 to March 31, 2027 unless an exception applies; staff note this tightening is assessed to be inconsistent with the IMF’s Institutional View and encourage replacement with measures that support supply and affordability without discriminating by residency. - Additional Commonwealth initiative: - The Commonwealth Government’s $45 billion Homes for Australia plan aims to support the national target of 1.2 million new homes. - Recommended holistic strategy to boost supply and affordability: - Steadfastly implement the commitment to deliver 100,000 homes for first-home buyers or consider limiting the guarantee program to new dwellings. - Boost construction productivity and workforce via training and skilled migration. - Incentivize build-to-rent investments and expand social and affordable housing. - Relax zoning and building restrictions, expedite approval and land release processes (drawing inspiration from Canada and New Zealand). - As part of comprehensive tax reform, consider replacing stamp duties with recurring property taxes and review tax arrangements affecting housing demand and investment, redirecting potential fiscal savings to support new housing supply. - Authorities concurred with staff that increasing supply is critical and highlighted efforts to remove structural barriers, encourage zoning reforms, clear approvals backlog, and improve construction productivity through advanced building methods and skills development. ### Structural reforms and productivity - Australia’s productivity growth has been weak over the past decade and has contributed to slow economic growth. - Factors behind productivity stagnation include: - Slow adoption of new technologies. - Fading business dynamism. - Inefficiency in capital reallocation. - Since 2020, average working hours in the non-market sector have grown faster than the market sector, weighing on aggregate productivity. - Within the market sector, more than half of industries recorded growth below their 20-year average over the past three years. - The non-market sectors have recorded negative productivity growth in recent years. - Authorities’ multi-pronged strategy (Productivity Commission’s Advancing Prosperity report) includes corporate tax reform, reducing regulatory burdens, advancing digitalization and AI adoption, accelerating the clean energy transition, efficient education and training, and improved care services delivery. - After the August 2025 Economic Reform Roundtable, near-term reform priorities include implementing a road-user charge, eliminating nuisance tariffs and duplicative rules, modernizing construction codes but pausing non-urgent updates until mid-2029, and designing a national AI strategy. - Staff emphasize the importance of maintaining momentum with clear implementation plans. *Sources: Haver Analytics, S&P (as of Nov 30, 2025) and IMF staff calculations.* ### 42. Prioritizing and bundling of reforms will be important to maximize synergies and help ### Prioritizing and bundling of reforms will be important to maximize synergies and help ### Reform priorities and overarching recommendations - Focus on easing overarching binding constraints across sectors and states that hinder productivity growth. - Prioritize three reform areas for close attention due to recent momentum and potential reinforcement effects: - Regulatory compliance costs - Skills mismatch - Falling innovation - Reforms should be well-sequenced and cross-cutting measures combined into coherent policy packages that generate synergies, supported by clear implementation plans. - Streamline regulations, leverage technology adoption, and advance labor market reforms as overarching binding constraints to growth. - Green transition and the 2035 climate commitments present opportunities for investment and diversification. - Industrial policy should remain time-bound, narrowly targeted, cost-effective, transparent, and include institutional safeguards for implementation risks and WTO compliance. ### Leveraging technology adoption and innovation - R&D supports productivity through adoption and development of new technologies; Australia’s R&D investment as a share of GDP has fallen over the last 15 years. - Australia’s strong AI preparedness (2024 AIV Staff Report Annex VIII) suggests faster adoption of AI, coupled with strengthened safety nets for displaced workers, could help unleash productivity gains. - The National AI Plan (through 2030) sets three pillars: 1. Fostering a competitive AI ecosystem by expanding digital infrastructure, boosting local R&D, and drawing international investment. 2. Broadening benefits through industry AI adoption, digital skills improvement, and modernized public service delivery. 3. Ensuring safety by establishing an AI Safety Institute, strengthening ethical and regulatory safeguards, and aligning Australia with global AI standards. - Existing initiatives to advance AI and innovation include the National Reconstruction Fund, AI R&D tax incentives, the National AI Centre, AI Adopt Centers (introduced in 2024), and the Investor Front Door pilot. - Strengthening the innovation ecosystem through networks for knowledge transfer, access to skills and finance could bolster economywide productivity. ### Boosting competition and business dynamism - A task force to identify priority competition policy reforms based on data-driven analysis and global best practices is showing promise. - From 2026, Australia moves to a mandatory suspensory merger reporting regime to reduce inefficiencies in regulatory oversight. - Significant measures include banning non-compete clauses for low- and middle-income workers, banning wage fixing arrangements and no-poach agreements starting 2027 to improve labor mobility and wages. - A National Productivity Fund will disburse one-off payments to states and territories conditional on reform delivery to strengthen incentives for subnational reform. - Ongoing consultations on harmonizing occupational licensing and standards and moving toward a single national market could further boost labor mobility and amplify gains from competition reforms. ### Labor markets and human capital - Initiatives underway: expanding early childhood education quality, supply and accessibility; establishing Jobs and Skills Australia to advise on workforce, skills, and training needs. - Sustained investment required in education and training, international visa frameworks to address skill gaps, and policies that support inclusive labor market access. - Modernized public employment services, digital job-matching platforms, and relocation assistance can facilitate mobility from declining to expanding sectors. - Flexible work arrangements can boost productivity by improving labor allocation, retaining vulnerable workers (especially women), and enabling welfare-improving wage agreements. ### Climate transition, emissions targets, and implications for productivity - Australia’s 2030 climate targets will raise renewable energy to 82 percent of electricity generation. - The 2035 goal aims for a 62–70 percent emissions cut from 2005 levels and will require strong and consistent policies. - Staff analysis: upgrading the capital age and share of intangible assets of the bottom 50 percent of firms in select industries to median industry levels could: - raise total factor productivity by 1–2 percent - reduce emissions by 4–7 percent (Annex IX) - Policy tradeoffs: - Carbon pricing is more fiscally efficient overall. - Investment subsidies support firms’ technology adoption, boosting profits and long-run consumption, but entail additional fiscal costs. - Fossil export demand faces downside risks; Australia’s domestic reserves of critical minerals and potential sector expansion could support export diversification, reduce the current account deficit, and partially offset transition costs (Annex IX). - Reforms should prioritize domestic diversification, address supply chain vulnerabilities, and expand economic and trade partnerships. ### Industrial policy (IP) guidance - Future Made in Australia (FMiA) Bill approved in late 2024 establishes production tax incentives for renewable hydrogen production and processing and refining of critical minerals, effective from 2027 through 2040, with incentives accessible for up to ten years per project. - IP should maintain a disciplined and narrow focus on addressing market failures and generating positive externalities, with cost-benefit analysis and performance monitoring to mitigate risks. ### Authorities’ views and commitments - Authorities agreed improving productivity should remain at the forefront of the government’s policy agenda. - The August 2025 Economic Reform Roundtable produced a prioritized list of ten reform directions with consensus, emphasizing policy coordination toward a single national market, reduced duplication of regulations, skilled and adaptable workforce development, and National Competition Policy’s role. - The government released the National AI Plan on 2 December 2025, setting Australia’s vision for an AI-enabled economy and using existing regulatory frameworks to address AI harms. - Authorities reiterated commitment to the energy transition and the Net Zero 2050 goal; indicated Australia is on track to meet its 2030 target and highlighted the 2035 goal of reducing emissions by 62–70 percent below 2005 levels. - The United States–Australia Framework for Securing of Supply in the Mining and Processing of Critical Minerals and Rare Earths includes commitments; the authorities indicated Australia will provide at least $1 billion for projects by April 2026. ### Staff appraisal — macroeconomic stance and risks - Australia is managing a soft landing amid an uncertain global outlook; the economy is returning to internal balance amid uncertainty about residual excess demand and supply capacity amid weak productivity growth. - Resilient labor markets and growth in disposable incomes have supported consumption growth; private investment and sentiment are rebounding. - Risks: a slower-than-expected winddown of public demand, pockets of tightness in the labor market, and rising labor costs could strengthen price pressures. - External position: moderately weaker than the level implied by medium-term fundamentals and desirable policies; external asset and liabilities balances are well-hedged. ### Policy recommendations — near-term macro and prudential - Near-term macroeconomic policies should remain agile and responsive to external shocks; monetary and fiscal policies are appropriately returning toward neutral settings but require continued vigilance. - Monetary policy should remain data-driven: - If data signal residual tightness, the RBA should hold off on further monetary easing. - Strengthening price pressures or faster-than-expected private demand pickup that signals inflation entrenchment would warrant a more restrictive setting. - Repealing the Treasurer’s power to override monetary policy decisions would further bolster central bank independence. - Planned medium-term fiscal consolidation should begin in FY2026/27 and aim to enhance productivity and support growth. - Consolidation is broadly aligned with IMF advice given private sector recovery, the need to unwind cost-of-living measures, normalize infrastructure spending, and rebuild fiscal buffers. - A comprehensive tax reform package could boost efficiency, productivity and intergenerational equity; reductions of corporate and labor taxes could be offset by an increase in indirect taxation. - Expenditure reforms should target efficiency savings in growing cost areas and protect productive infrastructure investment. - Nationwide coordination of fiscal strategies and refinement of fiscal frameworks are needed to address rising state and territory debt, missed sub-national fiscal targets, and widening sub-national disparities; regular assessment and publishing compliance with sub-national fiscal targets could improve transparency. - Regulators must remain vigilant for financial stability: - Ongoing banking-sector stress tests and close monitoring of emerging risks are critical. - A system-wide stress test will improve understanding of interconnections across banks and superannuation funds. - As financial conditions ease and housing prices rebound, regulators should continue agile macroprudential adjustments. ### Housing supply and tax recommendations - A holistic strategy is crucial to overcoming structural barriers to new housing supply: - Carry through supply-boosting initiatives on social housing, supporting infrastructure, and advanced construction methods. - Concerted efforts across levels of government are needed to meet national housing targets and improve affordability. - Focus on easing zoning and building restrictions, expediting land release and approval processes, and enhancing construction productivity. - Authorities are encouraged to consider shifting away from stamp duties to recurring property taxes and reviewing other housing tax arrangements as part of comprehensive tax reform. *Source: IMF staff analysis and authorities’ views as presented in the provided chapter excerpt.* ### 55. It is recommended that the next Article IV consultation be held on the standard ### It is recommended that the next Article IV consultation be held on the standard 12-month cycle. ### Economic recovery and imbalances - A gradual handover from public to private demand as the central growth driver is underway. - Inflation has declined, supported by services disinflation, but a recent uptick signals some persistent pressures. - Net migration has declined and is stabilizing near pre-pandemic levels. - Labor productivity decline persists, while wage growth is slowing more gradually, leading to rising unit labor costs. ### Labor market - Labor market conditions easing gradually, with unemployment picking up but underemployment stable. - Labor Market Indicators (Percent, seasonally adjusted): charts shown for Unemployment (in % of labor force), Underemployment (in % of labor force)-RHS, Youth Unemployment-RHS (source: ABS). ### Monetary policy and financial conditions - The RBA commenced a gradual easing in February 2025, cutting the cash rate by 75 bps over the year. - Long-term yields declined on the back of monetary easing, depicting divergence from US yields. - Lending rates have declined in line with monetary easing. - Credit growth is picking up, driven by business and housing credit. - Liquidity remains ample. - The Reserve Bank is continuing to reduce asset holdings, although at a slowing pace. - Financial Conditions: equities have rebounded from the spring 2025 decline; the yield curve shifted up and steepened over 2025; corporate bond spreads remain near their tightest levels; the Australian dollar has appreciated recently. ### Housing market - Housing prices have increased further under remaining policy easing. - Supply of new homes is slowly coming on stream as approvals and completions improve and normalize toward pre-pandemic levels. - Residential Rental Vacancies: series shown for AUS, Sydney, Melbourne, Perth, Brisbane. - Household debt remains high in Australia: - Household Debt (In percent of disposable income) series presented, with comparisons to OECD peers (2025Q3 or latest available). ### Banking sector resilience - The banking sector remains resilient. - Funding costs have retreated from their post-pandemic peaks. - Bank reserves continued to normalize toward pre-pandemic levels. - Business bankruptcy has inched up but remains at low levels; credit default swap spreads remain tight. ### Fiscal position - Following a significant pandemic fiscal expansion, Australia made a sizeable consolidation. - FY2024/25 saw an increase in primary expenditure which created a modest positive fiscal impulse. - A gradual fiscal consolidation is expected across general government into the medium term. - Net debt is forecast to gradually decline, but the composition is shifting towards sub-national debt. ### External position - The evolution of the current account deficit reflects movements in commodity prices and exports. - The NEER declined slightly since 2024, consistent with monetary easing, while terms of trade moved sideways. - Arrivals and departures are back to pre-pandemic levels. - Despite current account deficits, the NIIP is improved from past years, reflecting valuation effects on equity holdings. ### Key projections and statistics (selected from Table 1: Australia: Main Economic Indicators, 2021-2031) - Real GDP: 2021 5.4, 2022 4.2, 2023 2.1, 2024 1.0, 2025 1.9, 2026 2.1, 2027 2.2, 2028 2.2, 2029 2.3, 2030 2.3, 2031 2.3 (Annual percent change). - Domestic demand: 2025 2.2. - Private consumption: 2025 2.0. - Unemployment (percent of labor force): 2025 4.3, 2026 4.4, 2027 4.4, 2028 4.4, 2029 4.4, 2030 4.5, 2031 4.5. - Consumer prices (avg): 2025 2.8, 2026 3.4, 2027 2.7, 2028 2.5, 2029 2.5, 2030 2.5, 2031 2.5. - Core consumer prices (avg): 2025 2.8, 2026 3.0, 2027 2.7, 2028 2.5, 2029 2.5, 2030 2.5, 2031 2.5. - 10-year treasury bond yield (percent, avg): 2025 4.4, 2026 4.5, 2027 4.4, 2028 4.3, 2029 4.4, 2030 4.3, 2031 4.3. - Mortgage lending rate (percent, avg): 2025 8.0, 2026 7.9, 2027 7.7, 2028 7.6, 2029 7.4, 2030 7.3, 2031 7.1. - Credit to the private sector (percent change): 2025 5.6, 2026 5.4, 2027 4.8, 2028 4.8, 2029 5.0, 2030 4.8, 2031 5.0. - House prices (% change): 2025 6.1, 2026 7.2, 2027 5.6, 2028 4.8, 2029 4.8, 2030 4.9, 2031 4.9. - Household debt (percent of disposable income): 2025 181, 2026 176, 2027 175, 2028 175, 2029 178, 2030 175, 2031 177. - General government net lending/borrowing (percent of GDP): 2025 -3.2, 2026 -2.9, 2027 -2.0, 2028 -1.9, 2029 -1.8, 2030 -1.5, 2031 -1.4. - Gross debt (percent of GDP): 2025 50.0, 2026 51.4, 2027 51.5, 2028 51.2, 2029 50.6, 2030 50.1, 2031 49.4. - Net international investment position (percent of GDP): 2025 -23.5, 2026 -24.4, 2027 -25.6, 2028 -26.8, 2029 -27.9, 2030 -29.1, 2031 -30.2. - Nominal GDP (bn A$): 2025 2,853; 2026 3,000; 2027 3,134; 2028 3,274; 2029 3,425; 2030 3,582; 2031 3,746. ### Monetary and financial sector (selected from Table 4, year-end) - Total assets (A$ bn): 2024 7,208; 2025 7,539; 2026 7,903; 2027 8,256; 2028 8,622; 2029 9,007; 2030 9,408; 2031 9,826. - Loans (A$ bn): 2024 4,250; 2025 4,482; 2026 4,725; 2027 4,947; 2028 5,181; 2029 5,433; 2030 5,691; 2031 5,968. - Deposits of non-banks (A$ bn): 2024 3,740; 2025 3,909; 2026 4,085; 2027 4,268; 2028 4,460; 2029 4,661; 2030 4,871; 2031 5,090. - Credit non-bank private sector growth (percent change): 2025 5.6, 2026 5.4, 2027 4.8, 2028 4.8, 2029 5.0, 2030 4.8, 2031 5.0. ### Banking sector soundness (selected from Table 5) - Regulatory capital to risk-weighted assets: 2022 17.9, 2023 17.8, 2024 20.0, 2025Q1 20.5. - Nonperforming loans to total gross loans: 2022 0.7, 2023 0.9, 2024 1.0, 2025Q1 1.1. - Liquid assets to total assets: 2022 23.2, 2023 23.7, 2024 23.8, 2025Q1 23.3. ### Illustrative adverse global scenarios (Annex I) - Scenarios built with IMF’s GIMF with global value chains for 10 regions highlighting China, the US and the euro area, along with Australia; includes endogenous monetary policy and automatic fiscal stabilizers. - Three-layer adverse global shock design: - Higher Tariffs and Supply Chain Disruptions: assumes tit-for-tat retaliation by countries other than China to the reciprocal tariffs announced on April 2 by the US; China retaliates with a 50 percentage point increase in tariffs; US counter-retaliates with same rates against all countries including China. The July 2025 WEO scenario assumes permanently higher US tariffs than baseline starting end-2025, with effective tariff rate on US imports increasing by 10 percentage points overall and tariff revenue used to pay down public debt over the WEO horizon. The July 2025 WEO scenario assumes that countries do not retaliate. - Higher global trade policy uncertainty: assumes a one-standard-deviation increase in the global economic policy uncertainty measure in Baker, Bloom and Davis (2016) in full force for two years before declining. The July 2025 WEO GIMF scenario does not consider this channel. - Tighter global financial conditions: assumes a marked decline in asset prices globally and a strong increase in sovereign and corporate spreads for three years before declining; combined effect amplified by additional tightening in global financial conditions. The July 2025 scenario does not consider this channel. - Scenarios account for Australia’s policy toolkit, institutional strength, floating exchange rate, and flexible factor and product markets; impacts expected to dissipate over the WEO forecast horizon. *Source: 1ausea2026001-source-pdf - 55.* ### 2. Main Transmission Channels: Australia is expected to be mostly impacted by weaker ### 2. Main Transmission Channels: Australia is expected to be mostly impacted by weaker ### Main transmission channels and exposure - Weaker demand for exports primarily stemming from slowing growth in key trading partners in Asia, most notably China, as well as Japan, India and Korea, and the ASEAN region, which together account for over 60 percent of its exports. - Tighter global financial conditions and rising policy uncertainty could dampen private investment and consumption in Australia relative to the baseline. - A sharp global equity selloff, similar to April 2 2 , could lead to significant losses in Australia’s domestic and offshore investments (including that of superannuation funds), potentially further dampening consumption via the wealth effect channel. - Sectoral tariffs (for example on pharmaceuticals) are an additional channel that could cause significant disruptions across pharmaceutical-related industries; however: - Pharmaceutical exports to the US account for under one percent of all Australian goods exports. - The pharmaceutical industry accounts for under 0.5 percent of total industry GVA. - These pharmaceutical tariffs are not expected to give rise to a material aggregate-wide macroeconomic impact on Australia. ### Impact on growth and inflation - Overall assessment: Given Australia’s agile macroeconomic policy toolkit, institutional strength and flexible factor and product markets, the impact of the global shocks is expected to be manageable. - Tariff layer effect: - The tariff layer alone could affect Australia real GDP level by -0.1 to 0.2 percent relative to the baseline by the end of year 2, with any positive impact likely driven by potential trade diversion and dissipating as the global recession worsens over the medium term. - Higher global policy uncertainty: - In combination with the April 2025 WEO Scenario A tariff layer would reduce real GDP in Australia by 0.4 percent relative to the baseline. - Combined shocks: - If, in addition to these layers, global financial conditions were to tighten strongly, the combined effect on Australia real GDP could be more significant. - On impact, the combined shock could lower real GDP by -0.6 percent in the next two years, or even more if the July 2025 WEO update tariff scenario were to be more accurate. - Inflation dynamics: - The impact on inflation during 2025-26 is relatively benign and inflation will stay well within the inflation target range. - This reflects monetary policy interaction with downward pressure from lower demand and a partial offset from upward pressure from higher prices for some tradable goods due to global supply chain and exchange rate adjustments. ### Labor market and financial sector effects - Labor market: - The shock is estimated to cause a 0.9 percent decline in total labor hours, which would translate into a 0.9 percentage-point increase in the unemployment rate, if only the number of jobs is the margin of adjustment. - The negative impact of the tariff shocks on the labor market is mitigated due to the Reserve Bank of Australia’s (RBA) dual mandate on price stability and employment. - The shocks would gradually fade thereafter over the forecast horizon. - Financial sector resilience: - Australia’s financial sector has proven resilient and is expected to remain stable under this adverse scenario. - APRA’s 2 2 banking system stress test considered a more economic downturn with much larger impact on Australia, and found Australian banks had sufficient capital to withstand the shock and were able to meet their liquidity obligations. - The authorities have implemented macroprudential and supervisory measures (see Annex II actions below). ### Policy responses and past actions (Annex II summary) - Fiscal policy: - With inflation moving to target, the 2024/25 countercyclical fiscal stance was broadly in line with staff advice. - Authorities used discretionary spending to support households and increase infrastructure investment during the downturn; Commonwealth energy subsidies were phased out in 2025. - Care Act and NDIS reforms and a medium-term fiscal consolidation forecast are noted. - Monetary policy: - RBA’s policy remained data dependent with inflation expected to gradually move back within the target band and employment gains largely preserved, allowing the policy rate to be cautiously reduced starting in 2025. - The RBA has enhanced communication and data-driven decision-making, including establishment of the Monetary Policy Board. - Financial sector policy: - APRA has kept its minimum serviceability buffer at 3 percent and the countercyclical capital buffer at 1 percent. - A new 20-percent limit on new high DTI lending was introduced in November 2025 to take effect in February 2026. - APRA conducted its inaugural financial system stress test in the year referenced. - Structural policies: - Authorities advancing reforms from the 2023 Advancing Prosperity report, including mandatory suspensory merger reporting (starting 2026), bans on certain non-compete and wage-fixing arrangements (from 2027), expanded early childhood education, Jobs and Skills Australia, and measures to boost the AI ecosystem (AU$1 billion National Reconstruction Fund; nearly AU$500 million in AI R&D tax incentives). - Ambitious climate targets announced with a 2035 target supported by the Future Made in Australia Act; National AI Plan through 2030. ### Fiscal and debt outlook (selected projections and indicators) - Public debt (Percent of GDP): - Actual/Projected: 2024: 50.8; 2025: 51.2; 2026: 51.0; 2027: 50.8; 2028: 50.5; 2029: 49.9; 2030: 49.2; 2031: 48.4; 2032: 47.6; 2033: 46.7; 2034: 45.7. - Change in public debt (Percent of GDP): 1.4; 0.4; -0.2; -0.2; -0.3; -0.6; -0.7; -0.7; -0.8; -0.9; -1.0 (by year as reported). - Primary deficit (Percent of GDP): 1.5; 2.0; 1.4; 1.0; 0.9; 0.7; 0.5; 0.5; 0.4; 0.3; 0.2 (by year as reported). - Gross financing needs: 9.1; 9.3; 7.4; 7.9; 8.1; 8.0; 7.7; 7.5; 7.4; 7.3; 7.3 (by year as reported). - Memo: Real GDP growth (percent) 1.0; 1.9; 2.1; 2.2; 2.2; 2.3; 2.3; 2.3; 2.3; 2.3 (by year as reported). - Commentary: Public debt increased over the pandemic, has since stabilized and is expected to gradually decline to pre-pandemic levels; public debt is held by a diversified set of creditors. ### Risk assessment and medium-term outlook - 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. - Key medium-term metrics (selected): - Probability of debt non-stabilization (percent): 63.0. - Terminal debt-to-GDP: x6.30. - Debt fanchart index (DFI): 1.1 (signal: Low). - Average baseline GFN (percent of GDP): 8.1. - GFN financeability index (GFI): 4.8 (signal: Low). - Final assessment: Prob. of missed crisis, 2025-2030, if stress not predicted: 9.1 pct.; Prob. of false alarms, 2025-2030, if stress predicted: 61.4 pct. - Commentary: Australia’s high quality institutions, strong track record and liquid domestic banking sector provide reassurance that risks are contained. *Source: IMF staff estimates and projections.* ### Annex IV. External Sector Assessment ### Annex IV. External Sector Assessment ### Overall assessment - The external position in 2025 is preliminarily assessed to be moderately weaker than the level implied by medium-term fundamentals and desirable policies; the assessment is unchanged from the previous year. - The CA deficit stabilized in 2025 and is forecast at 1.9 percent of GDP for the year. - The decline in commodity exports in 2025 was offset by lower oil import prices, strong overseas equity income, and lower payments on equity liabilities (primarily in the mining sector). - The NIIP was broadly stable in 2025, benefiting from valuation effects on overseas equity holdings. - The CA deficit is expected to widen slightly as new structural policies encourage investment; in the long-term, the decline in commodity prices and global energy transition will weigh on commodity exports. ### Potential policy responses - The planned gradual medium-term fiscal consolidation could contribute to containing the current account deficit. - New policies promoting investment may temporarily widen the deficit, but the recently launched structural policy agenda could boost competitiveness by: - incentivizing innovation, - reducing barriers to labor mobility, - boosting competition. - Industrial policies should be pursued cautiously, remain narrowly targeted to specific objectives where externalities or market failures prevent effective market solutions, and aim to minimize trade and investment distortions. - The exchange rate should continue to move flexibly as the key shock absorber. ### Foreign asset and liability position and trajectory - Background: - Australia’s II is forecast at -23.5 percent of GDP at end-2025, from -23.0 percent of GDP in 2024. - The NIIP remains significantly stronger than in the pre-COVID decade, when it averaged below -50 percent of GDP. - The improvement in the last five years has been driven by strong revaluation effects on foreign equities, and strong commodity prices supporting CA surpluses in 2021-22. - Roughly 46 percent of Australia’s gross liabilities are debt obligations, and about half of the debt liabilities are denominated in domestic currency, while assets are largely denominated in foreign currency. - Foreign liabilities composition: about one-quarter FDI, one-half portfolio investment (principally banks’ borrowing abroad and foreign holdings of government bonds), and one-quarter other investments and derivatives. - Assessment: - The II level and trajectory are sustainable. - The structure of Australia’s external balance sheet reduces the vulnerability associated with its negative NIIP. - With a positive net foreign currency asset position, a nominal depreciation would strengthen the external balance sheet. - The banking sector’s net foreign currency liability position is mostly hedged, and the maturity of banks’ external funding has lengthened since the global financial crisis. - Growing exposure to foreign equity markets in recent years (most notable for pension funds) may raise vulnerability to extreme global financial market volatility. - The government’s balance sheet remains strong and can provide credible support in a tail-risk event in which domestic banks suffer a major loss. - Key 2025 (% GDP) indicators: - NIIP: -23.5 - Gross Assets: 164.9 - Debt Assets: 38.2 - Gross Liabilities: 188.4 - Debt Liabilities: 86.7 ### Current account - Background: - Australia’s CA balance deteriorated significantly in 2024 (to -2.2 percent of GDP, from -0.4 percent of GDP in 2023), reflecting softening demand in key trading partners and a normalization in coal and iron ore prices. - The CA largely stabilized through 2025Q3 as a further decline in commodity exports and an uptick in imports were offset by lower oil import prices, strong overseas equity income, lower payments on equity liabilities (primarily for mining companies), and stronger service exports. - The merchandise trade surplus is expected to decline from 2.5 percent of GDP in 2024 to 1.9 percent of GDP in 2025. - The services deficit is expected to narrow to 1.2 percent of GDP (from 1.4 percent of GDP in 2024). - The primary income deficit is estimated at 2.6 percent of GDP for the year, primarily reflecting dividend payments on Australia’s equity liabilities, especially in the mining sector. - While a slight recovery in commodity prices is forecast in 2026, softening in demand in key trading partners will contain export growth. - New policies encouraging investment may temporarily shift the savings-investment balance, consistent with a slight widening of the CA deficit in coming years. - In the medium term, slowing and greening steel production, especially in China, is expected to weigh on Australia’s export performance as demand for metallurgical coal and seaborne thermal coal trade declines. - Emerging trends (increased reshoring, rising global defense spending, and the data center boom) should partially offset headwinds by supporting demand for steel and Australia’s critical mineral sector. - Assessment: - The EBA model estimates a CA norm of –0.5 percent of GDP, relative to the cyclically adjusted CA deficit of –2.5 percent of GDP. - This implies a model-based CA gap of –2.0 percent of GDP with a range of –2.5 to –1.5 percent of GDP. - The fiscal position, slightly looser than optimal medium-term settings, contributes to this gap, but the gap is primarily driven by country-specific factors not included in the EBA model (the residual). - Key 2025 (% GDP) indicators: - CA: -1.9 - Cycl. Adj. CA: -2.5 - EBA Norm: -0.5 - EBA Gap: -2.0 - Staff Adj: 0.0 - Staff Gap: -2.0 ### Real exchange rate (REER) - Background: - The REER weakened slightly in 2025, averaging 3 percent lower through 2025Q3 than in 2024Q4. - In nominal terms, the Australian dollar depreciated slightly in 2025 against a basket of peer currencies, averaging around 3 percent below 2024Q4 levels. - The AUD appreciated against the USD over the course of the year, reflecting weakness in the latter. - Movements likely reflect changing interest rate differentials as the RBA reduced interest rates, as well as commodity price movements. - Assessment: - The IMF staff-assessed CA gap implies a REER gap of 11.1 percent (applying an elasticity of 0.18). - The EBA REER level model points to an overvaluation of 13.9 percent, while the index model points to an undervaluation of 3.2 percent. - Consistent with the CA gap, staff assess the REER gap to be in a range of 8.3 to 13.9 percent, with a midpoint of 11.1 percent. ### Capital and financial accounts: flows and policy measures - Background: - The financial account recorded net inflows in 2025, driven by net inflows in portfolio investment and direct investment, which more than offset outflows in financial derivatives. - Net inflows in portfolio investment were driven by debt inflows, while equity flows remained negative in net terms. - 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 increased to $107 billion by 2025Q3, from $102 billion at the end of 2024. - Assessment: - The authorities are strongly committed to a floating exchange rate regime, which reduces the need for reserve holdings. - Although domestic banks’ external liabilities remain sizable, they are either in local currency or hedged. Hence, reserve needs for prudential reasons are also limited. ### Risk dynamics (high-level) - Key external risks noted that could affect the external assessment include: - Commodity price volatility and global demand slowdowns (high likelihood; moderate expected impact). - Financial market volatility and correction driven by stretched asset valuations and leverage (high likelihood; moderate expected impact). - Geopolitical tensions affecting trade and commodity prices (high likelihood; low expected impact on growth in key partners). - Climate transition risks affecting coal and energy-related exports (medium likelihood; high/moderate expected impact). ### Implications for policy - Allow the exchange rate to act as the principal shock absorber. - Pursue medium-term fiscal consolidation to support external rebalancing. - Design structural and industrial policies narrowly to address market failures while minimizing trade and investment distortions. - Monitor external balance sheet composition closely, including growing exposure to foreign equities. - Maintain readiness to provide liquidity support and monitor banking and NBFI balance sheets given global financial volatility risks. ### Annex VI — Superannuation funds (role and vulnerabilities) - Size and macroeconomic role: - As of June 2025, the superannuation sector manages approximately AU$4.3 trillion in assets, accounting for roughly 160 percent of GDP and representing a quarter of total financial system assets. - The banking sector has total assets of AU$6 trillion, which is about 240 percent of GDP. - Since the early 1990s, asset growth has been driven by favorable membership demographics, a gradual increase in the superannuation guarantee rate (from 3 in 1992 to 12 percent in 2025), and robust investment performance. - Investment profile and external linkages: - Superannuation funds maintain a diversified investment portfolio, including a significant allocation to overseas assets. - Approximately two-thirds of offshore allocations are invested in equities. - Returns on international investments contribute positively to the current account as primary income and serve as a hedge against BoP risks from declining commodity prices. - The expansion of offshore assets has strengthened superannuation funds’ influence on capital flows and the balance of payments. - Vulnerabilities and risks: - The effectiveness of FX hedging strategies allows funds to mitigate currency fluctuation risks; however, interconnectedness with domestic banks raises systemic risk concerns during extreme market conditions. - The substantial investment in overseas equities exposes funds to valuation fluctuations; it is estimated that Australia’s institutionally managed retirement savings accounts lost approximately $170 billion in local and global equities investments during the sharp decline in risky asset prices between February and April 2025. - Policy-relevant considerations: - Superannuation funds have the potential to bolster economic growth by channeling savings toward productivity-enhancing sectors, but this requires balancing fiduciary duties with profitable investment strategies. - Monitoring of funds’ exposures, hedging practices, and interconnectedness with banks is warranted to limit systemic vulnerabilities. *International Monetary Fund — Annex IV. External Sector Assessment (content unit).* ### 3. A certain p n f sup annua n fun s’ ffs ass s s g us ng f gn ### 3. A certain p n f sup annua n fun s’ ffs ass s s g us ng f gn ### FX hedging, margin risk, and financial system exposure - Superannuation funds use foreign exchange (FX) swaps to mitigate FX risks on overseas investments, but sharp depreciation of the Australian dollar can create margin call pressures on these FX swaps. - Margin call stresses could: - Force superannuation funds to raise liquidity by selling domestic financial assets, risking market functioning disruptions. - Expose domestic banks to counterparty risks if funds struggle to meet margin payments. - Historical precedent: - During the COVID-19 pandemic, super funds met FX margin calls through ongoing net contribution inflows and the sale of overseas assets without disruption to the domestic financial system. - Valuation gains on overseas investments from currency depreciation provided an offset against margin-call pressures. - Risk management practices by super funds include spreading FX hedge maturities over time to manage liquidity risks. - Regulatory context and constraints: - Most hedges contracted by super funds do not require margin payments (per the RBA’s October 2022 Financial Stability Review).3 - Super funds are not eligible to access RBA liquidity facilities unless they were already counterparties prior to September 23, 2019.4 - RBA interventions in government bond and repo markets during COVID-19—including asset purchases and liquidity injections—supported market functioning and helped super funds meet member demands without triggering fire-sale dynamics.5 ### Structural soundness, liquidity buffers, and interconnectedness - Superannuation sector characteristics: - Predominantly defined contribution plans where investment gains and losses pass directly to members. - Maintain substantial liquidity buffers, including cash holdings. - Are restricted from taking on leverage. - Regulatory enhancements: - APRA tightened investment governance standards in early 2023, enhancing stress testing, asset valuations, and liquidity risk management. - Ongoing system-wide stress test by APRA remains a key regulatory focus. - Systemic concern: - The sheer size of the sector (noted in the April 2025 Financial Stability Review) and strong connections between superannuation funds and domestic banks—through holdings of bank equity and debt—could amplify stresses under extreme circumstances, especially if the sector faces sudden and significant liquidity drains. - Pandemic evidence: - During COVID-19, temporary measures allowing early withdrawals and switching from higher-risk investments to cash were weathered by super funds without systemic breakdown. ### Fiscal implications and public finances - Superannuation funds mitigate fiscal pressures associated with age pension spending and other social security as population ages; Australia is noted as one of the few OECD countries projected not to experience higher pension expenditures in coming decades due to aging. - Revenue forgone from superannuation tax concessions (measured against a comprehensive income tax settings benchmark) is large and is anticipated to rise. - Government policy response: - The government has proposed modifying the concessional tax treatment of large superannuation balances. ### Growth, investment opportunities, and fiduciary constraints - Potential macroeconomic benefits: - Increased compulsory contribution rates have boosted savings, potentially increasing investment and reducing the current account deficit by lessening reliance on foreign capital. - Superannuation funds could be leveraged to support productivity-enhancing investments in infrastructure, housing, and energy transition. - Legal constraint: - Investments by superannuation trustees must meet fiduciary duty obligations under the Superannuation Industry (Supervision) Act 1993 to act in the best financial interests of members. ### Annex VII — Lessons from Commonwealth and Sub-National Fiscal Strategies (summary) - Theme: Need for across-federation fiscal coordination given new spending commitments; options to enhance oversight of sub-national fiscal targets and peer learning. - Divergent fiscal outcomes: - Commonwealth recorded two successive budget surpluses in FY2022/23 and FY2023/24, repeatedly outperforming budget estimates. - Since 2012, state governments’ net debt-to-GDP ratio has increased 7.5 times from a low base of 1.3 percent. - All states except Western Australia are forecast to see rising debt per capita levels; ACT and Northern Territory expected to overtake the Commonwealth on this metric by 2029. - Drivers of divergence: - Commonwealth benefited from strong corporate taxation (high commodity prices) and strong labor tax receipts (labor market resilience and bracket creep). - Resource-rich states recorded growing royalty revenues; states reliant on payroll taxes, stamp duty, and land taxes saw slower revenue growth. - NSW and Victoria were hit harder by the pandemic due to stricter lockdowns, causing higher expenditures and lower revenues. - Expenditure pressures: - Infrastructure spending surge (states and Commonwealth) to support productivity and energy transition has raised fiscal costs and exacerbated cost overruns amid high construction demand. - Health expenditure grew during the pandemic and remains high; cost-of-living support expanded at state and Commonwealth levels. - Major sub-national tax reform has been largely absent despite mounting spending pressures. ### Compliance with fiscal strategies and institutional oversight - Commonwealth approach: - Principle-based fiscal strategy, conservative commodity revenue forecasts, and long-term planning (Intergenerational Report) helped bank majority of revenue gains while retaining flexibility to support vulnerable households. - Trade-off: Lack of rigidity could allow structural deficits to become embedded. - State approaches and rule strain (examples): - Northern Territory (NT): In 2025 scrapped AU$15 billion debt ceiling legislated in 2021 after projections indicated breach in 2028-29 financial year; NT has highest net debt per capita. - Tasmania (Tas): 2023/24 commitment to 11 strategic actions and targets to be met by 2032/33; gross debt per capita on government forecasts is on an upward trajectory and forecast to exceed the 2032/33 target each year over the forecast horizon. - Queensland (QLD): Revised up forecast debt from AU$176 billion to AU$218 billion in 2027/28; new Treasurer warned debt per capita is “tracking to be the worst in the country” and that a rating downgrade was “highly likely”. - Oversight entities: - Parliamentary Budget Office (PBO) conducts regular analysis of long-term fiscal sustainability and publishes the National Fiscal Outlook aggregating state and Commonwealth budgets annually. - Commonwealth Treasury publishes forecast errors as part of budget transparency. - State treasuries and some state fiscal councils undertake oversight of state rules. - Uniform Presentation Framework (UPF) mandates common reporting requirements across Commonwealth, state and territory budget papers, though some data (notably reporting on net debt) varies across institutions. - Market discipline: - Commonwealth has maintained AAA credit ratings from Standard & Poor’s (S&P), Moody’s, and Fitch since 2013, 2012, and 2011, respectively. - Credit rating agencies have raised concerns about rising spending, structural deficits, and increasing state debt; S&P indicated markets may interpret an implicit federal support in severe stress scenarios.2 - Two jurisdictions have AAA ratings3; five ratings downgrades across states in the last 5 years; S&P assigned negative outlooks to three of the six states it reviews.4 - TAS and NT have incorporated credit rating agency targets into their fiscal strategies over the past 6 years.5 ### Conclusions and policy recommendations - Nationwide coordination: - Renewed need for a nationwide conversation on fiscal coordination in light of new spending commitments. - Best practice: sub-nationals should set fiscal objectives transparently in coordination with central government to reach nationwide fiscal sustainability objectives. The Council on Federal Financial Relations (CFFR) is identified as an appropriate venue. - Commonwealth could introduce stronger guidance on state finances and borrowing; states can learn from Commonwealth practices on transparency, independent oversight, and strong budget processes. - Revenue and expenditure reform opportunities: - Scope to review spending and revenue policies across the federation, including fiscal equalization, GST reform, and land tax. - A GST increase could be paired with reductions in inefficient state taxes such as fees and stamp duty. - Continued focus on overcoming coordination issues on infrastructure to address cost overruns. - Oversight enhancements: - Expand PBO mandate to include analysis of subnational fiscal positions and monitoring a broader set of indicators at higher frequency (debt levels, cost of servicing debt, estimates of structural deficits, interest burdens, vertical imbalances).8 - Forge a stronger network between the PBO and state fiscal councils. - Commonwealth could present enhanced transparency and monitoring of state fiscal positions in Budget documentation, potentially within the fiscal risks statement. - Risk-based monitoring: - If states continue to miss targets, the Commonwealth could adopt a risk-based monitoring framework subjecting states with rising debt and deficits to enhanced scrutiny and oversight under an integrated, evenhanded framework, supported by corrective mechanisms if no improvement is observed. *Source: IMF staff summary of chapter content in the provided PDF.* ### Annex VIII. Cross-Country Insights into Housing Market ### Annex VIII. Cross-Country Insights into Housing Market Developments ### Overview and key findings - Real house prices in Australia have steadily increased since the 2000s. - The pace of price increases in Australia has far exceeded the growth of real incomes, driving the house price-to-income ratio to a historic peak in 2024, contributing to making Australia’s housing market one of the least affordable in the E D. - Staff’s cross-country analysis (a staff update of the model in Geng (2018)) confirms disposable income, interest rates, demographics, new supply, and government policies as key drivers of housing prices (Table 1). ### Drivers of housing price trends - Mortgage rates are identified as a key driver; housing prices in Australia have shown a strong response to past monetary policy easing cycles during the post-GFC period and the COVID-19 pandemic. - The high proportion of variable-rate mortgages in Australia amplifies price sensitivity by allowing changes in the official cash rate (OCR) to be transmitted to mortgage rates more quickly than in most other OECD countries. - Aggregate demand factors highlighted include household formation, immigration, and subsidies. - Government policy interventions aimed at improving housing affordability (for example, by reducing the costs of buying, owning, or renting a home) can have price effects by shifting the balance between housing demand and supply. ### Supply-side dynamics and implications - Australia’s population growth has been among the fastest in the E D and well above the average; combined with the downtrend in average household size, this has generated robust growth in fundamental housing demand. - Housing investment has not always kept pace with rising demand, particularly during periods of abrupt change. - Delays in scaling up residential investment during the pandemic—owing to shortages of labor and material—along with structural challenges in housing planning, approvals, and construction, have constrained supply. - Supply constraints have amplified price effects; in the current monetary policy easing cycle, price effects from lower interest rates are expected to be at least partially offset by an increase in housing supply, similar to the trend observed during the post-GFC period. Without the supply response (affected by construction capacity constraints), the price effects would likely have been larger. ### Policy implications and recommendations - Address the chronic demand-supply imbalance through a comprehensive strategy encompassing: - Expanding housing supply. - Improving market flexibility. - Removing structural barriers in planning, approvals, and construction to increase responsiveness of supply to demand fluctuations. - Monitoring financial risks as housing prices resumed strong growth in 2025 and household balance sheets and incomes may become increasingly strained by worsening housing affordability. - Recognize that government affordability interventions can alter demand-supply balances and thus require coordination with supply-side measures to avoid unintended price pressures. *Prepared by Sophia Zhang, Mike Li, Samikshya Siwakoti, and Dan Zheng; Annex VIII, IMF.* ### 2. Enhance A RA’s supervisory ### 2. Enhance APRA’s supervisory approach by carrying out periodic in-depth reviews of governance and risk management (APRA) ### Summary of completion status and overall developments - Status: ST Complete (as indicated at start of section). - APRA has enhanced its supervisory approach for governance and risk management by: - building internal capability; - enhancing its supervisory risk assessment model (SRI); - strengthening its prudential framework. ### Capability building and supervisory activity - APRA has built supervisor and risk specialist capability to undertake in-depth reviews of governance and risk management and regularly conducts entity-specific and thematic reviews. - APRA expanded its Non-Financial Risk division by setting up dedicated teams for: - governance and behavioural risk; - operational risk; - technology resilience; - cyber risk; - climate risk. - From July 2 2, annual “pulse” risk culture surveys will provide supervisors with robust, comparable evidence to focus risk culture discussions and provide entities with peer benchmarks to meet prudential standard CPS 220 Risk Management obligations. ### Supervision Risk and Intensity (SRI) model enhancements - The introduction of APRA’s new risk assessment model (SRI) enhanced its focus on governance and risk management. - APRA’s SRI model: - has categories for key non-financial risk topics; - contains detailed guidance supporting the assessment of governance and risk management; - ensures supervisory action is taken when weaknesses in individual entities are identified. - The capital section of the SRI model requires supervisors to consider the results of recent stress tests in determining the appropriate rating of capital. ### Prudential framework updates and regulatory measures - Updated or issued prudential standards and frameworks: - CPS 230 Operational Risk Management (released in July 2025); - CPS 234 Information Security (released in 2019); - CPS 511 Remuneration (released in 2023); - CPS 510 Governance — review currently under way and expected to be finalised in 2025/26. - Prudential Standard CPS 234 Information Security (2019) aims to ensure APRA-regulated entities maintain resilience against information security incidents (including cyber-attacks) by implementing robust controls, governance, and capabilities to protect confidentiality, integrity, and availability of information assets. - Prudential Standard CPS 511 Remuneration (2023) requires regulated entities to maintain remuneration arrangements that incentivise individuals to prudently manage risks and impose appropriate consequences for poor risk outcomes. - Prudential Standard CPS 230 (July 2025) aims to strengthen operational risk management, enhance business continuity planning, and improve oversight of third-party service providers; scheduled onsite reviews of CPS 230 implementation and compliance will occur during 2025 and 2026 with a selection of entities classed as SFIs (significant financial institutions), including major banks. ### Accountability and conduct frameworks - Financial Accountability Regime (FAR): - FAR replaced the 2018 BEAR in 2024; - FAR extends accountability requirements to all APRA-regulated entities and applies to accountable persons with effect from July 2025; - FAR extends responsibility and accountability framework for directors and senior executives (accountable persons) to all APRA-regulated institutions and covers conduct-related matters. - In March 2025 APRA released a discussion paper proposing changes to modernise and uplift governance requirements (conflicts management, independence, skills, board reviews and fitness and propriety); changes will apply to all APRA-regulated institutions from 1 July 2028. ### Climate risk and operational resilience integration - Since 2021 APRA has strengthened expectations around climate risk management by: - issuing cross-industry guidance (CPG 229 Climate Change Financial Risks); - embedding expectations into supervision; - conducting Climate Vulnerability Assessments (CVA); - running industry self-assessments; - integrating climate risk into prudential reviews; - promoting transparency through information papers. - APRA led the Banking Climate Vulnerability Assessment of Australia’s five largest banks in 2021-22; results published in November 2022. - APRA ran a pilot on small bank exposures to climate concentration risks (pilot complete). - Insurance CVA commenced in July 2023 focusing on home building insurance affordability; APRA expects to complete this initiative in FY2025/26. - Operational resilience: APRA’s corporate plan for 2 2 -2026 places emphasis on cyber risk, financial resilience (stress testing and geopolitical preparedness), operational resilience (e.g., supervising CPS 230), and uplifting governance (refreshing CPS 510 Governance and CPS 520 Fit and Proper, and focus on boards). ### Stress testing and systemic risk integration (linked recommendation 3) - APRA increased stress testing activities across regulated industries and analysed results under a range of scenarios to identify potential vulnerabilities and regulated institutions at heightened risk of failure. - APRA has transitioned to an annual stress testing program for the banking industry. - APRA developed a stress testing handbook to guide supervisors in assessing stress testing approaches. - APRA has continued to develop internal stress testing models across banking, insurance and superannuation. - APRA commenced its first system risk stress test in 2025 to better understand spillovers of risks between industries and across the financial system. - APRA extended stress testing to explore emerging and system-wide risks, including operational and climate change financial risks. ### Data and reporting developments (linked recommendations 4 and others) - APRA continues implementing a pipeline of new and amended data collections, including updated collections capturing Interest Rate Risk in the Banking Book and data on investments, company structure and financial data for pension funds. - Since 2024 APRA ceased nine ad-hoc data collections for the banking sector no longer necessary for effective prudential oversight. - After introduction of the new capital framework for banks in September 2023, the number of associated reporting forms were significantly reduced. - APRA is transitioning data collections from its legacy system to APRA’s new collection platform; planned pace, sequencing and priorities of new collections are set in context of migration and an uplift of APRA’s data and technology capabilities including a new data platform and improved enterprise data governance over the next 4 years. ### Inter-agency coordination and transparency - Multi-Agency Data Committee (MADC) established including APRA, ASIC, RBA, Treasury, ATO, ABS to create a unified strategic approach to data. - APRA shares superannuation data with ASIC, ATO and ABS where designed with partner agencies for topics of mutual interest. - ASIC built an advanced data collection portal; IDR reporting coverage increased from initial 344 entities to approximately 8,600 entities now reporting biannually (data received in early 2024). - APRA consults other CFR agencies on macroprudential settings and considers feedback when determining macroprudential policy. - CFR has increased transparency by publishing statements following regular CFR meetings since December 2018 and updating its website. - CFR published an updated Charter and an updated MoU on Crisis Management in July 2025. - In September 2025 the RBA provided financial stability advice to the CFR in line with the updated CFR Charter and MoU between APRA and the RBA. ### Key implementation timelines and milestones - CPS 234 Information Security: released in 2019. - CPS 511 Remuneration: released in 2023. - New capital framework for banks: introduced in September 2023. - Banking CVA: conducted in 2021-22; results published November 2022. - FAR applies to accountable persons with effect from July 2025; FAR introduced in 2024. - CPS 230 Operational Risk Management: released in July 2025; onsite reviews scheduled during 2025 and 2026. - APRA discussion paper on governance changes: March 2025; changes to apply from 1 July 2028. - APRA commenced first system risk stress test in 2025. - Insurance CVA commenced July 2023; expected completion in FY2025/26. - APRA corporate plan emphasis: 2 2 -2026 (places greater emphasis on governance and risk management). - APRA introduced limits for high debt-to-income (DTI) home lending in November 2025 (see related macroprudential developments). *Source: 2. Enhance APRA’s supervisory approach by carrying out periodic in-depth reviews of governance and risk management (APRA) — extracted from the supplied PDF content.* ### 9. Commission analysis by the ### 9. Commission analysis by the CFR member agencies on relevant financial stability policy issues ### Financial stability monitoring and international studies - CFR actively considers the impact of policy changes on financial stability; CFR agencies and Working Groups frequently report to the CFR on any risks in the housing market. - RBA participation in international CGFS work: - Participated in a CGFS working group which studied property price dynamics and the influence of international investors; report released in February 2020. - Participated in a CGFS study group on policies to mitigate housing-related risks; the group released its report in December 2023. - Participated in a CGFS working group on Interest rate risk exposures of non-financial corporates and households; the group released its report in November 2024. - Status: In progress. ### Financial Crisis Management and Safety Nets — resolution policy framework (APRA, Treasury) - 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. - Time frame: ST - Developments and implementation: - Progress includes introduction of resolution planning standards and progressing resolution planning for large and mid-sized banks. - Resolution planning standards: In May 2023, APRA finalised prudential requirements and guidance for resolution planning with prudential standard CPS 900 Resolution Planning (CPS 900) & prudential practice guide CPG 900 Resolution Planning. The prudential standard commenced on 1 January 2024. - Resolution planning: APRA is currently resolution planning with Australia’s largest banks. Preferred resolution strategy advised to entities; entities at varying levels of progress identifying and implementing pre-positioning actions. - Several entities intend to complete the first iteration of their Resolution Plan and transition to the monitoring and review phase of resolution planning by mid-2026. - The 5 largest banks have successfully met the additional Loss-Absorbing Capacity (LAC) requirement of 4.5 percent of Risk Weighted Assets. - Supervisory review: Several large banks are planning the first holistic test of their resolution plan as part of internal assurance to inform APRA’s approval process. APRA specifies three yearly (rather than annual) reviews of resolution plans and does not expect that frequency to change. - Crisis exercises: In September 2024, a crisis exercise with Executive-level participants focused on resolution of a trans-Tasman banking group, conducted in conjunction with New Zealand regulators through the Trans-Tasman Council on Banking Supervision. CFR conducts more focused working-level simulations, normally annually; a crisis communications-focused simulation will occur in November 2025. ### Extend resolution funding options and LAC (APRA, Treasury) - Recommendation: Extend resolution funding options by expanding loss-absorption capacity for large and mid-sized banks and introduce statutory powers. - Time frame: ST - Status: Complete. - Developments and implementation: - November 2018: APRA released a discussion paper proposing changes to capital adequacy framework to increase LAC. - July 2019: APRA finalised approach to LAC for banks, including requiring the D-SIBs to lift Total Capital by three percentage points of RWA by January 1, 2024. - 2021: APRA finalized requirement for D-SIBs, increasing Total Capital by 4.5 percentage points in aggregate. The requirement will come into effect from 1 January 2026. - Requirements for other entities, including mid-sized banks, to be determined as part of resolution planning. - One further large bank required to maintain additional LAC for resolution purposes. - The five banks currently subject to a LAC requirement are successfully meeting that requirement. - On 9 December 2024, APRA announced it would remove regulatory Additional Tier 1 (AT1) capital from the bank prudential framework from 1 January 2027 to simplify and improve effectiveness of bank capital in a crisis. ### Trans-Tasman cooperation on cross-border bank resolution (CFR agencies) - Recommendation: Advance mutual understanding between Australia and New Zealand resolution authorities on cross-border bank resolution modalities, through the Trans-Tasman Banking Council (TTBC). - Time frame: ST - Status: Complete. - Developments and implementation: - APRA advanced understanding between Australian and New Zealand resolution authorities on cross-border modalities. - First entity-specific Crisis Management Group (CMG) for a trans-Tasman bank established at the end of 2019; CMG comprises APRA, RBNZ, ASIC, FMA and RBA. - CMG effective for development and evaluation of detailed resolution strategies; engagement with New Zealand authorities now part of APRA’s regular resolution planning. - September 2024: TTBC conducted a crisis simulation exercise testing readiness of trans-Tasman regulators for a major bank failure; participants included APRA, RBA, ASIC, Australian Treasury, RBNZ, FMA and NZ Treasury. Exercise tested liquidity, capital, and entity control responses; deemed successful in facilitating connections across agencies. - TTBC reviewed and updated its terms of reference and memorandum of cooperation in 2024. - APRA undertaking resolution planning with other trans-Tasman banks. ### Financial Market Infrastructure (RBA, ASIC, Treasury) - Recommendation: Strengthen independence of RBA and ASIC for supervisory oversight, enhance enforcement powers and promote compliance with regulatory requirements. - Time frame: I - Status: Complete. - Developments and implementation: - Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act (the Act) came into effect in September 2024. - The Act: - Extends powers for ASIC and the RBA to support supervision of FMIs and ability to take action to address identified deficiencies. - Transfers a range of licensing and supervisory powers from the Minister to ASIC and the RBA. - Recommendation: Finalize the resolution regime for FMIs in line with the FSB Key Attributes. - Time frame: ST - Status: Complete. - Developments and implementation: - The Act (September 2024) establishes a resolution and crisis management regime (based on the FSB Key Attributes) for clearing and settlement facilities operating in Australia. - Work has commenced to operationalise RBA and ASIC powers under the new regime. ### Anti-Money Laundering / Countering the Financing of Terrorism (AML/CFT) (Attorney-General’s Department, Treasury, AUSTRAC) - Recommendation: Expand the AML/CFT regime to cover all designated non-financial businesses and professions (DNFBPs) and strengthen AML/CFT supervision by improving data collection and risk analysis; increasing oversight of controls and compliance; and undertaking more formal enforcement action in the event of breaches. - Time frame: I - Status: In progress. - Developments and implementation: - Australian Parliament passed the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 on 29 November 2024. The Act: - Expands the AML/CTF regime to additional high-risk services provided by lawyers, accountants, trust and company service providers, real estate professionals, and dealers in precious metals and stones. - Modernises regulation of digital currency and of virtual assets and payments technology. - Simplifies and clarifies the AML/CTF regime to increase flexibility, reduce regulatory impacts, and support businesses to better prevent and detect financial crime. - The Act ensures Australia’s AML/CTF regime meets international standards set by the Financial Action Task Force. - Effective dates: - For reporting entities already regulated: new obligations come into effect from 31 March 2026. - For new reporting entities: obligations commence from 1 July 2026. - AUSTRAC developments: - On 2 August 2025, AUSTRAC tabled the Anti-Money Laundering and Counter-Terrorism Financing Rules 2025 in Parliament following a two-stage consultation process. The Rules provide supplementary detail to obligations in the AML/CTF Act. - October 2025: AUSTRAC published guidance to help current reporting entities and tranche 2 entities understand changes and meet obligations; includes core guidance, sector-specific guidance, and AML/CTF starter programs for small businesses. - December 2024: new powers to obtain information or documents from reporting entities introduced to improve enforcement and intelligence outcomes. - Data collection and risk analysis: - Since 2018, AUSTRAC has produced National Risk Assessments (NRAs) and issue-specific risk assessments; NRAs include analysis of money laundering risks facing DNFBPs. NRAs are publicly available on AUSTRAC’s website. - Since 2021, AUSTRAC transforms data inputs into risk insights through implementation of a risk scoring model; approach is dynamic and adjusts regulatory activities as risk exposure and management change. - Supervision and oversight: - AUSTRAC oversees the compliance of more than 18,000 Australian regulated businesses (reporting entities), including banks, credit unions, non-bank lenders and financers, gambling and bullion service providers, remittance providers and digital currency exchanges. - AUSTRAC adopts a risk-based approach: frontline supervision teams conduct targeted assessments and campaigns, monitor remediation, and refer matters to enforcement. AUSTRAC has a centralised capability for identification, triage and assessment of non-compliance. - Since the last FSAP review, supervisory campaigns focused on: - implementation of the customer due diligence (applicable customer due diligence), beneficial ownership and PEP requirements; - implementation of ongoing customer due diligence (including transaction monitoring and enhanced customer due diligence); - implementation of the AML/CTF program obligations, including employee due diligence, staff awareness training, independent reviews; - implementation of appropriate ML/TF risk assessments; - implementation of the correspondent banking obligations; - implementation of the board and senior management approval requirements; - assessing processes and procedures to identify and submit suspicious matters to AUSTRAC. - Enforcement: - Since 2017, AUSTRAC concluded five enforceable undertakings with reporting entities (including ING Bank (Australia) and National Australia Bank); two further undertakings ongoing (including Bank of Queensland). - Since 2017, AUSTRAC successfully concluded court proceedings against Westpac Banking Corporation and the Commonwealth Bank of Australia for breaches of the AML/CTF Act where the banks were ordered to pay penalties of $1.3 billion and $700 million, respectively. These two penalties are the highest and second highest civil penalties ever ordered in Australia. - AUSTRAC also concluded civil penalty proceedings against two other reporting entity/groups resulting in penalties of $450 million and $67 million respectively. - A further three court proceedings against reporting entities are ongoing alleging serious breaches of the AML/CTF Act. - AUSTRAC issued 23 infringement notices during that period to reporting entities believed to have breached certain AML/CTF laws and issued a remedial direction to Australian Military Bank in 2021. - The 2024 reforms enhanced AUSTRAC’s enforcement capability through introduction of new information gathering powers. ### Data Issues — Data Adequacy Assessment and gaps - Annex XI: Data Issues includes: - Table 1. Australia: Data Adequacy Assessment for Surveillance. - Table 2. Australia: Data Standards Initiatives. - Table 3. Australia: Table of Common Indicators Required for Surveillance. - Key findings and ratings (selected): - Median Rating for inter-sectoral consistency: A - Coverage ratings: A across listed categories. - Consistency ratings: A across listed categories. - Frequency and Timeliness ratings: mixed, including B, C, D in some categories. - Specific issues: - While monetary and financial statistics are comprehensive and of high quality for surveillance, gaps remain in data regarding the Nonbank Financial Institution sector (NBFIs), which may hinder timely identification of potential vulnerabilities, including those related to exposure to Commercial Real Estate (CRE). - Regulatory agencies are actively addressing these gaps to enhance visibility into less-regulated NBFIs. APRA has recently reviewed its data roadmaps and rebalanced collection activities alongside an uplift in data. - Change since last Article IV: - Australia Bureau of Statistics announced plans to publish a monthly CPI starting in November 2025, replacing the previous monthly CPI indicator. - Staff assessment: - Data provision is adequate for surveillance. Adding monthly inflation data (currently scheduled for November 2025) will further strengthen data adequacy for surveillance purposes. *Source: 9. Commission analysis by the CFR member agencies — developments and implementation as presented in the provided PDF content.* ### 2. Australia: Data Standards Initiatives ### 2. Australia: Data Standards Initiatives ### Data adequacy and IMF engagement - The data provided to the Fund are adequate for surveillance. - The data provided to the Fund have some shortcomings but are broadly adequate for surveillance. - Membership Status: Joined: August 5, 1947; Article VIII. - Quota: 6,572.40 SDR Million (100.00 percent). - Fund holdings of currency (holdings rate): 4,863.22 SDR Million (73.99 percent). - Reserve tranche position: 1,709.43 SDR Million (26.01 percent). - SDR Department net cumulative allocation: 9,382.52 SDR Million (100.00 percent). - SDR Department holdings: 9,847.43 SDR Million (104.95 percent). - Outstanding Purchases and Loans: None. - Financial Arrangements: None. - Projected obligations to Fund (Charges/interest): 0.04 (for each year 2025, 2026, 2027, 2028, 2029) SDR million; Total: 0.04 (for each year 2025, 2026, 2027, 2028, 2029) SDR million. ### Recent macroeconomic developments and outlook - CPI inflation rose to 3.8 percent year-on-year in December 2025, up from 3.4 percent in November 2025. - Quarterly underlying inflation (trimmed mean, excluding volatile CPI components) in the December quarter reached 3.4 percent year-on-year (up from 3.0 percent in the September quarter). - Unemployment rate declined to 4.1 percent in December 2025, from 4.3 percent in November 2025. - Consumer spending growth was robust through November 2025. - Treasury forecasts growth to lift over the next few years, with growth expected to shift from public to private demand. - Public consumption is expected to slow as demand-driven programs moderate and public investment softens when major transport projects finish. - Non-mining business investment is expected to grow strongly, driven by energy transformation, data centers and computer software. - Inflation has substantially moderated since its peak in 2022 but increased over the second half of 2025 owing partly to temporary factors (like the cessation of energy rebates) and partly to more persistent factors (particularly housing and market services inflation). - Treasury expects these pressures will moderate, and inflation to be back within the Reserve Bank of Australia’s target band within the next two years. - Labor force participation is expected to remain near historical highs, including record female participation. ### Monetary policy - The Reserve Bank of Australia (RBA) raised the cash rate target by 25 basis points to 3.85 percent on February 3, 2026, ending a six-month pause. - Previously, the RBA had gradually lowered the cash rate from 4.35 to 3.6 percent between February and August 2025. - RBA cited capacity pressures, residual tightness in the economy (including the labor market), and uncertainties about the economic and inflation outlook as justifications for a slightly more restrictive stance. - The Reserve Bank is expected to continue a data-dependent approach to balance price stability and full employment. ### Fiscal policy and public finances - The Government identified a further AU$20 billion of budget savings and reprioritizations in the Mid-Year Economic and Fiscal Outlook (MYEFO). - The cash balance for 2025-26 is expected to be a deficit of 1.3 percent of GDP and fall to a deficit of 1.1 percent of GDP by 2028-29. - Gross debt remains low by international standards, at less than half of the advanced economy average. - Over the medium term, the cash balance is expected to improve and the budget to return to balance. - The Government is addressing large structural spending pressures including the National Disability Insurance Scheme (NDIS), support for veterans and their families, and aged care. - Commonwealth-state coordination mechanisms: Council on Federal Financial Relations; Commonwealth Treasury monitors subnational fiscal outcomes and collaborates with states. ### Financial sector resilience and policy actions - The Australian financial system continues to display a high level of financial resilience. - Banks have maintained prudent lending standards and provisioning, are well capitalized and have large holdings of liquid assets. - In November 2025, the Australian Prudential Regulation Authority (APRA) announced a debt-to-income lending limit on residential mortgage lending as a macroprudential tool to pre-emptively contain a build-up of housing-related vulnerabilities. - Around half of Australian non-bank financial institution (NBFI) sector assets are held by prudentially regulated superannuation funds. - APRA’s 2026 system risk stress test will provide further insights on readiness of all participants, including superannuation funds, to respond to systemic liquidity stress events. - The authorities welcome the commencement of the IMF’s Financial System Stability Assessment for Australia and expect the first full mission in March. ### Structural reforms: productivity, climate, and housing - In August 2025, the Government hosted an Economic Reform Roundtable informed by nearly 900 submissions and over 40 forums, outlining ten clear reform directions. - Government measures to support productivity include the abolition of another 500 nuisance tariffs, opening of the new Investor Front Door, and a review into reducing unnecessary compliance burden in the corporate tax system. - Climate and energy transition: - In September 2025, the Government released a 2035 emissions reduction target of 62 to 70 percent below 2005 levels, alongside the Net Zero Plan and six supporting sectoral decarbonization plans. - Commitment to net zero by 2050 and continuation of the 2030 target. - Measures include subsidizing batteries, rooftop solar and energy efficiency upgrades for households and small businesses, modernizing electricity grids, reforming the National Energy Market, and improving regulatory frameworks. - Industrial policy focuses on expanding capabilities in green metals, cleaner fuels and critical minerals and supporting access to capital for net zero investments and innovations. - Housing: - Government target to build 1.2 million new homes over 5 years as part of the 2022 National Housing Accord. - Additional measures: funding for enabling infrastructure, building 55,000 new social and affordable homes, investing in the skills pipeline, new tax incentives to encourage private investment in Build to Rent developments. - Expansion of the 5 percent Deposit Scheme to help more Australians into home ownership. - Launch of the Help to Buy Scheme to support 40,000 low- to middle-income households through shared equity. *Source: 2. Australia: Data Standards Initiatives (1ausea2026001-source-pdf)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1ausea2026001-source-pdf.pdf_