## _cr12305

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---

### Household Saving and Fiscal Multipliers
- Household saving trends and drivers
  - Household saving as a share of GDP began increasing in 2005 and increased sharply as the global financial crisis began to unfold.
  - Household saving ratio (household savings to household disposable income) rose by more than 5 percentage points in 2008-2009.
  - Since 2009, both household saving measures appear to have stabilized at levels above the pre-crisis averages.
  - The household saving ratio seems to have stabilized at around 10 percent after increasing sharply at the onset of the global financial crisis.
  - The sharp increase in 2008-2009 reflected:
    - Slower growth in private consumption.
    - A temporary boost to household income, with a significant contribution from the cash transfers paid to households as part of the government’s fiscal stimulus package during the crisis (fiscal stimulus averaging about 2 percent of GDP a year in 2009-2011).
    - A decline in household interest payments of more than 30% between the third quarter of 2008 and the first quarter of 2009, largely due to monetary policy easing.

- Fiscal multipliers and macroeconomic context
  - Fiscal multipliers vary significantly by the underlying state of the economy; multipliers tend to be larger in downturns than in expansions.
  - Given that Australia’s economy is close to potential, the contractionary impact of the current fiscal consolidation is likely to be smaller than in other countries with large negative output gaps.
  - The impact of fiscal consolidation could also be mitigated by Australia’s still-sizable monetary policy space.
  - Results broadly in line with Global Integrated Monetary and Fiscal (GIMF) model simulations.

- Projections and implications for household saving
  - Household saving ratio is likely to decline modestly as interest rates normalize and household sentiment improves.
  - Saving ratio expected to remain above pre-crisis levels because the persistently strong capital gains in household assets in the 1990s and 2000s are unlikely to be repeated in the near future.

- Key statistics
  - Increase in household saving ratio in 2008-2009: more than 5 percentage points.
  - Fiscal stimulus: averaging about 2 percent of GDP a year in 2009-2011.
  - Decline in household interest payments: more than 30% between the third quarter of 2008 and the first quarter of 2009.
  - Household saving ratio stabilized at around 10 percent (post-crisis observation).

### Fiscal Strategy
- Fiscal strategy and objectives
  - Three pillars: achieving budget surpluses, on average, over the medium term; keeping taxation as a share of GDP below the 2007–08 level on average (23.7 percent of GDP); and improving the government’s net financial worth over the medium term.
  - Real spending growth capped at 2 percent annually until surpluses are at least 1 percent of GDP while the economy is growing at or above trend.
  - Projected fiscal path:
    - Surpluses gradually increase from ¼ percent of GDP in 2013/14 to 1 percent of GDP in 2015/16.
    - Net commonwealth debt falls from about 10 percent of GDP in 2012 to zero by 2020/21.
  - States and Territories expect gradual expenditure reduction, including public sector wage control measures.

- Tax policy
  - Reforms implemented on July 1, 2012 include:
    - a minerals resource rent tax (MRRT),
    - a broadening of the base of the petroleum resource rent tax (PRRT),
    - and a carbon price with a transition to emissions trading over time.
  - Staff welcomed the MRRT and broadening of PRRT base and continued to support the carbon price as well-designed and intended to be fiscally neutral.

- Fiscal policy management and stabilizers
  - Monetary policy expected to be the main demand management tool in the medium-term; fiscal policy can respond to shocks.
  - Staff recommendation: allow automatic stabilizers to move fully in both directions.
  - Growing importance of mining increases government revenue exposure to commodity income swings.

- Medium-term fiscal challenges
  - Expenditure pressures:
    - Aging and health care costs together estimated to increase public expenditure by over 3 percent of GDP by 2030.
  - Revenue context:
    - Revenue around 21.0 percent of GDP in 2011/12, below the government’s cap of 23.7 percent of GDP.
  - Policy implication:
    - Re-prioritization of spending likely needed if the revenue ceiling is maintained.
  - Risk:
    - A sustained 30 percent decline in the terms of trade, partly offset by exchange rate depreciation, could worsen the budget balance by 2 percent of GDP (staff estimate).

- Authorities’ views on resource proceeds
  - No plan for an earmarked sovereign wealth fund; plan to use tax proceeds to contribute to gradual reduction in gross public sector debt.
  - Rationale: mining share projected to increase to around 10 percent of GDP and contribution to public revenue will remain limited; minable resources expected to be long-lasting.

### External Sector, Exchange Rate, and Current Account
- Exchange rate assessment
  - Authorities committed to a freely-floating exchange rate.
  - Model-based approaches suggest the real exchange rate is 10-20 percent above the level predicted by Australia-specific factors.
  - IMF amended real exchange rate regression yields an estimate of 20 percent overvaluation.
  - Real exchange rate remains 32 percent above its 1983-2012 average.

- Current account, saving, investment, and projections
  - Current account deficit: widened from 2¼ percent of GDP in 2011 to 3¼ percent in the first half of 2012.
  - Staff projects current account to widen to 6 percent in the medium term as the investment boom continues and the terms of trade and interest rates on external borrowing normalize.
  - Investment projected to peak at 29 percent of GDP in 2015 from 27 percent in 2011, then fall to 28 percent of GDP in 2017.
  - Saving projected to decline gradually from 25 to 22½ percent of GDP reflecting declines in private sector corporate and household savings rates.
  - If government saving does not rise by the projected 3 percent of GDP, the current account deficit would be correspondingly larger.
  - Terms of trade projected to decline by 15 percent between 2011 and 2017.
  - Staff assesses the underlying current account deficit is 2 percent of GDP larger than the estimated medium-term norm of a deficit of 4 percent of GDP.

- Structural change and adjustment
  - Structural transition toward a services-oriented economy and greater links to Asia.
  - Mining sector stages: commodity price boom → large scale investment phase → expected rapid growth in exports as projects complete.
  - Policy challenge: facilitate labor and capital movement across the economy and promote diversification into services exports (health, education, tourism, professional services).

- Fiscal federal system insurance (Box 4)
  - Federal fiscal system compensates about a quarter of household income lost in state-level shocks; four fifths of insurance comes from the tax side.
  - Federal taxes decrease by approximately twenty cents per dollar lost in income; federal transfers increase by approximately five cents per dollar lost.

### Staff Appraisal: Macro Policy and Financial Sector
- Outlook and risks
  - Outlook favorable due to strong commodity demand and a mining investment boom.
  - Outside mining, growth expected to be slow with weak consumer confidence and a strong exchange rate weighing on business investment.
  - Risks tilted to the downside from uncertain global economy and potential global financial disruptions.

- Monetary policy
  - Current accommodative stance broadly appropriate; RBA has scope to cut policy rate and provide liquidity support if global recovery stalls.

- Fiscal policy
  - Deficit reduction path balances reducing public debt and containing adverse impacts on growth.
  - Much of the year’s adjustment reflects a catch up of revenue, mitigating impact on aggregate demand.
  - Maintaining surpluses over the medium term would relieve pressure on monetary policy and the exchange rate.

- External vulnerabilities
  - Net foreign liabilities large by international comparison.
  - Strong Australian dollar stronger than consistent with adjustment alone and could lead to build-up of bank foreign liabilities over time.
  - Increasing national saving, including through budget deficit reduction, would help reduce pressure on the current account.

- Financial sector
  - FSAP Update: financial system sound, resilient, well-managed.
  - Banks moving to more stable funding and hedged against exchange rate risk but continue to rely on wholesale funding.
  - Stress tests indicate major banks adequately capitalized but would require RBA liquidity support to withstand an extreme funding shock.
  - Authorities should continue intensive bank supervision and introduce higher loss absorbency for systematically important banks.

### Risk Assessment Matrix (Appendix I)
- Major risks and expected impacts (likelihood / expected impact)
  - Strong intensification of the Euro area crisis — Likelihood: Medium; Expected Impact: Medium.
    - Main channels: financial sector linkages; declining export demand; higher unemployment could exacerbate banking stresses.
  - Significant fall in non-oil commodity prices — Likelihood: Medium; Expected Impact: Medium.
    - Free-floating exchange rate would help buffer impact via a weakening Australian dollar.
  - Hard landing in emerging Asia — Likelihood: Low; Expected Impact: High.
    - One-third of Australia’s exports go to emerging Asia.
  - Volatility in wholesale and external funding — Likelihood: Medium; Expected Impact: Low.
    - Banks’ reliance on wholesale funding remains high; RBA liquidity support reduces forced asset sale risk.
  - Sharp fall in house and/or commercial real estate prices — Likelihood: Low; Expected Impact: Medium.
    - Average LTV around 50 percent on outstanding owner-occupied mortgages; commercial real estate ~10 percent of banks’ exposures.

### External Debt Sustainability: Scenario Results (selected figures)
- Baseline external debt (percent of GDP): 106
- Historical: 67
- CA shock: 109 (Baseline 106)
- Combined shock: 109 (Baseline 106)
- Combined shock with 30% depreciation: 111 (Baseline 106)
- Growth shock: 108 (Baseline 106)

- Notes on scenarios
  - Individual shocks are permanent one-half standard deviation shocks.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - One-time real depreciation of 30 percent occurs at the end of 2012; assumes foreign exchange hedging covers 80 percent of foreign currency debt and ignores offsetting impacts on partially hedged asset positions and trade response.

- Baseline and scenario averages (select)
  - Growth (Baseline; Scenario; Historical): 1.6; 1.9; 3.1
  - Another set: 3.2; 2.7; 3.0
  - Current account (Baseline; Scenario; Historical): -4.2; -4.8; -2.3

### Key Macroeconomic Indicators and Projections (selected)
- Output and demand (percent change)
  - Real GDP: 1.4 (2009); 2.5 (2010); 2.1 (2011); 3.3 (2012); 3.0 (2013).
  - Total domestic demand: -0.8 (2009); 4.1 (2010); 4.6 (2011); 4.7 (2012); 3.6 (2013).
  - Private consumption: 1.0 (2009); 2.9 (2010); 3.3 (2011); 3.7 (2012); 3.4 (2013).
  - Total investment: -3.0 (2009); 4.9 (2010); 7.1 (2011); 8.2 (2012); 5.5 (2013).

- Inflation and labor market
  - CPI inflation: 1.8 (2009); 2.9 (2010); 3.3 (2011); 2.0 (2012); 2.6 (2013).
  - Unemployment rate: 5.6 (2009); 5.2 (2010); 5.1 (2011); 5.2 (2012); 5.3 (2013).

- Saving and investment (percent of GDP)
  - Gross national saving: 23.1 (2009); 23.9 (2010); 24.9 (2011); 24.3 (2012); 23.5 (2013).
  - Gross capital formation: 27.3 (2009); 26.8 (2010); 27.2 (2011); 28.4 (2012); 29.0 (2013).

- Fiscal indicators (cash basis, percent of GDP)
  - Receipts: 23.1 (2009); 21.8 (2010); 21.3 (2011); 22.3 (2012); 23.6 (2013).
  - Payments: 25.2 (2009); 26.0 (2010); 24.7 (2011); 25.3 (2012); 23.5 (2013).
  - Underlying cash balance: -2.2 (2009); -4.2 (2010); -3.4 (2011); -3.0 (2012); 0.1 (2013).
  - Net debt: -1.3 (2009); 3.3 (2010); 6.0 (2011); 10.0 (2012); 9.4 (2013).

- External positions (percent of GDP)
  - Net external liabilities: 61.7 (2009); 57.3 (2010); 59.5 (2011); 61.4 (2012); 64.1 (2013).
  - Net external debt: 52.6 (2009); 47.9 (2010); 50.8 (2011); 52.5 (2012); 54.1 (2013).

- Selected levels and demographic indicators
  - Nominal GDP (2011): $A 1,44 billion.
  - Quota (in millions): SDR 3,236.
  - GDP per capita (2011): $A 63,576.
  - Population (September 2012): 22.7 million.
  - Unemployment rate (September 2012): 5.4 percent.

### Financial System and Household Vulnerabilities
- Banking system and prudential indicators
  - Banks’ Tier I capital to risk-weighted assets: 7.2 (2007); 8.2 (2008); 9.4 (2009); 9.7 (2010); 10.3 (2011).
  - Impaired assets to total assets: 0.2 (2007); 0.8 (2008); 1.2 (2009); 1.2 (2010); 1.1 (2011).
  - Housing loans share of total: 42.3 (2007); 44.2 (2008); 48.3 (2009); 51.5 (2010); 51.9 (2011).
  - Banks reduced short-term wholesale debt from 33 to 18 percent of all funding over the last four years.

- Household balance sheet indicators and vulnerabilities
  - Household debt to disposable income and household interest payments have declined marginally; household net wealth has fallen since the crisis.
  - Average loan-to-valuation ratio around 50 percent on outstanding owner-occupied mortgages.
  - Mortgages with LTV above 80 percent are about one-quarter of total stock and typically covered by lenders’ mortgage insurance.
  - Many households ahead of scheduled mortgage repayments (on average equivalent to 18 months of scheduled repayments).

- Staff recommendations for the financial sector
  - Continue intensive bank supervision.
  - Consider higher capital requirements for systematically important domestic banks and encourage further reductions in short-term external borrowing.
  - Maintain liquidity support frameworks and monitor housing market and household debt levels.

### Public Recommendations, Consultation Scheduling, and Carbon Price (Executive Board Assessment)
- Consultation scheduling
  - Staff recommends the next Article IV consultation be held on the standard 12-month cycle.

- Executive Board and staff recommendations (selected)
  - Commended authorities for sound macroeconomic management delivering impressive growth, low unemployment, and subdued inflation.
  - Supported government consolidation plans and recommended preserving policy space to respond to shocks.
  - Recommended raising national saving, including through budget deficit reduction and further incremental increases in employer-provided pension contributions.
  - Urged reductions in banks’ short-term wholesale debt and broadening domestic funding sources; close monitoring of housing market and household debt.
  - Encouraged structural reforms to seize opportunities from Asia: skills, education, innovation, infrastructure, tax and regulatory reform.

- Carbon price and monetary/fiscal implications
  - Quarterly increase in headline CPI reflected a modest inflationary impact from the introduction of an explicit carbon price in July this year, plus seasonal and temporary factors.
  - Directors viewed monetary stance as broadly appropriate; scope for further easing if warranted.
  - RBA policy rate lowered by 150 basis points since November 2011, most recent cut in October 2012.

- Public Information Notice highlights
  - Real GDP accelerated to 4 percent in the first half of 2012 (from 2¾ percent in the second half of 2011).
  - By Q2 2012, terms of trade had fallen by around 10 percent; spot prices for iron ore and coking coal fell by 25 and 30 percent respectively (by Q2 2012).
  - The 2011/12 underlying cash deficit came in at 3 percent of GDP, about 1½ percentage points higher than forecast during the 2011-12 Budget.

*Source: IMF staff report content compiled from _cr12305 (Australia country chapter, appendices, and Public Information Notice).*

### 1. Household Saving and Fiscal Multipliers _______________________________________________________ 10

### 1. Household Saving and Fiscal Multipliers

### Household saving trends and drivers
- Household saving as a share of GDP began increasing in 2005 and increased sharply as the global financial crisis began to unfold.
- Household saving ratio (household savings to household disposable income) rose by more than 5 percentage points in 2008-2009.
- Since 2009, both household saving measures appear to have stabilized at levels above the pre-crisis averages.
- The household saving ratio seems to have stabilized at around 10 percent after increasing sharply at the onset of the global financial crisis.
- The sharp increase in 2008-2009 reflected:
  - Slower growth in private consumption.
  - A temporary boost to household income, with a significant contribution from the cash transfers paid to households as part of the government’s fiscal stimulus package during the crisis (fiscal stimulus averaging about 2 percent of GDP a year in 2009-2011).
  - A decline in household interest payments of more than 30% between the third quarter of 2008 and the first quarter of 2009, largely due to monetary policy easing.

### Fiscal multipliers and macroeconomic context
- Fiscal multipliers vary significantly by the underlying state of the economy; multipliers tend to be larger in downturns than in expansions.
- Given that Australia’s economy is close to potential, the contractionary impact of the current fiscal consolidation is likely to be smaller than in other countries undergoing similar fiscal adjustment but with large negative output gaps.
- The impact of fiscal consolidation could also be mitigated by Australia’s still-sizable monetary policy space.
- These results are broadly in line with those suggested by the Global Integrated Monetary and Fiscal (GIMF) model simulations.

### Projections and implications for household saving
- Going forward, Australia’s household saving ratio is likely to decline modestly as interest rates normalize and household sentiment improves.
- The saving ratio is expected to remain above the pre-crisis levels because the persistently strong capital gains in household assets in the 1990s and 2000s, which allowed households to enjoy rising wealth with low rate of saving, are unlikely to be repeated in the near future.

### Key statistics (as reported)
- Increase in household saving ratio in 2008-2009: more than 5 percentage points.
- Fiscal stimulus: averaging about 2 percent of GDP a year in 2009-2011.
- Decline in household interest payments: more than 30% between the third quarter of 2008 and the first quarter of 2009.
- Household saving ratio stabilized at around 10 percent (post-crisis observation).

*Source: IMF staff analysis in “Household Saving and Fiscal Multipliers” (Box 1) from the Australia country report.*

### 18. Fiscal Strategy. The government’s fiscal strategy has remained unchanged since first

### 18. Fiscal Strategy

### Fiscal strategy and objectives
- Three pillars: achieving budget surpluses, on average, over the medium term; keeping taxation as a share of GDP below the 2007–08 level on average (23.7 percent of GDP); and improving the government’s net financial worth over the medium term.
- Commitment to limiting spending growth: while the economy is growing at or above trend, real spending growth, on average, will be capped at 2 percent annually until surpluses are at least 1 percent of GDP.
- Projected fiscal path:
  - Surpluses gradually increase from ¼ percent of GDP in 2013/14 to 1 percent of GDP in 2015/16.
  - Net commonwealth debt falls from about 10 percent of GDP in 2012 to zero by 2020/21.
- States and Territories: anticipate a gradual reduction in expenditure over the medium term, in part through public sector wage control measures, to maintain reputation among international bondholders in the face of lower projected GST revenues.

### Tax policy
- Staff supports recent tax initiatives following Australia’s Future Tax System (2010).
- Reforms implemented on July 1, 2012 include:
  - a minerals resource rent tax (MRRT),
  - a broadening of the base of the petroleum resource rent tax (PRRT),
  - and a carbon price with a transition to emissions trading over time.
- Staff view:
  - welcomed the MRRT and broadening of PRRT base,
  - continues to support the carbon price, described as well-designed along FAD recommendations and intended to be fiscally neutral.

### Fiscal policy management and stabilizers
- Monetary policy expected to be the main demand management tool in the medium-term; fiscal policy can play a role responding to economic shocks.
- Staff recommendation: allow automatic stabilizers to move fully in both directions.
- Staff note: growing importance of mining increases government revenue exposure to commodity income swings.

### Medium-term fiscal challenges
- Expenditure pressures:
  - Aging and health care costs together estimated to increase public expenditure by over 3 percent of GDP by 2030.
- Revenue context:
  - Revenue currently around 21.0 percent of GDP in 2011/12, well below the government’s cap of 23.7 percent of GDP, implying some room to accommodate higher spending needs through revenue increases.
- Policy implication:
  - Re-prioritization of spending would likely be needed to accommodate additional commitments and produce budget surpluses if the revenue ceiling is maintained.
- Risk:
  - A sustained shock to the terms of trade would add to these challenges (see staff estimate footnote: a sustained 30 percent decline in the terms of trade, partly offset by exchange rate depreciation, could worsen the budget balance by 2 percent of GDP).

### Authorities’ views on fiscal strategy and resource proceeds
- Agreed with staff on role of automatic stabilizers and acknowledged medium-term budgetary challenges.
- Noted that the revenue ceiling is based on 2007-08 receipts and reflects temporary pre-crisis factors (high capital gains taxes, surging asset prices, rapidly rising commodity prices, rapid credit growth, low household savings rate).
- Structural changes to the tax base during the recovery (shifting consumption patterns, lower asset price growth, higher depreciation deductions) are likely to persist; authorities do not expect the revenue ceiling to be binding over the next several years if current tax policy framework is maintained.
- Strategy for public sector proceeds from increased mining exports:
  - Do not plan an earmarked sovereign wealth fund.
  - Rationale: share of mining sector projected to increase to around 10 percent of GDP and contribution to public revenue will remain limited; minable resources expected to be long-lasting rather than temporary.
  - Plan: tax proceeds to contribute to gradual reduction in gross public sector debt, providing equivalent outcomes to a formal fund.

### Source attribution
*International Monetary Fund — excerpt from IMF staff report content provided.*

### 33. The authorities viewed much of the projected widening of the current account deficit

### 33. The authorities viewed much of the projected widening of the current account deficit

### External sector assessment and exchange rate
- Authorities view much of the projected widening of the current account deficit as sustainable and related to major investment projects in mining financed by foreign investment, retained earnings, and long-term debt.
- Authorities reiterated their strong commitment to a freely-floating exchange rate, which they see as playing a key role in containing external vulnerabilities.
- The floating exchange rate has helped the economy absorb a sharp increase in terms of trade without leading to an overheating domestic economy and a spike in inflation.
- Staff assessment and model-based estimates:
  - Model-based approaches suggest the real exchange rate is 10-20 percent above the level predicted by Australia-specific factors.
  - The IMF’s amended real exchange rate regression approach yields an estimate of 20 percent overvaluation.
  - The real exchange rate remains 32 percent above its 1983-2012 average.
  - Staff notes the exchange rate is modestly overvalued relative to what might have been expected given the recent decline in the terms of trade, while also noting past episodes in which the exchange rate did not move closely with the terms of trade on a short-term basis.

### Current account, saving, investment, and projections
- Recent and projected balances and trajectories:
  - Current account deficit widened from 2¼ percent of GDP in 2011 to 3¼ percent in the first half of 2012.
  - Staff projects the current account to widen to 6 percent in the medium term as the investment boom continues and the terms of trade and interest rates on external borrowing normalize.
  - Investment is projected to peak at 29 percent of GDP in 2015 from 27 percent in 2011, and then to fall back to 28 percent of GDP in 2017.
  - Saving is projected to decline gradually from 25 to 22½ percent of GDP reflecting projected declines in currently high private sector corporate and household savings rates.
  - If government saving does not follow its projected path of rising by 3 percent of GDP, the current account deficit would be correspondingly larger.
  - The terms of trade is projected to decline by 15 percent between 2011 and 2017.
  - The riskless real interest rate is assumed to return to the pre-crisis average.
- Staff’s assessment of the underlying current account:
  - Staff assesses the underlying current account deficit is 2 percent of GDP larger than the estimated medium-term norm of a deficit of 4 percent of GDP.
  - The medium-term norm of a 4 percent of GDP deficit is close to the 4¼ percent of GDP average of the current account deficit since 1988.
  - Staff notes sensitivity of the assessment to projections of saving behavior and the nature, volume, and timing of mining investment and export deliveries.

### Structural change and adjustment
- Structural transition and challenges:
  - Australia is undergoing long-term structural change toward a services-oriented economy and responding to the rise of Asia; demand for non-rural commodities and growth in the Asian middle class shape opportunities.
  - The mining sector is moving through stages: commodity price boom → large scale investment phase (current) → expected rapid growth in exports as projects complete.
  - Commodity prices have likely peaked; while expected to remain at high levels they will no longer be a key driver of income growth.
  - Strong demand from urbanization and industrialization in emerging Asia is fueling a surge in resources sector investment projected to reach historic highs as a percent of GDP over the next two years.
  - Policy challenge: facilitate movement of resources across the economy and promote diversification into other growth drivers such as services exports, health, education, tourism and professional services.
- Authorities’ view on facilitating change:
  - The government’s role is to increase the flexibility, capabilities, and stability of the economy.
  - Exchange rate flexibility is emphasized as key in adjusting to cycles in the terms of trade.
  - Institutional improvements cited: floating exchange rate regime, decentralized wage bargaining, inflation targeting and operational independence for the RBA, and product market reforms (e.g., removal of trade barriers).
  - As the investment phase winds down, growth in other sectors such as residential construction will need to pick up; early signs assisted by significant monetary policy easing were noted.

### Fiscal federal system as regional insurance (Box 4)
- The federal fiscal system provides important insurance to households against idiosyncratic state-level income shocks via countercyclical federal taxes and transfers.
- Staff estimates:
  - About a quarter of the income lost in households is compensated by this insurance.
  - Four fifths of the insurance comes from the tax side.
  - Federal taxes decrease by approximately twenty cents per dollar lost in income (combined effect of federal taxes on income, wealth, and other taxes).
  - Federal transfers increase by approximately five cents per dollar lost in income.
- The analysis focuses on disposable household income and captures countercyclical effects rather than redistribution; total insurance to household incomes is larger when including state taxes and transfers and horizontal fiscal equalization mechanisms.

### Staff appraisal: macro policy and financial sector
- Outlook and risks:
  - Outlook remains favorable due to strong commodity demand from China driving export earnings and a mining investment boom.
  - Outside mining, growth is expected to be slow with weak consumer confidence and a strong exchange rate weighing on business investment.
  - Risks to growth projections are tilted to the downside due to an uncertain global economy and potential disruptions to the global financial system.
  - The flexible exchange rate provides a buffer against shocks, particularly fluctuations in global commodity demand.
- Monetary policy:
  - The current accommodative monetary policy stance is broadly appropriate given expected inflation within the target range, the strong Australian dollar, and efforts to return the budget to surplus this year.
  - The RBA’s credibility and rapid transmission allow monetary policy to react quickly; if the global recovery stalls, monetary policy should act as the first line of defense with scope to cut the policy rate and provide liquidity support.
- Fiscal policy:
  - The government’s deficit reduction path balances reducing public debt and containing adverse impacts on growth.
  - Much of the year’s adjustment reflects a catch up of revenue, mitigating impact on aggregate demand.
  - Maintaining surpluses over the medium term would relieve pressure on monetary policy and the exchange rate and improve resilience to future shocks and aging costs.
  - Australia’s modest public debt gives scope to delay planned surpluses if the outlook sharply deteriorates.
- External vulnerabilities and exchange rate:
  - Australia’s net foreign liabilities are large by international comparison.
  - The current account deficit is projected to widen as mining-related capital goods imports, mostly financed by direct investment, pick up.
  - The strong Australian dollar, while reallocating resources toward mining, is stronger than would be consistent with this adjustment alone and at current levels would likely lead to a build-up of bank foreign liabilities over the longer term.
  - Increasing national saving, including through budget deficit reduction, would help reduce pressure on the current account.
- Financial sector:
  - An FSAP Update found Australia’s financial system to be sound, resilient, and well-managed.
  - Banks are moving to more stable funding and are hedged against exchange rate risk but continue to rely on wholesale funding, exposing them to global market turmoil.
  - Stress testing indicates major banks are adequately capitalized and likely to withstand large macroeconomic shocks, but would require RBA liquidity support to withstand an extreme funding shock.
  - Authorities should continue intensive bank supervision and introduce higher loss absorbency for systematically important banks.

*Source: _cr12305 - 33. The authorities viewed much of the projected widening of the current account deficit*

### 44. Staff recommends that the next article IV consultation be held on the standard 12-

### _cr12305 - 44. Staff recommends that the next article IV consultation be held on the standard 12-

### Consultation scheduling
- Staff recommends that the next article IV consultation be held on the standard 12-month cycle.

### Growth: overview and drivers
- Australia’s growth is strong and driven by still-strong terms of trade and growing links to Asia, especially China.
- Growth composition and contributions (Y/Y percent change, selected quarters shown):
  - Consumption, Investment, Net Exports contributions depicted for 09Q2–12Q2.
- Terms of Trade (goods and services, 2000 = 100): Australia compared with Canada, New Zealand, South Africa, Brazil (1991–2012 series shown).
- Exports by destination (percent of total): CHN JPN KOR IND US UK NZL ITA SGP HK GER (2000 vs 2011).
- Commodity prices (U.S. dollars per metric ton): Thermal coal spot price; Iron ore spot price (Nov-09 … Oct-12 series).
- Capital expenditure (In percent GDP): Non-mining vs Mining (1996–2012 series).
- Employment by industry (In thousands): Mining and Construction vs Manufacturing (2000–2012 series).

### Household vulnerabilities
- Household debt to disposable income (In percent): AUS CAN NZL GBR USA (1999–2011 series).
- Household interest payments to disposable income (In percent): AUS CAN NZL GBR USA (1999–2011 series).
- Net wealth to disposable income (In percent): AUS CAN NZL GBR USA (1999–2011 series).
- Real house prices (2000 = 100): AUS/CAN/IRL/NZL/GBR/USA/FRA/ESP (2001–2012 series).
- House price-to-income ratio (1990 = 100): AUS (APM and ABS measures) vs IRL NZL GBR ESP USA (1991–2012 series).
- House price-to-rent ratio (1990 = 100): AUS (REIA and RP Data Rismark measures) vs IRL NZL GBR ESP USA (1991–2012 series).
- Key observations from charts:
  - Household debt declined marginally.
  - Debt-servicing costs have fallen.
  - Household net wealth has fallen since the crisis.
  - House price-to-rent and affordability indicators have improved, but households remain vulnerable to unwinding of the prior run-up in house prices.

### Inflationary pressures and labor market
- Underlying inflation (Trimmed mean and Weighted median) has been falling (2007–2012 series).
- Wages and productivity (Percent change, y/y): Private sector wages roughly in line with trend productivity; Productivity (output per hour worked, market sector) series shown (2007–2012).
- CPI inflation and expectations:
  - Headline CPI and expectations (Consumers' and Market Economists')—CPI inflation (percent change, y/y) series (2007–2012).
  - Inflation expectations remain stable around 2½ percent.
- Output gap and resource pressure:
  - Output gap (% of GDP) series and indicators of resource pressure: Unemployment rate (rhs) and Capacity Utilization (lhs).
  - Charts indicate spare capacity in the economy.
- Price pass-through and producer prices:
  - Tradables and Non-tradables CPI inflation (percent change, y/y) series.
  - Producer price inflation by stage of production (Intermediate, Final; y/y) declined.

### Monetary stance and financial conditions
- Policy rate and Taylor-type rule:
  - Policy rate implied by Taylor-type rule and Cash Rate series (2006–2012).
  - Policy rate is close to that implied by a Taylor rule.
- Real interest rates:
  - Real 1-year OIS rate (based on trimmed mean CPI inflation) and Real policy rate (based on trimmed-mean CPI inflation) series; real policy rate stabilized below its recent average.
- Bank funding and lending rates:
  - Funding cost and Lending rate spread to cash rate; Funding costs remain elevated while mortgage rates followed the cash rate.
  - Mortgage interest rates (Housing loans 3-year fixed; Housing loans standard variable) tracked cash rate.
  - Market lending and real lending rates close to historical averages.
- Charted indicators:
  - Major banks' lending rates and funding costs spread to cash rate.
  - Mortgages and business lending rates vs 15 year averages.
  - Real lending interest rate (based on trimmed-mean CPI inflation; year-on-year).

### Fiscal stance and outlook
- Consolidation and budget outlook:
  - An ambitious consolidation will return the budget to surplus this fiscal year.
  - Underlying cash balance projected to be 0.1 percent of GDP in 2012/13 (Table 1 shows underlying cash balance -3.0 for 2011, 0.1 for 2012).
  - Budget surplus projected to increase to about 1 percent of GDP over the medium term.
  - Net debt projected to peak at almost 10 percent in 2011/12 (Commonwealth net debt entries).
- Fiscal impulse and composition:
  - Commonwealth Government Fiscal Impulse (In percent of GDP) and structural balance series (2007/08–2017/18).
  - Commonwealth revenue and expenditure (Y/Y growth, in percent) series show restraint in expenditure and revenue growth.
  - States are consolidating gradually their budgets.
- Medium-term projections and key fiscal numbers (Table 3, fiscal accounts, selected entries):
  - Commonwealth government revenue: 22.6 (2009/10), 22.1 (2010/11), 23.0 (2011/12), 24.3 (2012/13), with continued projections through 2017/18.
  - Expenditure: 26.8 (2009/10), 25.8 (2010/11), 26.0 (2011/12), 24.1 (2012/13) etc.
  - Underlying cash balance (cash basis): -4.2 (2009/10), -3.4 (2010/11), -3.0 (2011/12), 0.1 (2012/13), and projected 0.1–0.7 thereafter.
  - Commonwealth government net debt (percent of GDP): 3.3 (2009/10), 6.0 (2010/11), 10.0 (2011/12), 9.4 (2012/13), 9.0 (2013/14), 8.4 (2014/15), 7.4 (2015/16), 6.8 (2016/17), 5.7 (2017/18).

### Fiscal comparison and structural implications
- After a period of high real expenditure growth driven mainly by current transfers, consolidation is faster than in most advanced countries.
- General government net debt is forecast to fall over the medium term; gross debt projected to remain among the lowest in advanced economies (figures and cross-country comparisons shown).

### Banking system developments and vulnerabilities
- Lending structure and housing exposure:
  - Over half of total lending is to housing (Banks' Lending Structure, Jun-06–Jun-12).
  - Housing % of total lending depicted.
- Liabilities and funding:
  - Deposits, Notes and other borrowings, Other liabilities series (Mar-2006 to Mar-2012) show deposits increasing share of liabilities while wholesale funding remains sizeable.
- Capital and profitability:
  - Tier 1 capital and Total capital ratios increased (2005–2012 series).
  - ROA, Net Interest Margin, ROE (after tax; percent) show banks profitable.
- Asset quality:
  - Impaired assets to total assets and specific provisions to impaired assets remain above pre-crisis levels but asset quality is generally good.
- Loans to deposits:
  - Banks' loans to deposit ratio has continued to fall (2006–2012 series).
- Table 7 highlights (selected indicators, 2007–11):
  - Banks: Tier I capital to risk-weighted assets 7.2 (2007), 8.2 (2008), 9.4 (2009), 9.7 (2010), 10.3 (2011).
  - Impaired assets to total assets: 0.2 (2007), 0.8 (2008), 1.2 (2009), 1.2 (2010), 1.1 (2011).
  - Housing loans share of total: 42.3 (2007), 44.2 (2008), 48.3 (2009), 51.5 (2010), 51.9 (2011).

### Financial market indicators
- Equity and sector performance:
  - AS30 stock index broadly unchanged over the year; Financial stocks gained while resources index fell sharply.
- Bank CDS spreads:
  - Bank credit default swap spreads are above crisis levels yet below those for European and U.S. banks (Five-year; average of four largest banks).
- Liquidity and market expectations:
  - Exchange settlement balances at the RBA remain lower than in early 2009.
  - Market-derived OIS expectations point to further cuts in the policy rate over the next year (3-month OIS, market-exp rate in 1 yr derived from OIS curve, overnight cash rate series).
- Sovereign yields and spreads:
  - Australian Commonwealth bond yields fell to historic lows during the year; Commonwealth bond spreads narrowed relative to U.S. yields (2Y, 5Y, 10Y yields and AUS 5Y/AUS 10Y spreads).

### Trade, balance of payments, and capital flows
- Composition of exports (2004–2012H1): Rising share for resource exports; services, manufactures, rural, other goods shown.
- Export performance:
  - Exports of goods (real terms, y/y percent change) by category: rural commodities, non-rural commodities, manufactures.
  - Exports of coal and iron ore (millions of tons): Aug-09 … Aug-12 series; coal and iron ore exports remain strong.
- Imports and current account:
  - Imports of goods (real terms, y/y percent change): consumption goods, capital goods, intermediate goods—rebounded contributing to widening current account deficit.
  - Current account balance (In percent of GDP): net income and transfers, trade in goods and services series show current account deficits with 2012H1 noted.
- Financing of current account:
  - Net capital inflows (In percent of GDP): Increasingly financed by equity flows and debt flows to the public sector; series show Net Equity Flows, Net Debt Flows (Public Sector), Net Debt Flows (Private Sector).

### External vulnerability and external accounts
- Net foreign liabilities and external debt:
  - Net foreign investment position (2011): Australia’s net foreign liabilities are relatively high (chart comparing countries, In percent of GDP).
  - Current account balance (2017 projection): projected to be larger than most advanced economies (In percent of GDP).
  - Total external debt (2012Q1) low compared to many countries (In percent of GDP).
- Short-term external debt:
  - Short-term debt declined somewhat from its pre-crisis peak; as a share of GDP is less than in most other advanced economies.
  - Short-term gross external debt and short-term external debt by maturity charts shown.
- Bank gross external debt is low relative to most other advanced countries (2012Q1 comparisons).
- External positions and projections (Table 4 & 5 highlights):
  - Net external liabilities (percent of GDP): 56.3 (2007), 57.2 (2008), 61.7 (2009), 57.3 (2010), 59.5 (2011).
  - Net external debt (percent of GDP): 52.1 (2007), 56.0 (2008), 52.6 (2009), 47.9 (2010), 50.8 (2011).
  - Gross external debt (percent of GDP): 92.1 (2007), 103.6 (2008), 99.0 (2009), 92.4 (2010), 94.4 (2011).

### Key macroeconomic indicators and projections (selected)
- Nominal GDP (2011): $A 1,44 billion (table shows as presented).
- Quota (in millions): SDR 3,236.
- GDP per capita (2011): $A 63,576.
- Population (September 2012): 22.7 million.
- Unemployment rate (September 2012): 5.4 percent.
- Main exports: Metal ores and minerals; tourism; coal and coke (fuel).
- Output and demand (percent change, Table 1):
  - Real GDP: 1.4 (2009), 2.5 (2010), 2.1 (2011), 3.3 (2012), 3.0 (2013).
  - Total domestic demand: -0.8 (2009), 4.1 (2010), 4.6 (2011), 4.7 (2012), 3.6 (2013).
  - Private consumption: 1.0 (2009), 2.9 (2010), 3.3 (2011), 3.7 (2012), 3.4 (2013).
  - Total investment: -3.0 (2009), 4.9 (2010), 7.1 (2011), 8.2 (2012), 5.5 (2013).
- Inflation and unemployment (in percent, Table 1):
  - CPI inflation: 1.8 (2009), 2.9 (2010), 3.3 (2011), 2.0 (2012), 2.6 (2013).
  - Unemployment rate: 5.6 (2009), 5.2 (2010), 5.1 (2011), 5.2 (2012), 5.3 (2013).
- Saving and investment (percent of GDP, Table 1):
  - Gross national saving: 23.1 (2009), 23.9 (2010), 24.9 (2011), 24.3 (2012), 23.5 (2013).
  - Gross capital formation: 27.3 (2009), 26.8 (2010), 27.2 (2011), 28.4 (2012), 29.0 (2013).
- Fiscal indicators (cash basis, percent of GDP, Table 1):
  - Receipts: 23.1 (2009), 21.8 (2010), 21.3 (2011), 22.3 (2012), 23.6 (2013).
  - Payments: 25.2 (2009), 26.0 (2010), 24.7 (2011), 25.3 (2012), 23.5 (2013).
  - Underlying cash balance: -2.2 (2009), -4.2 (2010), -3.4 (2011), -3.0 (2012), 0.1 (2013).
  - Net debt: -1.3 (2009), 3.3 (2010), 6.0 (2011), 10.0 (2012), 9.4 (2013).
- Money and credit (end of period, Table 1):
  - Interest rate (90-day bill, in percent): 4.2 (2009), 5.0 (2010), 4.5 (2011), 4.5 (2012).
  - Treasury bond yield (10-year, in percent): 5.6 (2009), 5.5 (2010), 3.7 (2011), 2.8 (2012).
  - M3 (percent change): 4.1 (2009), 0.4 (2010), 10.4 (2011), 8.0 (2012).
  - Private domestic credit (percent change): 1.3 (2009), 3.0 (2010), 3.5 (2011), 4.6 (2012).
- Balance of payments (percent of GDP, Table 1):
  - Current account: -4.2 (2009), -2.9 (2010), -2.3 (2011), -4.1 (2012), -5.5 (2013).
- Terms of trade (percent change, Table 1): -9.1 (2009), 16.0 (2010), 13.6 (2011), -7.4 (2012), -4.0 (2013).
- External assets and liabilities (percent of GDP, Table 1):
  - Net external liabilities: 61.7 (2009), 57.3 (2010), 59.5 (2011), 61.4 (2012), 64.1 (2013).
  - Net external debt: 52.6 (2009), 47.9 (2010), 50.8 (2011), 52.5 (2012), 54.1 (2013).

*International Monetary Fund. Australia country chapter (figures, tables, and projections as presented).*

### Appendix I. Australia - Risk Assessment Matrix

### Appendix I. Australia - Risk Assessment Matrix

### Major risks and expected impacts
- Strong intensification of the Euro area crisis
  - Likelihood: Medium
  - Expected Impact on Economy: Medium
  - Key channels and effects:
    - Main direct impact through financial sector linkages, in particular if European funding markets would dry up.
    - Declining export demand would reduce GDP growth.
    - A sustained decline in GDP growth, together with a rise in unemployment, could exacerbate financial stresses in the banking sector.

- Significant fall in non-oil commodity prices
  - Likelihood: Medium
  - Expected Impact on Economy: Medium
  - Key channels and effects:
    - Would weaken Australia’s terms of trade.
    - The free-floating exchange rate would help buffer the impact, as declines in commodity prices can be offset to some extent by a weakening of the Australian dollar.

- Hard landing in emerging Asia
  - Likelihood: Low
  - Expected Impact on Economy: High
  - Key channels and effects:
    - One-third of Australia’s exports go to emerging Asia, leaving growth prospects vulnerable to their economic outlook.

- Volatility in wholesale and external funding
  - Likelihood: Medium
  - Expected Impact on Economy: Low
  - Key channels and effects:
    - Banks’ reliance on wholesale and external funding remains high.
    - Foreign liability positions are largely hedged and explicit liquidity support from the RBA means that a reversal of capital flows would unlikely result in forced asset sales.
    - Nevertheless, volatility in international funding markets could raise banks’ funding costs.

- Sharp fall in house and/or commercial real estate prices
  - Likelihood: Low
  - Expected Impact on Economy: Medium
  - Key channels and effects:
    - House prices have declined gradually over the past year, but a collapse in house prices appears unlikely.
    - An average LTV ratio of around 50 percent on outstanding owner-occupied mortgages provides a buffer for the financial sector against a large decline in house prices.
    - Likely negative wealth effect on consumption if house prices fall sharply.
    - Commercial real estate represents about 10 percent of banks’ exposures; a sharp fall in prices would likely impair banks’ balance sheets.
    - Commercial real estate prices have seen a large correction since 2008 but still appear high in international comparison.

### Note
- This matrix shows events that could materially alter the baseline path, the scenario most likely to materialize in the view of the staff.

*Source: Appendix I. Australia - Risk Assessment Matrix (IMF staff).*

### Appendix II. Australia: Main Recommendations of the 2011 Article IV Consultation

- Fiscal policy
  - Fund recommendations:
    - Staff welcomed the authorities’ commitment to return to a budget surplus by 2012/13, despite the negative impact of natural disasters.
    - The deficit reduction should put Australia in a strong position to deal with future shocks.
    - Staff noted that there was ample scope to slow the pace of exit or loosen fiscal policy in response to a downside scenario.
    - Staff emphasized that the automatic fiscal stabilizers should be allowed to operate fully, given that the growing dependence on mining may amplify the business cycle.
  - Authorities’ actions:
    - The 2011/12 underlying cash deficit came in larger than planned.
    - Authorities remain committed to returning to a budget surplus by 2012/13.
    - Beyond that, the authorities plan to improve the fiscal position by limiting real spending growth to 2 per cent a year, on average, until surpluses are at least 1 per cent of GDP.
    - The government’s strategy of achieving budget surpluses, on average, over the medium term and improving net financial worth is consistent with allowing automatic stabilizers to operate.

- Monetary policy
  - Fund recommendations:
    - Staff agreed with the monetary policy stance, which has helped anchor medium-term inflation expectations.
    - If the recovery remains on track, further increases in the policy rate are likely to be needed to contain inflation pressures from the impact of the mining boom on the wider economy.
    - If global financial markets become severely disrupted or world growth falters, the Reserve Bank of Australia (RBA) has ample space to cut the policy rate.
  - Authorities’ actions:
    - The RBA has lowered the policy rate by 150 basis points since November 2011, with the most recent cut in October 2012.
    - Initially, when inflation moderated at the end 2011, the RBA moved to remove a mildly restrictive stance.
    - During 2012, as the outlook for the global economy deteriorated and with projected inflation consistent with the target, the RBA shifted to an accommodative monetary policy stance.

- Financial sector policy
  - Fund recommendations:
    - Emphasized the importance of continued intensive bank supervision to maintain financial stability.
    - Recommended considering the merits of higher capital requirements for the systematically important domestic banks and encouraging banks to reduce further their short-term external borrowing.
  - Authorities’ actions:
    - The Australian Prudential Regulation Authority (APRA) undertook comprehensive stress tests of banks.
    - With respect to capital requirements, the authorities will consider next steps on higher loss absorbency following the G-20 endorsement of Basel recommendations for Domestic Systemically Important Banks (D-SIBs).

*Source: Appendix II. Australia: Main Recommendations of the 2011 Article IV Consultation (IMF staff).*

### External debt sustainability and scenario results (selected figures)
- Baseline external debt (External debt in percent of GDP): 106
- Historical: 67
- CA shock: 109 (Baseline 106)
- Combined shock: 109 (Baseline 106)
- Combined shock with 30% depreciation: 111 (Baseline 106)
- Growth shock: 108 (Baseline 106)
- Notes on scenarios:
  - Individual shocks are permanent one-half standard deviation shocks.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - One-time real depreciation of 30 percent occurs at the end of 2012. This scenario assumes foreign exchange hedging effectively covers 80 percent of foreign currency debt. The scenario ignores the offsetting impact of a depreciation on partially hedged asset positions, and it does not incorporate any positive movement of the trade balance in response to the depreciation.
- Baseline and scenario projections (select averages shown in the source):
  - Growth (Baseline, Scenario, Historical): 1.6; 1.9; 3.1
  - Another set shown (Baseline, Scenario, Historical): 3.2; 2.7; 3.0
  - Current account (Baseline, Scenario, Historical): -4.2; -4.8; -2.3

*Source: Appendix III. Australia: External Debt Sustainability: Bound Tests (IMF staff).*

### Key macroeconomic and fiscal indicators (from the Public Information Notice)
- Real GDP growth:
  - Accelerated from 2¾ percent in the second half of 2011 to 4 percent in the first half of 2012.
- External sector and commodity prices:
  - Australia’s terms of trade peaked in 2011.
  - By Q2 2012, the terms of trade had fallen by around 10 percent.
  - Spot prices for iron ore and coking coal fell by 25 and 30 percent respectively (by Q2 2012).
  - Current account deficit narrowed to 2¼ percent of GDP (peak period referenced).
- Inflation and labor market:
  - CPI target band: 2-3 percent.
  - Underlying measures of inflation near the middle of the 2-3 percent target band.
  - Unemployment rate: below 5½ percent.
  - Wage growth: marginally above its 10 year average in June 2012.
- Monetary policy actions:
  - RBA policy rate lowered by 150 basis points since November 2011, most recent cut in October 2012.
- Fiscal outturns and composition:
  - The 2011/12 underlying cash deficit came in at 3 percent of GDP, about 1½ percentage points higher than forecast during the 2011-12 Budget.
  - Receipts fell short of projections by 0.9 percent of GDP during 2011/12.
  - Payments during 2011/12 exceeded forecasts by 0.6 percent of GDP, mainly due to payments related to natural disasters and accelerated transfer payments to households and businesses.

*Source: Public Information Notice (IMF Executive Board concluding the 2012 Article IV Consultation with Australia).*

*Compiled from: _cr12305 - Appendix I. Australia - Risk Assessment Matrix; Appendix II; Appendix III; Public Information Notice (IMF staff).*

### introduction of carbon price.

### introduction of carbon price

### Executive Board Assessment
- Executive Directors commended the Australian authorities for sound and prudent macroeconomic management that contributed to impressive growth, low unemployment, and subdued inflation.
- Economic outlook assessed as favorable but with risks tilted to the downside, including a possible deterioration in external demand and elevated stress in the global financial market.
- Need to preserve adequate policy space to respond to adverse shocks and continue structural adjustments to facilitate more balanced growth.
- Monetary stance: current accommodative stance judged broadly appropriate; scope for further easing if warranted.
- Policy effectiveness supported by the central bank’s high degree of credibility and a well-functioning transmission mechanism.
- Directors supported government consolidation plans that reduce public indebtedness while preserving growth via spending restraint and reprioritization, tax measures, and use of proceeds from mineral resources; welcomed intention to maintain budgetary surpluses over the medium term to strengthen fiscal buffers against future shocks and long-term population aging.
- If a sharp deterioration in the economic outlook caused revenue underperformance, delaying the return to surpluses could be an option given Australia’s modest debt-to-GDP ratio; allowing automatic stabilizers to operate fully could help relieve pressure on monetary policy.
- Flexible exchange rate viewed as critically important; Australian dollar “moderately above its long-term average” exerting pressure on non-mining tradable sectors, widening the current account deficit and net foreign liabilities.
- Recommendation to raise national saving, including through budget deficit reduction and further incremental increases in employer provided pension contributions, to help narrow the current account deficit over time.
- Financial system: FSAP Update found Australia’s financial system sound, resilient, and well managed; importance of continuing intensive bank supervision, liquidity support, and ensuring systemically important banks have adequate capital buffers emphasized.
- Encouraged reductions in banks’ short-term wholesale debt and broadening domestic funding sources; close monitoring of housing market and household debt levels urged.
- Supported government efforts to facilitate structural transition toward a services-oriented economy and to seize opportunities from growth of Asian economies, including enhancing productivity and flexibility in product and labor markets; welcomed the government’s White Paper on Australia in the Asian Century.

### Key economic indicators and projections (2009–13)
- Nominal GDP (2011): $A 1,44 billion
- Quota (in millions): SDR 3,236
- GDP per capita (2011): $A 63,576
- Population (September 2012): 22.7 million
- Unemployment rate (September 2012): 5.4 percent
- Main exports: Metal ores and minerals; tourism; coal and coke (fuel)

Selected annual numbers:
- Real GDP: 2009: 1.4; 2010: 2.5; 2011: 2.1; 2012: 3.3; 2013 Proj: 3.0 (percent change)
- Total domestic demand: 2009: -0.8; 2010: 4.1; 2011: 4.6; 2012: 4.7; 2013 Proj: 3.6
- Private consumption: 2009: 1.0; 2010: 2.9; 2011: 3.3; 2012: 3.7; 2013 Proj: 3.4
- Total investment: 2009: -3.0; 2010: 4.9; 2011: 7.1; 2012: 8.2; 2013 Proj: 5.5
- Net exports (contribution to growth): 2009: 2.2; 2010: -1.5; 2011: -2.7; 2012: -0.8; 2013 Proj: -0.7
- CPI inflation: 2009: 1.8; 2010: 2.9; 2011: 3.3; 2012: 2.0; 2013 Proj: 2.6 (in percent)
- Unemployment rate: 2009: 5.6; 2010: 5.2; 2011: 5.1; 2012: 5.2; 2013 Proj: 5.3 (in percent)
- Gross national saving: 2009: 23.1; 2010: 23.9; 2011: 24.9; 2012: 24.3; 2013 Proj: 23.5 (in percent of GDP)
- General government saving: 2009: -0.8; 2010: -0.1; 2011: -0.1; 2012: 2.4; 2013 Proj: 5.4 (in percent of GDP)
- Private saving: 2009: 23.9; 2010: 24.0; 2011: 25.0; 2012: 21.9; 2013 Proj: 18.1 (in percent of GDP)
- Gross capital formation: 2009: 27.3; 2010: 26.8; 2011: 27.2; 2012: 28.4; 2013 Proj: 29.0 (in percent of GDP)
- Fiscal receipts (cash basis, in percent of GDP): 2009: 23.1; 2010: 21.8; 2011: 21.3; 2012: 22.3; 2013 Proj: 23.6
- Fiscal payments (cash basis, in percent of GDP): 2009: 25.2; 2010: 26.0; 2011: 24.7; 2012: 25.3; 2013 Proj: 23.5
- Underlying cash balance (percent of GDP): 2009: -2.2; 2010: -4.2; 2011: -3.4; 2012: -3.0; 2013 Proj: 0.1
- Net debt (percent of GDP): 2009: -1.3; 2010: 3.3; 2011: 6.0; 2012: 10.0; 2013 Proj: 9.4
- Interest rate (90-day bill, end of period, in percent): 2009: 4.2; 2010: 5.0; 2011: 4.5; 2012: 4.5
- Treasury bond yield (10-year, in percent): 2009: 5.6; 2010: 5.5; 2011: 3.7; 2012: 2.8
- M3 (percent change): 2009: 4.1; 2010: 10.4; 2011: 8.0; 2012: 9.1
- Private domestic credit (percent change): 2009: 1.3; 2010: 3.0; 2011: 3.5; 2012: 4.6
- Current account (in percent of GDP): 2009: -4.2; 2010: -2.9; 2011: -2.3; 2012: -4.1; 2013 Proj: -5.5
- Terms of trade (percent change): 2009: -9.1; 2010: 16.0; 2011: 13.6; 2012: -7.4; 2013 Proj: -4.0
- Net external liabilities (in percent of GDP): 2009: 61.7; 2010: 57.3; 2011: 59.5; 2012: 61.4; 2013 Proj: 64.1
- Net external debt (in percent of GDP): 2009: 52.6; 2010: 47.9; 2011: 50.8; 2012: 52.5; 2013 Proj: 54.1
- Gross official reserves: 2009: 3.7; 2010: 3.1; 2011: 3.2; 2012: 3.1 (in percent of GDP)
- Net official reserves: 2009: 3.7; 2010: 3.1; 2011: 3.1; 2012: 2.7 (in percent of GDP)
- Exchange rate (period average) U.S. dollar/Australian dollar: 2009: 0.79; 2010: 0.92; 2011: 1.03; 2012: 1.03
- Trade-weighted index: 2009: 63.2; 2010: 70.9; 2011: 75.7; 2012: 76.9
- Nominal effective exchange rate (Information Notice System index, 2005 = 100): 2009: 98.1; 2010: 111.6; 2011: 119.5; 2012: 125.7
- Real effective exchange rate (2005 = 100): 2009: 100.6; 2010: 115.2; 2011: 123.4; 2012: 129.4
- Memorandum: Nominal GDP (in billions of Australian dollar): 2009: 1,251; 2010: 1,354; 2011: 1,441; 2012: 1,490; 2013 Proj: 1,561

### Economic outlook and sectoral transition
- Australian economy described as growing at trend pace with low unemployment, contained inflation, room to ease monetary policy, and public finances healthy with budget due to return to surplus in 2012-13.
- GDP forecast to grow around trend over next two years driven by strong resources investment and exports and solid household consumption, though global tepid recovery weighs on prospects.
- Risks highlighted: developments in Europe and emerging Asian economies, and unfavorable resolution of the US fiscal cliff.
- Mining boom phase: investment expected to peak over the next two years; petroleum and LNG to dominate forthcoming investment following iron ore and coal; substantial LNG investment pipeline with many projects committed or underway.
- Terms of trade expected to decline in the year due to falls in iron ore and coal prices but remain elevated by historical standards because of urbanization and industrializing Asian economies.
- Structural change toward services-oriented economy emphasized; opportunities from Asia include demand for health and aged care, education, financial services, and high-quality food products.

### Fiscal policy
- Authorities committed to strict fiscal discipline through the medium-term fiscal strategy unchanged since 2008-09.
- Mid-Year Economic and Fiscal Outlook shows net debt peaked at 10 per cent of GDP in 2011-12 and budget on track to return to a small surplus in 2012-13, followed by increasingly larger surpluses.
- Return to surplus made more difficult by weaker global outlook and falls in commodity prices, causing downward revision to tax receipts (mainly company tax receipts and resources rent taxes).
- Other factors limiting tax receipts: depreciation deductions associated with mining sector investment and lower capital gains tax receipts due to relatively subdued growth in housing and equity prices.
- Forecast return to surplus to be achieved through natural increases in tax receipts from a growing economy and continued spending restraint; government spending as share of economy below 24 per cent of GDP (30-year historical lows).
- Contractionary impact of the fiscal strategy expected to be significantly lower (¾ to 1½ per cent of GDP) than the 3.1 per cent of GDP turnaround in the underlying cash balance.
- Authorities judge return to surplus appropriate given current conditions but will consider Staff’s recommendation to allow automatic stabilizers to operate.

### Monetary policy and inflation
- Headline and underlying inflation consistent with medium-term target of 2 to 3 percent.
- Headline CPI increased by 1.4 percent in the September quarter, to be 2 percent over the year.
- Quarterly increase in headline CPI reflects a modest inflationary impact from the introduction of an explicit carbon price in July this year, plus seasonal and temporary factors.
- Domestic prices likely to remain subdued due to recent increase in productivity growth and slower wage growth.
- High exchange rate expected to have less disinflationary impact than in recent past due to diminishing effects of earlier appreciation.
- Monetary easing over the past year: official interest rate lowered by 150 basis points to 3.25 percent; rate near recent historic low but well clear of zero bound.
- Borrower interest rates have declined to be clearly below their medium-term averages; many households used lower rates to pre-pay mortgage debt rather than increase consumption.

### Exchange rate and external stability
- Australian dollar stayed above its long-term average for an extended period, near or above parity against the US dollar since October 2010.
- Strength driven by relatively higher risk-adjusted returns on Australian assets and wide interest rate differentials with other advanced economies.
- Current account deficit expected to widen over next two years, reflecting a fall in terms of trade and an increase in capital imports.
- Rising current account deficit driven by inflows of capital to finance surge in resources investment; household sector and Australian Government expected to be net lenders.
- High foreign ownership of resource sector means current account largely funded by foreign investors.
- Past bank intermediation of foreign borrowing associated with CAD has declined as resources investment has been internally funded from investors’ cashflow; bank intermediation expected to continue to decline as resources investment drives capital requirements.
- Authorities remain committed to a floating exchange rate for macroeconomic stability; exchange rate and inflation-targeting monetary policy have delivered stability over two decades.
- Strength of the Australian dollar exerts pressure on non-mining trade-exposed sectors (manufacturing, tourism); structural reallocation of resources improving productivity and producing smaller labor market variations across the country compared with past shocks.

### Financial sector, household balance sheet, and FSAP
- Financial system described as strong, well-regulated; four major banks among highest rated in the world.
- Banks adapting to slower credit growth while remaining conservative; APRA taking proactive, risk-based supervision.
- Banks continue to use offshore wholesale funding but have increased liquidity and moved to more stable funding by reducing short-term wholesale debt from 33 to 18 per cent of all funding over the last four years and replacing it with deposits and longer-term wholesale debt.
- Household risks (high household debt and elevated house prices) mitigated by:
  - Households in significant net asset position.
  - Average loan-to-valuation ratio relatively low at 50 per cent.
  - Mortgages with loan-to-valuation ratios above 80 per cent (about one-quarter of total stock) typically covered by lenders’ mortgage insurance.
  - Most households are well ahead of scheduled mortgage repayments (on average equivalent to 18 months of scheduled repayments).
  - Mortgages are full recourse loans.
- FSAP assessment: financial sector sound, resilient, and well managed; high level of compliance with international standards, strong systemic oversight, sound crisis management framework, and effective policy coordination.
- Stress testing by IMF and APRA shows the banking system capable of withstanding severe shocks.
- Australia on track to implement Basel III capital and liquidity reforms.
- Authorities welcome FSAP recommendations and intend to address IMF’s recommendations where appropriate.

### Structural reform priorities
- Structural change driven by rise of emerging Asia requires a whole-of-Australia effort; policy settings must be calibrated to seize opportunities and ensure benefits are widely dispersed.
- Authorities pursuing reforms and investments across five areas: skills and education, innovation, infrastructure (including telecommunications infrastructure), tax reform, and regulatory reform.
- Government’s White Paper on Australia in the Asian Century provides a strategy to engage the region, including improving language literacy, adapting business models to the region, and attracting highly skilled people to live, study, and work in Australia.

*Source: _cr12305 - introduction of carbon price.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12305.pdf_