Australia: Staff Concluding Statement of the 2021 Article IV Discussions
IMF News, September 24, 2021
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- Published: September 24, 2021
Overview and near-term outlook
- Date: September 23, 2021.
- By 2021Q2, output had recovered to well above pre-pandemic levels, faster than in most advanced economies.
- Following swift recovery from 2020 lockdowns, new outbreaks in mid-2021 set back economic activity in the near term.
- Recent progress in the vaccination campaign offers a pathway out of lockdowns starting in the December quarter and will enable an ensuing economic recovery.
- Baseline GDP projections: 3.5 percent in 2021 and 4.1 percent in 2022.
- Underlying inflation projected to reach 2 percent by end-2022 and remain within the RBA target range thereafter.
- Reduced migration due to ongoing border restrictions is expected to limit potential output in the near- and medium term.
- Household and firm balance sheets remained resilient through 2020; banking sector continued to have strong capital and liquidity buffers.
- The external position and exchange rate in 2020 remained broadly in line with fundamentals and desirable policies, with a significant increase in the current account surplus largely reflecting temporary factors.
Risks and scenarios
- Near-term risks are tilted to the downside and centered around the pandemic, notably the contagious Delta variant.
- Other downside risks: tightening of global financial conditions, geopolitical tensions, an eventual housing market correction, and climate-related risks.
- Upside risks: faster recovery in household consumption and business investment after ongoing lockdowns, supported by strong household and business balance sheets.
- Policy stance should remain agile; additional stimulus should be provided if downside risks materialize.
Fiscal policy recommendations
- Fiscal policy should continue to support vulnerable households and viable businesses.
- COVID-19 Disaster Payments and business support grants are broadly adequate and appropriately targeted, contingent on pandemic triggers and loss of hours worked or revenue.
- Given flexible design, these programs can be scaled up or reoriented rapidly as needed.
- If downside risks materialize that would endanger the broader economic recovery, authorities should provide additional targeted fiscal support, taking advantage of Australia’s substantial fiscal space, underpinned by robust public debt sustainability.
Monetary policy recommendations
- Monetary policy should remain data-dependent and nimble in a highly uncertain environment.
- Accommodative monetary policy settings will be important during lockdowns and the ensuing recovery.
- Timing and pace of policy normalization should be calibrated commensurate with the recovery in a gradual and well-sequenced manner.
- Clear communications, stressing the state-contingency of forward guidance, will be important for a smooth transition.
- If downside risks materialize, the RBA has space to provide additional support by:
- expanding its asset purchases,
- reinstating term funding facilities,
- lengthening the maturity of the yield target, and/or
- introducing negative rates.
Labor market and active policies
- Wage subsidies during the 2020 lockdowns were contingent on maintaining employment relationships and helped limit adverse labor market outcomes.
- Given renewed outbreaks, additional business support contingent on maintaining employment relationships may become warranted if employment risks increase.
- Monitor and strengthen active labor market policies to support disproportionately affected groups, including those facing underemployment or long-term unemployment, as well as casual workers.
- The JobMaker Hiring Credit program has played a relatively minor role thus far and should be reviewed and reinstated, particularly if the labor market recovery is slow.
- Consider scaling up programs for career support to find jobs and acquire training; continue wage subsidies to support apprentices and trainees.
Financial stability and housing
- Surging housing prices raise concerns about affordability and financial stability; housing prices have continued to surge despite lockdowns.
- The surge has been driven largely by owner-occupiers taking advantage of low mortgage rates and fiscal support programs.
- High debt-to-income mortgages are on the rise amid elevated household debt; investor demand has begun to increase from low levels.
- Business insolvencies may rise as temporary support measures expire, in particular for SMEs.
- Macroprudential policy should be tightened to address gradually rising financial stability risks.
- Recommended macroprudential options include:
- increasing interest serviceability buffers,
- instituting portfolio restrictions on debt-to-income ratios, and
- instituting portfolio restrictions on loan-to-value ratios.
- Lending standards should be monitored closely.
Financial sector and regulatory reforms
- Authorities are revising the bank capital framework to make it more flexible, risk-sensitive, and competition-enhancing.
- Aim: increase risk weights for high-risk mortgages and lower risk weights for SME lending to reduce banks’ concentration risks in housing.
- Government-approved financial market infrastructure reforms will enhance licensing, supervisory, and enforcement powers of ASIC and the RBA.
- The RBA will be granted crisis management and resolution powers over Australian clearing and settlement facilities.
- New regulations on climate and cyber risks and open banking are welcome; authorities should continue efforts in these areas.
- ASIC can further improve standardized disclosures of exposure to climate-related risks for large, listed companies.
- The AML/CFT framework should be further strengthened by expanding coverage to relevant non-financial and business professionals.
Housing supply and affordability
- Supply-side reforms could improve housing supply and support affordability, including:
- more efficient planning and zoning,
- better infrastructure, and
- financial incentives from Commonwealth and state/territory governments for local governments to streamline zoning and improve infrastructure.
- Promoting flexible work arrangements could allow workers to move away from capital cities, improving affordability.
- Governments should provide targeted fiscal support for low-income households and expand social housing.
- Transitioning from a housing transfer stamp duty to a general land tax would improve efficiency and provide a more stable revenue source for states and territories while promoting labor mobility.
- Reforms could be complemented by reducing structural incentives for leveraged investment by households, including in residential real estate.
Climate policy and transition
- Australia has made progress in reducing greenhouse gas emissions, including improving the emissions profile of land use and increasing the share of renewables in electricity generation.
- Australia’s commitment to step up investment in developing low emissions technologies is welcome.
- If Australia were to follow other countries in setting a time-bound net-zero emissions target, this would require faster progress within a comprehensive policy framework.
- Most effective approach: implement broad-based carbon pricing along with measures to mitigate transition risks for impacted industries and regions.
- Alternative regulatory reforms (less efficient than broad-based carbon pricing) include:
- enhancing the Emissions Reduction Fund and its Safeguards Mechanism, and
- employing sectoral policies aimed at reducing emissions in energy generation, transportation, and agriculture.
Tax and productivity reforms
- Longstanding recommendation: reduce relatively high direct taxes and strengthen indirect taxes.
- Specifically: reduce the corporate income tax burden and rely more on goods and services tax (GST) revenue, while making the impact of the GST less regressive for households through targeted cash transfers.
- Transition from housing transfer stamp duty to a general land tax recommended to improve efficiency and revenue stability.
- Promote innovation and competition to raise medium-term growth, and implement infrastructure projects to support short-term recovery and alleviate medium-term constraints.
- Recent reforms:
- Enhanced R&D tax incentive to encourage innovative investment, with scope to ease administrative burden and scale up government R&D spending.
- Digital Economic Strategy needs rapid implementation to build skills and infrastructure for digitalization.
- Continued reforms to digitize business-government interactions and widen automatic cross-jurisdictional recognition of occupational licenses can boost competition.
- Reducing financing constraints for SMEs can help improve resource allocation.
- Recent reforms to the childcare subsidy program and increased funding for aged care and the National Disability Insurance scheme will help promote an inclusive recovery.
- Continued reforms in the education sector can improve education outcomes and ensure equal opportunities.
External relations and trade
- Australia is a signatory of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) and the Regional Comprehensive Economic Partnership (RCEP).
- Australia has been strengthening its network of bilateral free-trade agreements and strongly supports the WTO process.
- Recently amended foreign direct investment framework aims at safeguarding national security; issuance of guidance for implementing the reform and intention for judicious use are welcome to keep the FDI approval process simple and transparent.
Closing
- The mission thanks the authorities and counterparts in the private sector, think tanks, universities, and other organizations for frank and engaging discussions.
International Monetary Fund.