Australia: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, November 15, 2022
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- Published: November 15, 2022
Macroeconomic outlook and recent performance
- Australia’s recovery since the depth of the pandemic has been among the strongest in the advanced economies and has returned to its pre-pandemic output trend.
- Growth in the first half of 2022 was 3.4 percent y/y.
- Growth is expected to slow from an expected 3.7 percent in 2022 to about 1.7 percent in 2023-24.
- Trimmed mean (underlying) inflation rose to 7.3 percent y/y in Q3 2022.
- RBA has hiked the policy rate by cumulatively 275 bps since May to 2.85 percent.
- Under baseline expectations, trimmed mean inflation is likely to remain elevated before declining to around 3 percent toward the end of 2024.
- Labor markets show employment and labor force participation near record highs; the unemployment rate is near a 50-year low.
- The Australian dollar and the country’s external position appear broadly in line with medium-term fundamentals.
Risks and scenarios
- Significant downside risks: a more pronounced global growth slowdown (including in China), more persistent inflationary pressures, and an acceleration of the ongoing housing price decline.
- In the staff baseline scenario, Australia is expected to steer clear of a recession, but with significant downside risks.
- Possible transmission channels to worsen outcomes: steeper and more prolonged monetary tightening if inflation/wage pressures persist; accelerated housing price declines reducing household consumption and affecting banks’ balance sheets.
- Household buffers (accumulated savings) could dampen and delay monetary transmission; high household debt and many mortgages on floating or soon-resetting rates point to relatively strong transmission.
Monetary and fiscal policy guidance
- Continued monetary and fiscal policy tightening is needed to rebalance domestic demand and keep inflation expectations well anchored.
- Monetary policy recommendations:
- RBA should continue to raise interest rates to keep inflation expectations well anchored.
- Communication should carefully assess the balance of risks and policy intentions given uncertainties in monetary transmission.
- Near-term fiscal guidance:
- Fiscal policy should support monetary tightening by moderating domestic demand growth through judicious budget execution and saving of any revenue overperformance.
- Fiscal support to address cost-of-living pressures should be temporary and well-targeted to the vulnerable to avoid broader demand stimulus.
- Activity through newly created investment vehicles (National Reconstruction Fund, Rewiring the Nation, and Housing Australia Future Fund) should be phased judiciously; proliferation of such vehicles should be avoided.
- Medium-term fiscal guidance:
- Medium-term fiscal plans should remain on a continued consolidation path despite substantial fiscal space.
- Growth in spending on the National Disability Insurance Scheme (NDIS), healthcare, and aged care is a risk to consolidation; reviewing these programs and designing reform options to strengthen efficiency and contain cost growth is recommended.
- Saving expected revenue overperformance and judicious implementation of spending programs, including infrastructure investment, would help contain demand and inflation.
Tax policy recommendations
- Tax reform could strengthen economic efficiency and public revenue:
- Transition from currently high direct taxes to underutilized indirect taxes, mitigating regressive impacts with targeted cash transfers to vulnerable households.
- Address bracket creep by raising tax brackets periodically.
- Stage 3 personal income tax cuts will reduce the personal income tax burden.
- Longstanding recommendations: broaden the goods and services tax (GST) base to limit exemptions for healthcare spending; restrict the capital gains tax exemption for the sale of main residences.
- Publication of additional information on distributional features of the tax system will be helpful.
- At state and territory level, implement recurring property taxes in lieu of stamp duties to promote housing affordability, labor mobility, and more stable tax bases.
Financial sector resilience and oversight
- The financial system appears resilient with adequate buffers and overall good liquidity positions.
- Risks and monitoring priorities:
- Higher global and domestic interest rates, falling housing and stock prices warrant close monitoring for pockets of vulnerability.
- Some increase in non-performing loans likely, especially among lower-income, highly indebted households with recent mortgages.
- Expected increase in bank wholesale funding at a time of higher rates and slowing growth may pose vulnerabilities, although liquidity coverage ratios are well above regulatory minimums and the share of deposits in the funding mix has improved.
- The increase in banks’ required capital buffers in the 2023 capital framework is welcome.
- Close scrutiny of non-bank financial institutions is important given their rapid growth from a low base.
- Potential cyberthreats require continued investment, close monitoring and contingency planning.
- Policy/action items:
- Council of Financial Regulators, including ASIC, can further improve standardized climate-risk disclosures for large, listed companies.
- Expand AML/CFT regulation to cover designated non-financial businesses and professionals and continue enhancing beneficial ownership transparency.
RBA governance
- The ongoing RBA review is welcome:
- Opportunity to reaffirm the inflation targeting regime within a clearly focused mandate.
- Opportunity to revisit governance arrangements and decision-making processes.
- Consider instituting periodic reviews in line with practices of some other central banks.
Housing market and affordability
- Housing prices have reversed from earlier surge and are expected to continue declining significantly amid rising interest rates, high inflation, and increasing housing supply.
- Affordability concerns are increasing due to strongly rising rents and lower borrowing capacity from much higher mortgage rates.
- Policy recommendations:
- Strong focus on boosting housing supply.
- Well-targeted support for lower-income households.
- At the state/territory level, move from stamp duties toward recurring property taxes to support affordability and mobility.
Crypto, payments, and regulatory architecture
- Crypto assets are largely unregulated for conduct and prudential purposes; various agencies supervise under frameworks not originally designed for crypto.
- Ongoing efforts: “token mapping” and identifying needed regulation.
- Policy recommendations:
- Achieve greater clarity in the regulatory architecture to ensure timely risk monitoring and clearer roles/coordination among regulatory agencies.
- Strengthen consumer protection.
- Reform payments regulatory framework to address new products and technologies.
Climate mitigation and energy transition
- The revised 2030 greenhouse gas emissions target (reduction by 43 percent from 2005 levels) is broadly in line with the long-term goal of reaching net zero by 2050 and puts Australia within the range of targets of other advanced G20 economies.
- The new Climate Change Act creates a framework for accountability, including legislating mitigation targets.
- Policy recommendations:
- An economy-wide carbon price is the most effective way to achieve emission reductions; where not feasible, strong sectoral policies with price signals can help deliver needed abatement.
- Transform the Safeguard Mechanism into a binding baseline-and-credit scheme as planned to drive down industrial emissions efficiently.
- Step up energy sector investment under the Rewiring the Nation program to speed deployment of renewables.
- Combine higher renewables penetration with adequate dispatchable capacity and an upgraded grid to improve electricity sector resilience and reduce risks of disruptions and price spikes.
Structural reforms and inclusion
- Addressing the labor productivity slowdown and achieving greater inclusion requires greater structural reform efforts.
- Policy recommendations:
- Sustain infrastructure spending but reprioritize and streamline the ambitious infrastructure pipeline given binding construction-sector constraints.
- Work proactively with the construction industry to alleviate capacity constraints.
- Support greater innovation, build digital infrastructure and skills, and reduce regulatory burden on business to boost potential output.
- Recent policy initiatives noted as welcome: free vocational training, expansion of university capacity, a temporary increase in migration, larger child-care subsidies, and expanded parental leave.
- The Jobs and Skills Summit highlighted priorities to boost inclusion, encourage female labor force participation, and tackle skill shortages.
Source: IMF staff concluding statement, November 15, 2022.