The International Monetary Fund (IMF) has published its policy ‘wish list’ for Australia. It includes stronger climate policies, a tougher approach to inflation, and sweeping tax changes.
The recommendations come from the IMF’s annual assessment of the Australian economy.
Here’s a closer look.
What is the IMF?
The IMF is an international institution focused on economic growth and stability. It provides loans to ‘bail out’ countries in debt trouble, which often come with strings attached, such as policy changes.
Even for countries like Australia which do not require IMF loans, the IMF routinely offers policy advice.
While it may sometimes mention economic equality, its main focus is on total prosperity and its advice should be seen through this lens.
The IMF’s wish list
The IMF noted that Australia, like many countries, is navigating difficult economic conditions, but has been “resilient”.
The key risk it identified is that inflation (rising prices) remains too high and risks becoming a long-term issue.
The IMF recommended the RBA raise interest rates further. It also suggested governments limit major public infrastructure projects, which can add to price pressures in construction.
It acknowledged the government’s “targeted” cost of living relief and called for further support for “vulnerable households”.
Spending, taxing
Over the longer term, the IMF called on the government to do more to fix the ‘structural deficit’ in its budget. That is, the situation where spending is expected to exceed tax over the long term.
On the spending side, it said there was a need to “contain” spending growth in health, aged care and the National Disability Insurance Scheme.
On the tax side, it called for a shift away from high ‘direct’ taxes (e.g. income tax and company tax) and towards ‘indirect’ taxes (e.g. GST and land tax).
The reason is that ‘indirect’ taxes – which apply when people own or purchase things, rather than when they earn money – are generally regarded as less disruptive to people’s decision-making.
However, the IMF acknowledges that ‘flat rate’ taxes like GST (10% on most goods and services) are more burdensome for people on lower incomes. The IMF recommends any GST changes be accompanied by “support to vulnerable households” to compensate for this.
Climate policy
The IMF recommended Australia implement an economy-wide price on greenhouse gas emissions (a ‘carbon price’), calling it “the most effective way to achieve net zero”.
The Australian Government’s key climate policy, the ‘safeguard mechanism’, is similar to a carbon price but it applies only to a selection of large polluters. The IMF called this “second-best” but “an important milestone”.
It welcomed government renewable energy targets and fuel efficiency standards. It said, however, that tax discounts for electric vehicle purchases were “regressive” as they primarily benefited high-income people.
Housing
The IMF welcomed recent policies by governments to boost the supply of housing. It identified insufficient supply as a key driver of housing affordability and accelerating rent prices.
It also noted the increase in migration since COVID was “adding to pressures” in housing, but that on the other hand migration was making a significant contribution to economic growth and productivity.
Government and opposition responses
Treasurer Jim Chalmers described the IMF’s wish list as “a glowing endorsement” of Australia’s economic management.
“The Government is helping not hampering the fight against inflation,” Chalmers said.
Acting Shadow Treasurer Jane Hume said the IMF’s concerns about inflation showed the Government was not doing enough. “Inflation is going to be higher for longer, because of Labor’s lack of action,” Hume said.
