The International Monetary Fund (IMF) has advocated for the Reserve Bank of Australia (RBA) to keep lifting interest rates to contain inflation and has supported the introduction of stage three tax cuts in its annual review.
Despite external factors, the Omicron COVID-19 wave, and floods in the first half of 2022, the Australian economy had recovered faster than most other advanced economies, the IMF noted.
Growth in the first half of 2022 was 3.4% while unemployment was near a 50-year low.
However, growth was projected to slow to around 1.7% in 2023/24 while high uncertainty remained regarding inflation and the tight labour market.
The IMF expected Australia to steer clear of a recession, but with “significant downside risks.”
“High inflation, the positive output gap, and the very tight labour market necessitate monetary and fiscal policy tightening,” read the review.
“Monetary policy needs to be focused first and foremost on keeping inflation expectations well anchored, which clearly points to more tightening in the short term.”
The IMF review also advocated for tax reforms to strengthen economic efficiency and public revenue.
“The stage three personal income tax cuts will reduce the personal income tax burden, and bracket creep should be addressed by raising the tax brackets periodically,” it stated.
“Longstanding recommendations include broadening the goods and services tax (GST) base to limit exemptions for healthcare spending and restricting the capital gains tax exemption for the sale of main residences.”
Additional suggestions included recurring property taxes in lieu of stamp duties at the state and territory level to promote labour mobility, housing affordability, and more stable tax bases over the medium term.
Treasurer, Jim Chalmers, welcomed the IMF review as an endorsement of the country’s responsible economic management.
“The IMF’s independent assessment confirms that despite a difficult international outlook and significant economic and budget challenges here at home, Australians should be optimistic about the longer-term future of our economy and our country,” said Chalmers in a statement.
He noted the Government’s spending restraint and approach to revenue upgrades would not add to inflationary pressures.
“The Government is returning 99% of the upward tax revisions for the next two years to the Budget when the inflation challenge is most severe, and 92% over the forward estimates,” he said.
“As a result of our spending discipline, payments will fall in real terms over the next two years, and real spending growth averages just 0.3% per year over the forward estimates.”
