Australia should keep lifting interest rate and deliver stage-three tax cuts, IMF says
Australia’s Reserve Bank should keep lifting the interest rate to ensure inflation is contained, and the country should stick with plans to introduce stage-three tax cuts planned for 2024, the head of the International Monetary Fund’s Australian division said.
Wrapping up two weeks of talks with the Albanese government as part of an annual review, the IMF’s division head, Harald Finger, said on Wednesday the agency expected “a soft landing” for the Australian economy with risks “skewed to the downside”.
GDP growth should slow from 3.7% this year to 1.7% in 2023. Globally, projected economic expansion of 2.7% would be the slowest since 2001 excluding the global financial crisis and Covid dips. Advanced economies may only grow 1.1% next year.
“In the near term, we think the risks are still on the side of [the RBA] having to raise interest rates more” to ensure inflation expectations are contained, Finger said. In line with the RBA and treasury, the IMF expects inflation to peak at about 8% in the current quarter.
Real estate prices were already down 5% and should retreat another 10%, he forecast, adding there were “no signs of stability risks” from the drop since prices would merely be retracing some of the gains made during the Covid period, he said.
In an accompanying report, the IMF gave their backing to the stage-three tax cuts that treasurer Jim Chalmers has said will cost the budget $254bn over a decade.
“The stage 3 personal income tax cuts will reduce the personal income tax burden, and bracket creep should be addressed by raising the tax brackets periodically, including to limit distributional implications for low-income households and women,” the fund said.
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Finger described Chalmers’ first budget as “responsible” because it met election promises “without very much new spending”, and by finding cuts to offset extra outlays. Its “conservative” commodity price assumptions also left “scope for revenue over-performance”.
Any plans to impose windfall taxes or other controls on energy prices for “short-term needs” should be carefully weighed against “medium-term objectives” including keeping a strong investment climate for the sector, he said.
Not mentioned in the IMF report was the risks for Australia and wider economic growth if China slowed more than expected because of its “Zero Covid policy or in response to the real estate crisis”, Finger said.
“It’s unlikely that China will go back to the same growth rates as seen in the last decade,” he said. “The global company will have to find other engines” of growth.
As for the government’s climate policies, Finger said Australia’s higher carbon emission reduction goal of cutting 2005-level pollution 43% by 2030 was welcomed but it needed to be backed by supporting policy.
While a broad-based carbon price was the “first best” way of getting there, “we also know in the Australian context that politically it’s been very difficult to achieve something like this”.
Sectoral policies such as the safeguard mechanism could “go a long way” to give industry incentives similar to introducing a broader carbon pricing scheme, Finger said.