Australia’s IMF report card: Needs work
The IMF’s delegation to Australia has wrapped up its visit, and its observations were unsettling for those feeling the strain of 13 consecutive interest rate increases. A key finding of the Washington-based fund was that inflation was unlikely to return to the Reserve Bank of Australia’s target range of 2-3 per cent until 2026, and it advised “further monetary policy tightening to ensure that inflation comes back to the target range by 2025”.
That observation, made in the IMF’s report at the end of last month, has fuelled expectations of yet another hike by the end of the year, following the quarter-point increase delivered this week.
The media has focused on this aspect of the RBA’s review, but it’s important to note the IMF wasn’t advocating relying on monetary policy alone. It also called for fiscal consolidation – tighter government finances – “to [ensure] more equitable burden sharing”. The report noted federal and state and territory governments “should implement public investment projects at a more measured and coordinated pace, given supply constraints, to alleviate inflationary pressures and support the RBA’s disinflation efforts” and other efforts to improve productivity. Otherwise, said the IMF’s mission chief to Australia, Abdoul Wane, mortgage holders would “bear the brunt of the full costs of adjustment”.
Clearly, a coordinated multipolicy response is fundamental to sustainable control of inflation.
These IMF reports are regular reviews of the Australian economy following in-depth consultations with officials from the central bank, Treasury and other economists. The feedback can be an effective basis for an overall policy rethink – if accepted as an objective gauge of the country’s economic performance and associated risks. From time to time, it’s been said that these IMF reports are not really as independent as they should be, given domestic policy authorities provide much of the input and related interpretations to the IMF staff and so can seek to influence the final assessments. Moreover, official participants in the consultations have often seen the reviews as a way to reinforce their arguments with the government and to push a particular policy response.
The IMF’s findings in this latest visit were in fact very favourable, focusing on the “strong post-pandemic recovery”, where “Australia’s economy is slowing but remains resilient”.
I was somewhat surprised that the IMF team didn’t comment publicly on the government’s RBA reforms, especially under the new governor, Michele Bullock. A feature of the recommendations from this year’s RBA review was the establishment of two main boards: the monetary policy board and a new, overarching governance board. To my mind, the substance of the governance board has been compromised by the treasurer’s recent decision to appoint the governor as the chair of both boards for an initial five-year period. Improved governance should, in my view, make Bullock accountable for her management of the bank to the new board and not just to parliament.
A practical example of a key governance challenge for the RBA in recent years was the Securency scandal in 2007 concerning the payment of bribes by this RBA subsidiary to ensure sales of their note-printing technology. Then governor Glenn Stevens’ statements to parliamentary inquiries suggested to me he had been caught short on the issue. It is not hard to understand how a shift in the governor’s focus beyond monetary policy could be time-consuming and distracting.
Notably, the IMF offered some views on tax reform as a medium-term project, that is, the need to reduce structural budget deficits and to promote economic efficiency. This was timely in light of recent debate about tax reform and, specifically, the comments by Michael Keating, a former secretary of the Department of Finance, that Australia’s taxes are insufficient to fund government spending priorities. Speaking at the recent Australia Institute revenue summit, he called for “a full-scale independent review of the funding required for adequate service provision”. He was most concerned about how to respond to the aged-care royal commission, meet projected hospital and Medicare spending requirements and increase JobSeeker payments. Keating also spoke of the costs of Australia’s commitments under the AUKUS agreement and the need to cut greenhouse gas emissions. Among possible solutions, he referred to congestion charging, expanding the GST and adjusting the stage three income tax cuts.
This year’s intergenerational report predicted a budget deficit of less than 1 per cent until the mid 2030s, but the Grattan Institute has recently projected a sharper deterioration, with the structural budget deficit widening out to close to 3 per cent of GDP in 10 years’ time. Keating thought this figure might be closer to 4 per cent “if the government meets public expectations for adequate services and income support”. He noted that further restraint on spending was likely to be politically difficult, as two thirds of the budget was “entitlement programs”, and he recalled the significant backlash to cuts in the Coalition’s 2014 budget.
The IMF assessment is that all levels of government need to improve expenditure outcomes and contain structural spending growth in health, aged care and the NDIS. The review offered support for the government’s new wellbeing framework, designed to improve quality of life, as it should foster cooperation across different levels of government. “Greater expenditure decentralization would enable the governments to implement comprehensive tax reforms, including rebalancing from high direct taxes to underutilized indirect taxes,” the report noted.
It also conceded support to “vulnerable households may be needed to address the regressive impacts of such reforms”. That is, a compensation package may be essential to effectively introduce such tax reforms. The IMF also claimed any associated revenue losses could be bridged, for example with a higher rate of GST, and also saw the opportunity and need to recalibrate the GST equalisation formula that can address “the differential impacts of the pandemic on fiscal sustainability at the subnational level”.
Any discussion of genuine tax reform seems somewhat surreal to me, given the pronounced unwillingness of our political leaders to propose details of such a thing. They recognise just how effective scare campaigns have been in the past, in areas such as the GST, superannuation and capital gains tax. This is compounded by a lack of will to objectively consider proposals from the perspective of our national interest, and a common tendency to instead seek simple solutions, despite the complexity of our tax system in both its design and incidence.
I speak here from personal experience. I still get social media pile-ons over my failure, in the lead-up to the 1993 election, to explain the likely price effects of the then proposed GST on a birthday cake. Confusion reigned. It was not a question, as many argue, as to what the tax would be – that was declared as 15 per cent. The issue was the possible impact on prices when the proposal was to replace the wholesale sales tax – which consisted of multiple rates with varying incidence – with the single rate of a broadbased GST. The mix of ingredients was therefore important.
I had gone into the interview with Mike Willesee fearing the usual “gotcha question”, and had boned up on the price of a litre of milk and a loaf of bread, as was the media game in those days. I fell into the “No” case strategy – “If you don’t understand it, don’t vote for it.”
Another tax proposal that has been subject to more-recent ignorant scaremongering is the switch from one-off stamp duty payments to an annual property tax. This too was supported by the IMF review, which listed a host of benefits, namely that it would promote housing affordability and a more efficient use of the housing stock, support labour mobility and a more stable tax base over the medium term.
I was disappointed that there was no interest in the substance of these issues beyond political games. It has since been a weakness of the tax reform debate, that it is so easy to run a scare campaign on any proposal, despite its merits. Just ask Bill Shorten.
Is a significant issue such as tax reform just too important to be left to politicians? Perhaps we should consider a fiscal/tax authority, with independence similar to the RBA, empowered to marshal the best international and domestic research and expertise, to set out an agenda for tax reform and other fiscal initiatives against which the major political players could be encouraged or required to take a position at elections.
The IMF also made some observations about traditional financial stability risks – insolvencies and non-performing loans – and was satisfied that our banks are “well placed to manage near- and medium-term risks to their loan portfolios” as they are profitable, with capital levels “at a historic high”. Nevertheless, in light of the renewed increase in the cost of housing, the IMF did suggest tools such as loan-to-value and debt-to-income limits, which have been applied successfully elsewhere to contain risks. Although the IMF didn’t explicitly say so, these kinds of quantitative restrictions can help to reduce over-reliance on interest rates in the conduct of monetary policy.
The IMF supported much of the rest of the government’s policy framework, in relation to employment, productivity growth, labour market reform, housing and climate change.
This latest review should encourage a deeper public discussion of the issues highlighted, and encourage a rethink of attitudes to raise these real financial challenges above the usual nonsense of political pointscoring, in the national interest.
This article was first published in the print edition of The Saturday Paper on November 11, 2023 as "Australia’s IMF report card: Needs work".
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