Australia needs more interest rate hikes to ensure inflation does not persist for too long, while a tax overhaul, including a higher GST, could help the national budget position, the International Monetary Fund has recommended.
State and Federal Governments have also been urged to adopt a more “measured and coordinated pace” for public investment to alleviate inflation pressure.
The IMF’s latest report from a regular examination of the national economy has backed in the Federal Government’s approach of returning budget windfalls back to the Budget bottom line to ensure fiscal policies don’t make the task of inflation tougher.
But the IMF has also recommended comprehensive tax reform, particularly around removing high, direct taxes to “underutilised” indirect taxes. These would include scrapping stamp duty in favour of property taxes to promote housing affordability. It says any revenue loss in the transition “could be bridged … with higher GST”.
But higher interest rates have also been recommended to ensure inflation returns to the Reserve Bank of Australia’s target of 2 to 3 per cent, amid concerns it will take longer than the bank expected to do so.
The RBA is widely expected to lift rates to 4.35 per cent when its board meets next Tuesday but some economists are suggesting a second hike, to 4.6 per cent, could be needed.
The RBA is concerned that inflation expectations — or how much people expect inflation to be part of their day-to-day financial situation — will rise, which would make it much harder to get back to target. Inflation nationally is now 5.4 per cent.
The IMF has also backed in calls from business and the Reserve Bank for a jump-start to productivity growth, which has slumped to a multi-year low. It says Australia’s global competitiveness has taken a hit, and has recommended continued investment in digital infrastructure.
Treasurer Jim Chalmers said the independent assessment had backed the Government’s Budget measures and policies to tackle cost-of-living pressures,
“This report welcomes the Government’s broader economic agenda, including investments in cheaper and cleaner energy, cheaper childcare, and skills and vocational training, as well as policies to boost housing supply,” he said.
But all Governments have been urged to improve spending outcomes to contain structural spending growth in health and aged care — and the IMF has also suggested a recalibration of the GST equalisation formula could help to address how the pandemic affected fiscal sustainability for each of the States. This appears to suggest a greater share of GST funding to Victoria which has one of the nation’s largest deficits and has had to pull back on infrastructure funding.
The Federal Government has committed to maintaining WA’s share of the GST, which was increased by previous Prime Minister Scott Morrison after the State’s share would have fallen to 16¢ in every dollar last financial year.
Businesses and industry groups have been largely supportive of a tax overhaul, with many analysts also suggesting the regime is too complicated and inefficient.
Australia’s share of income tax has also hit a new high as more people have taken up work, boosting the Federal Budget position.