Add Category
The Albanese government has been urged to embark on a range of unpalatable economic and tax reforms to pay for massive spending already baked into its budget.
Key points:
- The IMF is hopeful Australia can stay on a "narrow path" to avoid recession
- It has urged the nation to engage in significant tax reforms to improve the budget bottom line
- Treasurer Jim Chalmers has welcomed the economic assessment without endorsing any of its policy recommendations
While saying it is confident that Australia has a "narrow path" to avoiding a recession this year, the International Monetary Fund has targeted an overhaul of tax and spending programs, including the "stage three" income tax cuts and NDIS funding.
However, in its annual review of Australia, the IMF has suggested a range of tough reforms that are traditionally political "poison" to repair the national budget and to stabilise its finances for the long term.
It suggestions included raising the goods and services tax and broadening its base, winding back the capital gains tax exemption when people sell the family home, and reviewing the controversial "stage 3" personal tax cuts that favour high-income earners.
During the election campaign, both Treasurer Jim Chalmers and Prime Minister Anthony Albanese said they would not be unwinding the stage 3 tax cuts legislated by the former Liberal-National government, that are to take effect in July 2024.
In addition to ruling out a higher GST, Labor has abandoned policies it promulgated in 2019 to reduce the 50 per cent capital gains discount for property investors and shareholders, promises that contributed to Bill Shorten's election loss.
The IMF also called for broader tax reform — which has been resisted by successive Labor and Coalition governments — such as ending state stamp duties on property transactions in favour of land taxes.
Its call for a review into the funding of the National Disability Insurance Scheme (NDIS) comes as the program's $35 billion annual cost continues to balloon.
The fund suggested access to the NDIS should be means-tested and urged the introduction of co-payments to make it more financially sustainable.
While avoiding a direct response to those specific suggestions, Mr Chalmers hinted there would be some changes to the scheme.
"When it comes to the NDIS, we want to make sure it is sustainable so we are providing a decent level of service and care to Australians with a disability," he said.
"That is a really top priority, and obviously Minister Shorten and I, and Minister Gallagher, have been in discussions about how we make sure we can afford to fund the NDIS.
"The fastest-growing area of spending in the Commonwealth budget is the interest costs on the debt we inherited, the second-fastest is the NDIS, and so clearly we need to focus on that."
'Narrow path' to avoid recession
IMF's Australian mission chief, Harald Finger, said that, while the Australian economy was on a "narrow path to a soft landing", growth would slow to 1.6 per cent in 2023 from around 3.6 per cent last year.
Mr Finger sees inflation falling from the current runaway 7.8 per cent and gradually decelerating towards the Reserve Bank of Australia's target band of 2 to 3 per cent by the end of 2024.
The IMF warns the financial sector faces "significant uncertainty" amid a rapidly declining housing market but that Australian banks remain "liquid and well-capitalised", with households holding buffers of early repayments built up during the period of government stimulus and ultra-low interest rates throughout the pandemic.
Other headwinds for the economy include rising interest rates, uncertainty about global growth and related uncertainties about commodity prices, which have been helping to underwrite a significant improvement in the federal budget bottom line.
Treasurer Jim Chalmers has welcomed the IMF's backing of Australia's economic recovery and path to budget repair.
"The IMF recognises the Albanese Labor government's approach to managing the economy is responsible, makes key investments in growth and resilience, and begins the hard work of budget repair," Mr Chalmers said in a statement this morning.
"The IMF has provided a glowing report card for our budget and our economic plan.
"The independent assessment from the IMF backs our strategy to build a stronger, more-inclusive and more-resilient economy that can better withstand future shocks."
'Our policy has not changed'
However, at a later press conference, Mr Chalmers again ruled out major income tax changes in the upcoming budget.
"If there are avenues for responsible tax reform into the future, like what we are doing in multinationals, then obviously those opportunities and avenues should be explored," he said.
"Our policy has not changed on the stage 3 tax cuts.
"Obviously, I'm aware and follow closely the constituency calling for those tax cuts to be rewritten or junked.
"Those calls have been around for some time, and the IMF has made a contribution to that as well.
"We listen respectfully when those kind of suggestions are made to us, but the government's approach to the stage 3 tax cuts hasn't changed. We've got other priorities in the budget. You will see them in May."
Economist Richard Denniss, the Australia Institute's executive director, argued the Labor government is now a global outlier on tax policy.
"When both the IMF and British Conservative PM Rishi Sunak are more progressive on the issue of tax cuts for the rich than our own government, it's obviously untenable," he noted.
"The Treasurer's budget in May provides the best near-term opportunity to put the budget back on a responsible and fair footing.
"The IMF report today echoes what the Australia Institute and [more than] 100 leading economists and tax experts have been advising to Prime Minister: The stage 3 tax cuts for high-income earners are inappropriate for an inflationary economy and unaffordable, given the revenue needed for essential services [such as] aged care, Medicare, early childhood education, housing and the NDIS."