Australia Faces Calls for Broad Economic Reform Ahead of Federal Budget

Australia is facing calls for broad economic reform from international bodies, including the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF). These recommendations focus on critical areas such as taxation, housing, climate action, and government spending. The advice coincides with the Australian government's preparations for its May federal budget, which Treasurer Jim Chalmers has indicated will prioritize spending restraint, productivity, and potential tax reform, particularly concerning intergenerational housing equity.

The Opposition has also put forward proposals for budget savings, while recent polling reveals public support for spending cuts and certain tax changes to fund income tax reductions.

Economic Overview and Challenges

The OECD's latest economic survey for Australia indicates the economy is "now normalising" and has returned to a "normal economic state" following a period of weak growth post-pandemic. This assessment was supported by the IMF, which noted Australia achieved a "soft landing."

The OECD attributed this to the Reserve Bank of Australia's (RBA) monetary policy and prudent fiscal policies from federal and state governments, which managed inflation with fewer interest rate hikes and job losses compared to some other central banks. Government debt levels were described as "relatively light" by global standards.

The OECD projects average economic growth to reach slightly over 2% in the coming years, driven by anticipated interest rate cuts and a recovery in household real disposable incomes. However, challenges persist, including slow productivity growth, high housing costs, and elevated carbon emissions. The OECD also highlighted Australia's continued dependence on China and a lack of economic dynamism in some sectors. A recent uptick in inflation has lowered the probability of RBA interest rate cuts in 2024, although the OECD projects scope for "modest" rate cuts in 2026.

International Policy Recommendations

Both the OECD and IMF have put forward several policy recommendations:

Fiscal Strategy and Spending

The OECD urged governments to demonstrate "more urgency" in addressing budget deficits and to stabilize national finances through "expenditure restraint and revenue enhancing tax reforms."

It suggested formal caps on government spending, specifically mentioning state governments and the National Disability Insurance Scheme (NDIS). The OECD recommended reforms for the NDIS, including a review of eligibility criteria, the nature and cost of provided supports, and the extent of means testing. It also noted the average age of NDIS participants is lower than in comparable international disability programs.

Tax Reform

Both the OECD and IMF recommended broadening the Goods and Services Tax (GST) and considering an increase to its rate above 10%, with the IMF also suggesting the removal of GST exemptions. They advised reducing Australia's reliance on personal income and company taxes.

Proposals included introducing additional superannuation taxes, reducing capital gains tax (CGT) concessions (with the IMF suggesting their removal), and replacing state-based property stamp duties with a land tax. The IMF also suggested altering corporate income tax and phasing out superannuation concessions.

The OECD estimated that such GST reform could increase the size of the Australian economy by 1.6% within a decade.

Housing Affordability

The OECD emphasized the negative impact of Australia's housing market unaffordability, noting that shortages contribute to overcrowding, financial stress, reduced labor mobility, worsened intergenerational equity, and increased traffic congestion.

It supported federal and state initiatives to increase home supply by easing land restrictions and promoting higher-density development. Recommendations included adopting ambitious targets for social housing and increasing public funding for it. Social housing currently constitutes approximately 4% of Australia's housing stock, a decrease from 6% in 1990 and roughly half the OECD average.

Climate Action and Emissions

The OECD stressed the need for further efforts in reducing greenhouse gas emissions, particularly in transport, managing a greater share of renewables in the transport sector, and addressing agricultural emissions.

It advocated for a "gradual" increase in petrol taxes, which it noted are significantly lower than European levels, to encourage the adoption of low-emission vehicles. The OECD observed Australia's historical position regarding climate action, citing its high per capita carbon emissions and low implicit carbon prices globally, while also recognizing "relatively rapid progress" Australia has made recently in the energy transition.

Economic Dynamism

The OECD advocated for measures to boost the "dynamism" of the Australian economy, observing that a limited number of entities dominate sectors such as aviation, telecommunications, banking, and supermarkets.

Australian Government's Approach and Upcoming Budget

Treasurer Jim Chalmers has indicated the upcoming May federal budget, his fifth, will feature spending restraint while emphasizing productivity and tax reform. The budget's primary goal is to enhance the economy's growth capacity and manage inflation. Key objectives include a productivity package, a savings package, further steps in tax reform, addressing intergenerational housing equity issues, and improving the overall budget condition.

Chalmers stated that the government is eager for reform but will proceed cautiously, emphasizing that any tax changes would require thorough explanation to ensure their long-term stability. He outlined guiding principles for future tax reform: promoting intergenerational fairness, attracting increased investment, and simplifying the tax system.

Regarding specific tax reforms:

• Chalmers confirmed the government does not support a change to the Goods and Services Tax (GST).
• He identified the cost of housing as a key element of the intergenerational challenge. The government is considering reworking the capital gains tax (CGT) break for investment properties to address intergenerational inequality.
• Chalmers did not rule out changes to CGT but stated any such changes would require cabinet support and that the government's tax reform agenda primarily focuses on income tax cuts. He declined to comment on potential changes to CGT or retrospective reform affecting existing investments.
• The government's current tax agenda includes income tax cuts set to begin on July 1, along with a standard deduction and a boost to the low-income superannuation tax offset.

Chalmers acknowledged that government spending has played a role in inflation, though not as the primary factor, and noted that government spending is generally growing. He characterized the OECD report as an endorsement of the government's economic management and reform agenda, and stated that while the government would not adopt every idea from the IMF report, much of it aligned with their economic reform agenda.

Recent figures from the Finance Department suggest the federal budget deficit for the current financial year may be smaller than previously projected. Stronger-than-expected income tax collections, attributed to a robust job market (4.1% jobless rate) and higher commodity prices (iron ore, gold), contributed to this performance. However, indirect tax collections, including GST, excises, and customs duties, are currently below expectations. An intergenerational report on the budget and economy's long-term state is expected to be released this year.

Opposition's Response

Opposition leader Angus Taylor proposed establishing a bipartisan taskforce to identify federal budget savings, aiming to restore fiscal discipline, rebuild confidence, reduce inflation, and ease pressure on interest rates. The proposed taskforce would consist of equal representatives from the government and opposition, with Coalition members having access to government official briefings. The Coalition stated it would not consider higher taxes. Treasurer Jim Chalmers criticized this proposal, describing it as a "predictable stunt."

Taylor has committed to income tax reductions and rejected any changes to the capital gains tax break, arguing it would lead to fewer homes being built.

Public Opinion on Reforms

A Resolve Political Monitor poll conducted between February 8 and 14, surveying 1800 people, indicated public sentiment on potential reforms:

• Two-thirds of respondents supported government spending reductions.
• Half of those surveyed backed income tax cuts, with strongest support among high-income earners, Coalition voters, employed individuals, and Labor supporters.
• To fund income tax cuts, two-thirds supported spending cuts, 58% backed higher taxes on banks, and 57% wanted increased taxes on mining companies.
• 40% supported a reduction in capital gains tax concessions, with 17% opposed.
• Support for cutting negative gearing concessions on investment properties was stronger, with only 17% opposed.
• An increase in the Goods and Services Tax (GST) was the only option opposed by a majority (54%).
• Specific spending cut preferences included 53% backing a reduction in foreign aid and 29% supporting reductions in the government’s $5 billion renewable energy programs. Fewer respondents supported cuts to unemployment benefits, the age pension, assistance to states, or health spending.