Australia should ‘steer clear of a recession’, says IMF

An IMF report also backs the contentious stage-three tax cuts and broadening the GST base.

The IMF believes Australia can ‘steer clear of a recession’. Picture: AFP

The International Monetary Fund says Australia should “steer clear of a recession” in 2023, as ­visiting officials backed further Reserve Bank rate increases and ongoing budget discipline to regain control of inflation.

In a report following its recent “mission” to Australia, the IMF forecasts economic growth to slow sharply to 1.7 per cent, and warn of “significant downside risks” associated with the global growth slowdown and the risks of persistent inflationary pressures and a housing market collapse.

Westpac chief economist Bill Evans said the bank’s leading indicator of economic conditions suggested an even deeper slowdown next year to 1 per cent, from an anticipated 3.4 per cent in 2022. The RBA has predicted real GDP will expand by 1.4 per cent next year.

With mortgage payments as a proportion of household income set to lift to around 12-year highs as a result of seven consecutive rate rises so far, the Washington-based body urged the central bank and the government to stay resolute in their efforts to bring inflation back under control.

“The RBA should continue to raise interest rates, and fiscal policy should support it in moderating domestic demand growth through judicious budget execution and saving of any revenue over performance,” the report reads.

Despite the October budget estimating a $50bn structural deficit and near $1 trillion public debt pile, the IMF officials state “public debt remains sustainable, with substantial fiscal space”, even as they add that there is more work to tame the runaway cost of major programs such as the NDIS and in the areas of aged care and healthcare.

As the Albanese government attempts to craft an intervention into the energy market that could involve a tax-and-transfer approach to alleviating the pressure of surging power bills, the Washington-based body states “any additional cost-of-living support to soften the impact of high inflation should be temporary and well targeted to the vulnerable”.

The IMF has cautioned that the government’s new investment vehicles such as the National Reconstruction Fund, Re­wiring the Nation, and Housing Australia Future Fund should be phased into the budget “judiciously and, more broadly, a proliferation of such vehicles should be avoided”.

The IMF also advocates tax reform as part of the fiscal repair task, as well as a need to improve productivity.

“The stage three 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 report states.

“Longstanding recommendations include broadening the goods and services tax base to limit exemptions for healthcare spending, and restricting the capital gains tax exemption for the sale of main residences.”

Officials have also backed Jim Chalmers’s commitment in the October budget to publish an “enhanced tax expenditures statement in 2022-23” to “highlight distributional analysis for select major areas of tax expenditures, providing greater transparency to the public”.