Election 2025: Clamp down on spending ahead of US slowdown, IMF warns

Australia’s next government must rebuild its fiscal buffers, clean up public sector spending and urgently enact tax reform in preparation for a sharp slowdown in economic growth, the IMF says.

IMF managing director Kristalina Georgieva. Picture: Jim Watson / AP

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Australia’s next government must rebuild its fiscal buffers, clean up public sector spending and ­urgently enact tax reform in preparation for a sharp slowdown in economic growth as Donald Trump’s global trade war ­increases the chance of a US ­recession, the International Monetary Fund says.

The Washington-based IMF slashed Australia’s GDP growth projections for this year to just 1.6 per cent, down from 2.1 per cent six months ago, as the US President renewed his attacks on the US Federal Reserve, exacerbating a stockmarket rout already suffering from the White House’s ­aggressive pursuit of tariffs.

As the IMF pushed for a clampdown in expenditure, government finance statistics released on Tuesday showed Australia’s spending on social benefits blew out by $22.5bn last financial year, ­accounting for almost a third of the growth in ballooning public outlays. In the face of heightened uncertainty and persistently weak growth, the IMF said advanced economies such as Australia, which is heading for a budget ­deficit of $27.6bn this financial year and debt of $1 trillion for the first time in 2026, needed to ­“enhance public sector spending efficiency” and put “public debt on a sustainable path”.

“Fiscal adjustment plans should focus primarily on credibly rebuilding buffers … and contain risks relating to sovereign rating downgrades,” the IMF said, in its latest World Economic Outlook. “Countries should reprioritise expenditures and boost fiscal revenues, including by broadening their tax bases.

“Permanent increases in spending should be financed with revenues, and a greater focus on enhancing public sector spending efficiency may be warranted, particularly if fiscal space is constrained.”

Reacting to the report, Jim Chalmers said the “extreme global uncertainty” buffeting the global economy necessitated a vote for the Albanese government, which had left the nation “in good stead” after three years in office.

“The choice at this election is between responsible economic management and stability under Labor, or harsh cuts and mismanagement under Dutton and the Liberals,” the Treasurer said.

But opposition Treasury spokesman Angus Taylor accused Labor of leaving the country “dreadfully underprepared” for the fallout of a trade war and weaker growth, making the case for a change in government on May 3.

“Strong and decisive economic leadership is needed to secure Australians’ jobs, retirement savings and hopes of home ownership,” Mr Taylor said. Reserve Bank governor Michele Bullock, who will attend IMF meetings in Washington this week, has highlighted concerns about the US economy but has insisted “we’re not forecasting a recession in Australia over the next 12 months”.

Treasurer Jim Chalmers and opposition Treasury spokesman Angus Taylor. Picture: Christian Gilles / NewsWire

The IMF, in its 80th year promoting international financial stability, lifted its expectations of a recession in the US in 2025 to 37 per cent, higher than just six months ago, before Mr Trump won office.

While Mr Trump’s victory in November 2024 fuelled expectations that the President’s deregulatory agenda and corporate tax cuts would propel US economic growth, his pursuit of aggressive tariffs has since undermined that optimism. Fears of a US recession intensified overnight after Mr Trump flirted with the possibility of firing US Federal Reserve chairman Jerome Powell, causing a sharp sell-off in US stocks.

Australian shares followed the lead on Wall Street on Tuesday, dropping 1 per cent at the opening bell only to later pare back the early sell-off as a rally in bank and mining stocks offset heavy losses in tech stocks.

American economist Adam Posen, from the Peterson Institute for International Economics, now predicts a 65 per cent chance of the US falling into recession. Mr Posen said the situation could feature enough inflation and sluggish growth that the world’s largest economy entered stagflation. Others such as JPMorgan chief economist David Kelly said it was too early to call.

“For now, like the Federal Reserve, we are cautious about calling for a full-blown recession,” Dr Kelly said. However he said the theoretical impact of policy moves and a wide range of soft data on business and consumer attitudes “all point to recession”.

“As an economist, I’d have to say the odds still favour the economy slipping into a mild recession later this year as demand is reduced by the impact of the trade war on consumer prices.”

AMP chief economist Shane Oliver warned that the risk of the US entering a recession was approaching 50 per cent but expected Australia would avoid a downturn of its own.

“The real danger to Australia is if a US recession weighs on global growth, particularly China’s growth, leading to less demand for our exports, particularly iron ore,” Dr Oliver said.

Even so, he expected Australia’s flexible exchange rate, scope for additional Chinese stimulus, and the RBA’s ability to aggressively cut interest rates left the domestic economy in good shape to withstand a downturn.

In its outlook, the IMF also modelled two alternative scenarios whereby its economic growth projections could diverge from their current estimates. Under its first scenario, the IMF modelled for a further increase in tit-for-tat trade restrictions, tighter borrowing conditions, heightened economic uncertainty and further divergence between the US and China, as well as other economies in Europe.

If realised, economic growth would be modestly higher in the US but sharply lower in Europe, China and much of the global economy.

By contrast, under a second scenario modelled by the IMF where the US reduced its $US35 trillion debt and undertook broad tax reform, China experienced a productivity revival and Europe increased defence expenditure, higher GDP growth would be realised across the board.

With Mr Trump’s trade shock expected to have an outsized impact on sectors heavily reliant on trade with the US, Alex Joiner, chief economist at asset management firm IFM Investors, said government could play a greater role in shielding affected sectors.

“Right now, the market is really looking at the Reserve Bank to do all the heavy lifting on this,” Dr Joiner said, pointing to expectations of several interest rate cuts in 2025, including one in May.

“We need to ask what we’re going to do to support sectors if the economy does take a turn for the worse – there’s a role for fiscal policymakers there.”