Extra government spending could inject “additional stimulus” into the Australian economy, posing a risk the Reserve Bank will have to lift interest rates to keep inflation on a downward track, the International Monetary Fund says.
While Australia’s economy remained “resilient” and GDP growth should start to accelerate, it wasn’t yet time to cut official interest rates, the IMF said in its 2024 assessment report released on Thursday.
“The RBA’s decision to maintain its restrictive policy stance in the near-term is appropriate,” the fund said, echoing comments made last month by the RBA governor, Michele Bullock.
The IMF mission to Australia, led by Lamin Leigh, said the 2024-25 federal budget was “projected to deliver a positive fiscal impulse” as it swung from two surpluses to an expected deficit. Stage-three tax cuts and rebates contributed to extra demand.
“The mission’s analysis shows that while the cost-of-living support lowers the price level on a temporary basis, it may inject some additional stimulus into the broader economy,” Thursday’s report said.
The IMF called for a “comprehensive strategy” to help ease housing strains. These included “reevaluating property taxes” including tax concessions to property investors – a reference to the ongoing debate over whether negative gearing and capital gains concessions should be reconsidered.
“Tax breaks, including from capital gains tax discount and superannuation concessions, could be phased out to generate a more equitable and efficient tax system.”
The federal treasurer, Jim Chalmers, and his Treasury secretary, Steven Kennedy, have argued the budget put downward pressure on prices because energy and rental rebates lower headline inflation – as they did in August.
As various payments – such as pensions and even wage negotiation – are based on the consumer price index, suppressing headline inflation takes demand out of the economy, they argue.
The RBA, though, looks at what happens to total demand in the economy even if Bullock has said public spending is “not the main game” when tackling or reducing inflation.
Chalmers said the IMF had “endorsed the Albanese government’s responsible economic management”. The fund welcomed back-to-back surpluses “achieved by saving revenue windfalls” from commodities while providing targeted relief to households.
“The government’s primary focus is to get on top of our inflation challenge without ignoring the risks to growth and the IMF has backed this strategy,” he said.
The IMF’s Leigh, though, told a briefing “all the policy levers need to come together” – including by state governments – to ensure inflation remained on track to reach the RBA’s 2-3% target band.
“State and territory budgets have proven more expansionary than expected in the near term, incorporating further cost-of-living support and infrastructure spending,” the report said.
“Should disinflation stall, expenditure rationalisation at all levels of government could help lower aggregate demand and support a faster return of inflation to target.”
Underlying inflation eased to 3.4% in August from July’s 3.8%, the Australian Bureau of Statistics said last month.
Bullock has said the RBA would pay more heed to quarterly inflation due out later this month. Progress in bringing down underlying inflation “remained slow”, she said last week, suggesting she didn’t expect a rapid retreat from its 3.9% pace in the June quarter.
As in previous statements, the IMF also called for greater efforts to address climate change threats, including putting a price on carbon emissions.
“Progress towards ambitious emission reduction goals necessitates addressing construction bottlenecks and community engagement issues, and potential solutions include an economy-wide carbon price or targeted sectoral policies,” it said.
