Months after it emphasised the importance of fiscal-monetary harmony, the International Monetary Fund (IMF) doubled down on Tuesday, cautioning that stalled disinflation might demand “tighter monetary and fiscal policies”.
“Inflation is anticipated to sustainably return to the RBA’s target range only by the end of 2025, while a potential stall in disinflation poses a significant risk,” the fund said in its latest score card on Australia.
“In this context, the current restrictive monetary stance is appropriate, and needs to be supported by fiscal policy that avoids an expansionary stance and complements monetary policy’s disinflation objective.”
The IMF also highlighted “significant uncertainty” in the macroeconomic outlook, projecting GDP growth of 1.2 per cent in 2024 and 2.1 per cent in 2025.
“Domestically, persistent labour market tightness, stronger-than-expected fiscal impulses, and lower spare capacity than currently assessed could contribute to stalling the disinflation process, potentially leading to higher-for-even-longer interest rates that adversely impact consumption and investment,” the fund warned.
“Conversely, weaker-than-expected growth or a faster-than-projected increase in unemployment may prompt the Reserve Bank to lower interest rates sooner,” it highlighted.
External risks, according to the fund, include weakness in major trading partners, geoeconomic fragmentation affecting global trade, and rising shipping costs and volatile energy and food prices amid escalating geopolitical tensions, which could also complicate the disinflation process.
“Australia’s role in the Pacific continues to enhance regional stability through aid and remittances, while labour migration also helps alleviate Australia’s domestic capacity constraints and skills shortages,” the IMF said.
Ultimately, it believes that Australia remains on a narrow path to a soft landing, with risks tilted to the downside.
The IMF also renewed its call for broader tax and expenditure reforms in Australia, emphasising the need for “efficiency and fairness”. It recommended reducing reliance on direct taxes and high capital costs, and phasing out tax breaks like capital gains tax discounts.
“In light of long-term spending pressures from ongoing demographic headwinds, coupled with climate change, expenditure reforms should aim at enhancing efficiency and containing structural spending growth at all levels of government,” the fund said.
“Due consideration should be given to further strengthening fiscal policy frameworks with a clearer medium-term anchor to guide buffer rebuilding for future challenges.”
On the country’s housing crisis, the IMF said “a comprehensive policy package is essential”, focusing on increasing the construction workforce, relaxing zoning regulations, advancing initiatives to boost new housing supply, and reevaluating property taxes and stamp duty.
Moreover, the fund stressed the need to rejuvenate Australia’s productivity growth, with focus needing to be given to competition policy, reforms in capital and labour markets, and opportunities presented by AI technologies.
