Australia is on track to dodge a recession but the International Monetary Fund says there’s room for more interest rate hikes.
The IMF has slightly downgraded its growth expectations for Australia and anticipates growth slowing from 3.6% in 2022 to 1.6% in 2023, down a touch from the 1.7% predicted in November.
Growth is then expected to recover to about 2.25% over the medium term.
In its report card on the Australian economy, the IMF anticipated a gradual deceleration in inflation towards the Reserve Bank’s 2-3% inflation target by the end of 2024.
While the country is in better shape than other advanced economies because of a robust post-pandemic recovery and strong commodity prices, a “soft landing” is not a given.
The IMF outlined several downside risks that threaten Australia’s economic prospects, including the uncertain global environment, the housing market correction weighing on consumption and a potential drop-off in commodity prices.
In its regular assessment of the economy, the IMF said further interest rate rises were justifiable.
“With a positive output gap, a tight labour market and high inflation, further monetary policy tightening, complemented by fiscal consolidation, is warranted,” it said.
IMF staff expect the cash rate to peak around 3.85%.
“Given considerable uncertainty, the pace of further rate increases should be data-dependent, ensuring that inflation expectations remain well anchored.”
The agency said the government would need to keep spending contained.
It welcomed the review of the National Disability Insurance Scheme and recommended reviewing other existing large-spending programs for efficiency gains.
Any cost-of-living support should be targeted and temporary, the agency recommended.
The IMF also called for tax reform to make the system more “efficient and equitable”.
It said the stage three tax cuts would minimise the personal income tax burden but there could be scope to adapt them to assist with budget repair.
“With the cuts taking effect from the financial year 2024-25, there would be time, if needed, to re-assess the parameters to appropriately balance costs on the budget and benefits to the economy,” the report said.
Ordinary increases in tax thresholds were floated as an alternative solution to bracket creep.
The IMF also recommended broadening the GST base and reviewing property tax settings, such as stamp duty and capital gains tax exemption on main residences.
The treasurer, Jim Chalmers, said the government had no intention to take the IMF’s advice to reassess stage three tax cuts.
“Obviously we listen respectfully when those kind of suggestions are made to us but the government’s approach to the stage three tax cuts hasn’t changed,” he said.
“We’ve got other priorities in the budget – you’ll see them in May.”
He said the government would pursue tax reform, including a previously-flagged crackdown on multinational tax avoidance.
“We recognise when the budget is under as much pressure as it is now there is a role for spending restraint, which the IMF endorsed,” Chalmers said.
The shadow treasurer, Angus Taylor, said the report made it clear the government needed to rein in spending to ease budget pressures.
“You can’t tax your way out of a spending problem,” he said.
“The Coalition will not support tax changes that increase the tax burden on the economy, sap productivity, raid people’s retirement or make inflation worse.”